At any time during the performance of a cost-reimbursement contract, a fixed-price incentive contract, or a contract providing for price re-determination, the contracting officer may issue the contractor a written notice of intent to disallow specified costs incurred or planned to be incurred.
A notice of intent comes after a contractor and the Government cannot reach agreement and the Government is convinced that its position is correct. According to FAR 42.801, before issuing the notice, the contracting officer must make every reasonable effort to reach a satisfactory settlement through discussions with the contractor.
A notice of intent to disallow costs usually results from monitoring contractor costs. The purpose of the notice is to notify the contractor as early as practicable during contract performance that the cost is considered unallowable under the contract terms and to provide for timely resolution of any resulting disagreement. In the event of disagreement, the contractor may submit to the contracting officer a written response. Any such response shall be answered by withdrawal of the notice or by making a written decision within 60 days.
At a minimum, the notice must
- Refer to the contract's Notice of Intent to Disallow Costs clause (it is 52.242-1)
- State the contractor's name and list the numbers of the affected contracts.
- Describe the costs to be disallowed, including estimated dollar value by item and applicable time periods, and state the resons for the intended disallowance.
- Describe the potential impact on billing rates and formard pricing rate agreement.
- State the notic's effective date and the date by which written respons must be received
- List the recipients of copies of the notice; and
- Request the contractor to acknowledge receipt of the notice.
Many notices do not include the requisite information but don't count on winning the argument based on that technicality. It would strain relationships and in any event, the contracting officer could simply reissue his notice in a compliant form.
If the notice involves elements of indirect cost, it shall not be issued without coordination with the contracting officer or auditor having authority for final indirect cost settlement.
If in the event the contractor submits a response that disagrees with the notice, the contracting officer who issued the notice shall either withdraw the notice or issue his written decision.
Keep in mind, once you receive a Notice of Intent to Disallow, you only have 60 days to file your response. In some cases, upon request, contracting officers may grant extensions to the 60 day rule but there is never a guarantee.