Applicability: This FAR clause is incorporated in cost reimbursement contracts and Time-and-Materials (T&M) contracts for other than commercial items. For T&M contracts, the clause only applies to the part of the contract that reimburses materials on the basis of actual cost. The clause also includes four alternate versions, which are included in contracts as follows (the alternate versions generally provide additional wording regarding the frequency of payments):
- Alternate I is included in Construction Contracts that also include the clause at FAR 52.237-27, Prompt Payment for Construction Contracts;
- Alternate II is included if the contract is with an educational institution;
- Alternate III is included if the contract is with a State or local government; and
- Alternate IV is included if the contract is with (a) a nonprofit organization that is not an educational institution, or (b) a State government, local government, or nonprofit organization that are exempted under OMB Circular A-122.
Key Requirements: The clause addresses two key areas, (1) interim reimbursement of costs, and (2) determination of final indirect rates and billing rates. This Part 1 of our two part series addresses the interim reimbursement of costs. Part 2 of the series will address the determination of final indirect rates and billing rates. In regards to interim reimbursement of costs, under this clause the Government agrees to make payments to non-small business contractors when requested as work progresses, but nor more often than once every two weeks. The clause does not address the frequency of payments to small businesses (this frequency is generally addressed in agency policy memorandums and/or FAR supplements, and is usually more often than once every two weeks).
For all businesses, to be reimbursed, the costs must be allowable under the provisions of FAR Subpart 31.2, Contracts with Commercial Organizations. FAR Subpart 31.2 provides the criteria for the allowability of Government contract costs. In addition, for the purpose of reimbursing allowable costs (except for pension, deferred profit sharing, and employee stock ownership plan contributions), the clause defines the term “costs” to include:
- Costs recorded at the time of the request for reimbursement that the Contractor has paid by cash, check, or other form of actual payment for items or services purchased directly for the contract;
- Costs incurred, but not necessarily paid, for the following items (provided the contractor is not delinquent in paying these costs in the ordinary course of business))
– Supplies and services purchased directly for the contract and associated financing payments to subcontractors, provided payments determined due will be made in accordance with the terms and conditions of a subcontract or invoice. This provision of the clause states that the payments shall generally be made within 30 days of the submission of the contractor’s request for interim reimbursement
– Materials issued from the Contractor’s inventory and placed in the production process for use on the contract;
– Direct Labor;
– Direct Travel;
– Other direct in-house costs;
– Properly allocable and allowable indirect costs; and
– For subcontractors, the amount of financing payments that have been paid by cash, check, or other forms of payment to subcontractors.
Compliance Verification: While the contracting officer is generally the Government’s approval authority of requests for interim reimbursements, the method and extent of compliance verification differs significantly within and among Government agencies. For most contracts, the contracting officer technical representative (COTR) is a key player in the compliance review process. In addition, for the Department of Defense, the Defense Contract Audit Agency (DCAA) has traditionally been the primary organization involved in reviewing the requests. This has been done for many years by DCAA on a sampling basis, although the method and extent of sampling has varied, with particularly changes having been made over the past five to ten years. Although some civilian agencies also have agreements for DCAA to sample requests for interim reimbursement (e.g., Department of Homeland Security), many others do not, relying almost primarily on the COTR.
Remedies: When the contracting officer believes that the interim request includes requests for reimbursement that are not permitted under the clause, the contracting officer may (a) reduce the amount of the payment made under the particular request at issue, or (b) if the problem is found subsequent to payment of the request, reduce payments on future requests and/or issue a demand letter for reimbursement of the overpayment.
Background: The purpose of the clause is to provide contractors with interim reimbursement of costs incurred during contract performance. Since the Government does not pay interest costs related to contractor borrowing, it is necessary to have a mechanism to reimburse contractors during contract performance, rather than waiting to make any payments until the end of the contract.
Other Key Information: The clause states that the contractor may submit to an authorized representative of the Contracting Officer, in such form and reasonable detail as the representative may require, an invoice or voucher supported by a statement of the claimed allowable cost for performing this contract. One of the key issues that have arisen with the clause over the years are contractor concerns regarding the amount of detail required. In some cases, contractors have been required to provide boxes of data to support a single invoice. Often the information required is already being used by DCAA to review the vouchers under its sampling program. In other instances, contracting officers have required contractors to account/bill for costs on a line item basis, even though the accounting systems may not be structured in such a manner. These requirements often result in significant additional costs to the contractor, with little or no corresponding value to the Government. However, since most contracting officers do not see the costs of this extra effort as a direct charge to their contract, this inefficient practice often continues unless contractors raise the issue thru the various channels of the contracting agency (e.g., contracting officer, supervisor to contracting officer, head of contracting activity, senior procurement official).