Tricks of the Trade: Why Is Contract Closeout Important?
An effective contract closeout process enables you to realize the most beneficial financial gains

Contract closeout can be important on contracts that contain the clauses at FAR 52.216-8, Fixed Fee, or 52.232-7, Payments under Time-and-Materials and Labor-Hour Contracts. These clauses, if not waived, require you to withhold 15 percent of your fixed fee on cost-type contracts when you reach 85 percent of your fixed fee, and the government may withhold 5 percent of amounts due for labor, up to a maximum of $50,000 on Time-and-Materials (T&M)/Labor-Hour (LH) contracts respectively.

These withholdings can compromise a large amount of profit/fee due the contractor and put a strain on cash flow. The value of these withholdings obviously decreases with the passage of time due to inflation. In addition, the administrative costs associated with maintaining the books and records for physically complete, but open, contracts results in unnecessary administrative costs and no gain to the contractor.

The most effective way to expedite contract closeout is to waive these withhold requirements prior to or shortly after contract award. This will ensure that you do not have to wait until contract closeout to recover amounts withheld. To the extent you are unable to get these clauses waived, you may not see your money for several years.

Waiving this withhold will enable you to use the money today, but may require you to come up with cash during contract closeout, so if you choose to waive this requirement, you will want to closely monitor your indirect costs throughout the life of the contract to mitigate any risk of owing the government money during contract closeout.