1977, March, Pg. 428. The Significance of Funding Limitations in Government Contracts.

Authorby John H. Love

6 Colo.Law. 428

Colorado Lawyer

1977.

1977, March, Pg. 428.

The Significance of Funding Limitations in Government Contracts

428Vol. 6, No. 3, Pg. 428The Significance of Funding Limitations in Government Contractsby John H. LoveJohn H. Love, Boulder, is a practicing attorney and Certified Professional Contracts Manager of the National Contracts Management Association.429The most current funding provisions in the majority of cost reimbursement contracts with federal agencies, together with interpretations by several Boards of Contract Appeals for agencies, creates a substantial risk to the government contractor who agrees to perform a contract with such provisions in contract clauses and either is uninformed or fails to be diligent in fulfilling the contractual responsibilities of a contractor. Such contractual funding limitations, set forth below, provide a significant control mechanism to protect the taxpayer and place a great deal of pressure upon the management of contractors to manage programs under contract in such a way so as not to exceed the amounts allotted to the contract.

Substantial risk of loss for a contractor exists even though there may be negotiations in progress concerning change order and other types of equitable adjustments to modify a contract. An awareness of the government's policy considerations as well as business and legal implications is important at an early stage in order to assure that the proper action can be taken by a contractor to avoid nonrecovery of costs, which would otherwise be allowable. Contractors should not be lulled into a false sense of security because their contract is not of the fixed price or incentive type, since it is possible to lose costs incurred in excess of fees earnable under a contract.

The Funding and Change ClausesThe federal government has two distinct types of incremental funding clauses which are utilized in cost reimbursement government contracts with some variation for those contracts which do not provide for cost sharing or which do provide for cost sharing. Such clauses are most frequently utilized for Cost-Plus-Fixed Fee (CPFF) contracts.

An October 1966 "Limitation of Funds" (LOF) type of clause has been adopted by nearly all of the agencies and such clauses contain the following provision:(fn1) (e) Change orders issued pursuant to the Changes clause of this contract shall not be considered an authorization to the contractor to exceed the amount allotted by the government in the schedule in the absence of a statement in the change order, increasing the amount allotted. (Emphasis supplied.)

For example, see the clauses for "Supply" and "R&D" contracts that are found in the Armed Service Procurement

430Regulations (ASPR) 7.203-3(b), 7.402-2(c), which are found under Chapter 1 of Title 32 of the Code of Federal Regulations (CFR); Federal Procurement Regulations (FPR) 1-7.202-3(b) and 1-7.402-2(b) which are found under Chapter 1 of Title 41, CFR. It is assumed, however, that the practitioner would examine the regulations and clauses of the agency which is involved with a particular contractor. No attempt is made in this article to catalog all of the funding types of regulations and clauses of the various government agencies, including those agencies which implement, in whole or in part, the FPR.

However, the National Aeronautics and Space Administration (NASA) has retained an earlier provision which has a fundamentally different effect in a contract clause entitled "Limitation of Government's Obligation" (LOGO).(fn2) This provision does not include the above-quoted paragraph (e) of the LOF clause which specifically refers to change orders in relation to the amount allotted and comparable limitations which are designed to place a contractor in the position of exceeding the amount allotted at the contractor's own risk. This author would hope that the "Office of Procurement Policy," recently created under 41 U.S.C., Sec. 401, et. seq., would evaluate the justification for the continued utilization of the NASA LOGO clause since a federal policy utilizing consistent funding limitation clauses for all agencies would seem to have merit.

(For convenient reference, the LOF clause used in the Department of Defense's (DOD) incrementally funded cost reimbursement supply contracts which do not provide for cost sharing is set forth in Appendix A.)(fn3)

The related portion of an April 1967 ASPR "changes clause,"(fn4) for example, contains the following language, quoted in part: (a) The contracting officer may at any time, by a written order. . . make changes within the general scope of this contract. . .;

(b) If any change causes an increase or a decrease in the estimated cost of, or the time required for the performance of any part of the work. . . or otherwise affects any other provision of this contract, an equitable adjustment shall be made;

(i) in the estimated cost or delivery schedule, or both;

(ii) in the amount of any fixed fee to be paid to the contractor; and

(iii) in such other provisions of the contract as may be affected, the contract shall be modified in writing accordingly.

* * *

(c) Notwithstanding the provisions of (a) and (b) above, the estimated cost of this contract and, if this contract is incrementally funded, the funds allotted for the performance thereof, shall not be increased or deemed to be increased except by specific written modification of the contract indicating the new contract estimated cost, and if this contract is incrementally funded, the new amount allotted to the contract. Until such modification is made, the contractor shall not be obligated to continue performance or incur costs beyond the point established in the clause of this contract entitled "Limitation of Cost" or "Limitation of Funds."

Related DecisionsSeveral Armed Services Board of Contract Appeals (ASBCA) decisions are analyzed as follows:

In Breed Corporation the Board indicated:(fn5)

  1. Such funding clauses are mandatory for cost type contracts, and also are intended to implement policies based on

    431Acts of Congress to prevent overruns of expenditures on contracts, to maintain budget controls, and to eliminate one cause of deficiency appropriations.2. The giving of a notice of a cost overrun by the contractor does not entitle the contractor to have the overrun funded.

  2. Instead, when funds previously allocated to a contract have been exhausted, the government has an option to allocate additional funds to the contract if these can be obtained and continuation of the work is considered to be in the best interests of the government, or to refuse an allocation of additional funds, and bring the work to a halt if funds are unavailable or the additional expense for continuing the work is not deemed to be justified.

  3. Since the clause reserves to the contractor the right to stop work and the incurrence of performance costs when the allocated...

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