DoD Issues a Class Deviation to FAR 42.708

By: John Ford, Senior Consultant

On May 3, 2019, the Department of Defense (“DoD”) issued Class Deviation Number: 2019-00009 authorizing Administrative Contracting Officers (“ACOs”) to deviate from the values listed in Federal Acquisition Regulation (“FAR”) 42.708(a)(2) when using quick close-out procedures. This Class Deviation was effective upon issuance.

The contractual authorization for the use of the quick close-out procedures is found in subsection (f) of FAR 52.216-7, Allowable Cost and Payment, which permits the use of quick close-out procedures when the conditions in FAR 42.708(a) are met. As relevant to the Class Deviation, 42.708(a) reads in part:

The contracting officer responsible for contract closeout shall negotiate the settlement of direct and indirect costs for a specific contract, task order, or delivery order to be closed, in advance of the determination of final direct costs and indirect rates set forth in 42.705, if-

(1) The contract, task order, or delivery order is physically complete;

(2) The amount of unsettled direct costs and indirect costs to be allocated to the contract, task order, or delivery order is relatively insignificant. Cost amounts will be considered relatively insignificant when the total unsettled direct costs and indirect costs to be allocated to any one contract, task order, or delivery order does not exceed the lesser of-

(i) $1,000,000; or

(ii) 10 percent of the total contract, task order, or delivery order amount.

The Deviation changes the $1 million threshold to $2 million but does not explicitly change the 10 percent of total contract or order value. However, the Deviation does give the Defense Contract Management Agency (“DCMA”) ACOs blanket authority “to deviate from FAR 42.708(a)(2) and negotiate the settlement of direct and indirect costs for a specific contract, task order, or delivery order to be closed in advance of the determination of final direct costs and indirect rates set forth in FAR 42. 705 regardless of the dollar value or percent of unsettled direct or indirect costs allocable to the contract.” Other DoD ACOs are not given this additional authority.

It should be noted that FAR 42.708 does not list the types of contracts for which quick close-out procedures are permitted. However, because FAR 52.216-7 is used in cost reimbursement and Time and Materials (“T&M”)/Labor Hour (“LH”) contracts, it is commonly believed that quick close-out can only be used for those contract types. The deviation departs from this common wisdom and permits the use of quick close-out procedures for “cost reimbursement, time and material, labor hour, fixed-price incentive, and fixed-price redeterminable contracts, task orders, and delivery orders.”

Although the Deviation lists several contract types for which quick close-out can be used, we do not anticipate that it will have a significant impact on the closing of LH contracts because they are essentially fixed unit price contracts and no costs generally need to be settled. Similarly, we do not anticipate that the deviation will have a significant impact on Fixed Price Incentive (“FPI”) contracts. FPI Fixed Target contracts covered by FAR 52.216-16 do not require the submission of a proposal to establish final indirect cost rates. Instead, they require the contractor to submit:

(i) A detailed statement of all costs incurred up to the end of that month in performing all work under the items;

(ii) An estimate of costs of further performance, if any, that may be necessary to complete performance of all work under the items;

Similarly, FPI contracts subject to FAR 52.216-17 do not require the submission of a proposal to establish final indirect cost rates.

A prerequisite to the use of quick close-out is that the contract or order must be physically complete. In this regard, FAR 4.804-4 reads in pertinent part

a contract is considered to be physically completed when-

(1) (i) The contractor has completed the required deliveries and the Government has inspected and accepted the supplies;

(ii) The contractor has performed all services and the Government has accepted these services.

This definition raises questions as to when a cost reimbursement or T&M/LH contract can be considered physically complete.

A fully funded cost reimbursement contract is to contain the Limitation of Cost clause, FAR 52.232-20. Under that clause, a contractor is not required to continue work on the contract once the allowable costs incurred by the contractor equal the estimated cost of the contract. Thus, the contractor can stop performing although it has not delivered the supplies or performed the services called for by the contract.

Similarly, an incrementally funded cost reimbursement contract is required to include the Limitation of Funds clause, FAR 52.232-22. Under that clause, the contractor “agrees to perform, or have performed, work on the contract up to the point at which the total amount paid and payable by the Government under the contract approximates, but does not exceed, the total amount actually allotted by the Government to the contract.” Again, this clause permits the contractor to stop work when the total amount paid or payable approximates the amount allotted to the contract.

Finally, a T&M/LH contract is required to incorporate the T&M Payments clause, FAR 52.232-7.  That clause requires the contract to state a ceiling amount on the government’s liability to pay the contractor. Further, the contractor is not required to continue performance when the amount due would exceed the ceiling amount.

Thus, in all three instances, the express conditions for determining when a contract is physically complete may not be present. Therefore, in these situations, a contract must be considered physically complete if the government has decided not to add more funding to the contract so that the contractor is relieved of future performance obligations.

Finally, it should be noted that the rates used to close a contract under 42.708 are final and binding on the parties in regard to that contract and are not subject to adjustment when final rates are established using the procedures in FAR 42.705.