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What is the COR's role in monitoring cost reimbursement contracts?

Since cost reimbursement contracts place maximum risk on the government, the COR's monitoring duties are extensive and critical. Not only does the COR have to monitor the contractor for acceptable performance, but the CO also relies primarily on the COR to track and guide the contractor's activities in order to conserve funds. Therefore, the COR's careful review of the contractor's billings under a cost reimbursement type contract is particularly important.

The COR needs to closely monitor and guide the contractor's effort in order to prevent the waste of taxpayers' funds and to obtain the services or products needed within budget. Inefficient or misguided performance by the contractor can mean that the government will have to curtail or forgo needed services or rob other programs to provide additional funding. Either alternative has an adverse program impact.

What is the allowable cost and payment clause?

Cost reimbursement type contracts contain a clause entitled "allowable cost and payment." This clause:

Obligates the government to pay the contractor the "allowable" costs of performing the contract

Entitles the contractor to submit periodic invoices claiming such costs as the work progresses

Promises timely payment of such invoices.

What is an allowable cost?

An allowable cost:

Is reasonable

Is allocable

Is authorized by FAR Part 31 and by the terms of the contract

Follows accounting rules for cost accounting standards or generally acceptable accounting principles.

What are reasonable costs?

The FAR defines a reasonable cost as follows: "A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business." The CO has the ultimate responsibility for determining whether a particular cost is reasonable; however, the COR generally has technical experience related to the work that is being performed under the contract and can certainly assist the CO in determining reasonableness. Accordingly, to support the CO, invoices are routed to the COR for review, with respect to the reasonableness and allocability of costs claimed for reimbursement.

What are allocable costs?

A cost is properly allocable to a contract if it is incurred specifically for the contract or is incurred for another activity that also benefits the contract. With regard to the allocability of costs claimed, the COR must look for any direct costs that appear to have no connection with the contract work. If the COR cannot understand why the contractor would need materials or effort billed for to perform the contract, then the costs may have been charged to the contract in error.

What funding clauses are related to the cost-reimbursement contract?

FAR 32.704 provides for the use of two clauses regarding payment and funding of cost reimbursement contracts:

Limitation of cost clause. This clause is used when a contract is fully funded. It states the parties' agreement that performance of the contract will not cost the government more than the estimated cost specified in the contract. The contractor is required only to make his "best effort" to fulfill the requirements of the contract. If the estimated cost figure is reached and the contract requirements are not fulfilled, the government must make a decision about whether or not to provide additional funding and proceed with the project.

Limitation of funds clause. This clause is used in contracts to be funded incrementally. The clause is a risk-mitigation factor for the government. It provides that the amount of funds obligated to a contract at any given time represents the limit of the government's obligation under the contract. If there is no progress or unsatisfactory progress in performance, the government is under no obligation to provide additional funding.

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