Acquisition and Contract Financing
Domain 4 tests the financing rules between award and payment: how much can be obligated up front, how contractors are paid for work in progress, and what happens when funds run short on a cost-reimbursement contract.
Full funding and incrementality
The bona fide need rule generally requires full funding of a nonseverable requirement at award. Incremental funding is permitted only where statute or regulation allows - principally cost-reimbursement contracts. Severable services may be funded with an appropriation current at award if the contract period begins in that fiscal year and does not exceed twelve months (31 U.S.C. 1502(b)).
Obligation amount at award
Record obligation at the binding commitment: contract price for fixed-price; estimated cost plus fee for cost-reimbursement, capped by the funds actually placed on an incrementally funded contract. Advance payments are tightly limited and require approval; they are never a shortcut for recording obligations.
Financing methods
- Progress payments reimburse a percentage of allowable costs incurred (customary rates, higher for small business concerns), based on cost incurred, not billing milestones.
- Performance-based payments tie financing to defined, measurable events and are capped as a percentage of contract price.
- Commercial-item financing and advance payments are used sparingly, with approval and monitoring.
Limitation of Cost and Limitation of Funds
Cost-reimbursement awards carry FAR 52.232-20, or 52.232-22 when incrementally funded. The contractor must notify the contracting officer as allotted funds approach exhaustion (the clause sets the notification point, commonly 75 percent) and is not required to continue past the funded amount. The contracting officer must add funds or direct stop-work or descoping; silence is not an option.
Undefinitized contractual actions
When work must start before price agreement, obligations before definitization are limited (generally 50 percent of the negotiated price, with narrow exceptions) and definitization must occur within statutory time limits.
Worked example
A cost-reimbursement contract has $6,000,000 estimated cost plus $400,000 fee, with $2,500,000 allotted. At 75 percent of allotment - $1,875,000 - the contractor notifies. The obligation on the books stays $2,500,000, not $6,400,000. The program office must obtain funds before the contractor exceeds the allotment; paying past it would create an Anti-Deficiency Act exposure.
Traps that cost marks
Obligating the undefunded ceiling, treating an invoice as the obligation event, ignoring the notification threshold, and using one-year O&M money for a severable contract that runs nineteen months.