Basic Contract Administration

BASIC CONTRACT
ADMINISTRATION
TEXT REFERENCE
Chapters 1 – 13
Current Through FAC 90-46 and

DAC 91-12
Prepared by:
Logistics Management Institute Federal Acquisition Institute

Center for Public Administration 18th and F Streets, N.W.
2000 Corporate Ridge Washington, DC 20405
McLean, Virginia 22102-7805
BASIC CONTRACT ADMINISTRATION
Table of Contents
Chapter 1: Contract Administration Planning
Vignette: Eric’s First Day ................................................................................................. 1-1

Course Learning Objectives............................................................................................... 1-3
Introduction to Contract Administration Planning ............................................................. 1-4
Steps in Contract Administration Planning ........................................................................ 1-6
Contract Administration Planning ...................................................................................... 1-7

1.1 Review the Contract File ..................................................................................... 1-7
Vignette: Pallet Procurement Contract Administration Planning .................................. 1-10
1.2 Determine Criticality ......................................................................................... 1-10
Vignette: Which Designator for the Pallet Procurement? .............................................. 1-11
1.3 Identify Previous Issues and Problems .............................................................. 1-12
Vignette: Joanne’s Concern ............................................................................................ 1-15
1.4 Meet to Discuss Performance Monitoring ......................................................... 1-15
1.5 Determine the Extent of Performance Monitoring ............................................ 1-16
1.6 Delegate Contract Administration Functions .................................................... 1-20
1.7 The Contract Administration Plan ..................................................................... 1-31
1.8 Provide Notices and Instructions ....................................................................... 1-39
1.9 Provide Formal Notice to Contractor................................................................. 1-43
Vignette: Putting the Pallet Procurement in Perspective................................................ 1-46
Chapter 2: Postaward Orientations
Vignette: Assessing the Need to Get Started ..................................................................... 2-1

Course Learning Objectives................................................................................................ 2-3
Introduction to Postaward Orientations .............................................................................. 2-4
Steps in Postaward Orientation Planning............................................................................ 2-5
Postaward Orientation Planning ......................................................................................... 2-6

2.1 Determine the Need ............................................................................................. 2-6
2.2 Determine the Type of Orientation ...................................................................... 2-8
2.3 Planning Orientations ........................................................................................ 2-12
Vignette: Acquisition Team Planning .............................................................................. 2-14
Vignette: Harry’s Continuing Concern ........................................................................... 2-21
2.4 Conduct the Orientation ..................................................................................... 2-22
Vignette: It Never Hurts to Ask........................................................................................ 2-25
2.5 Prepare Postaward Orientation Report .............................................................. 2-25
2.6 Actions to Resolve Disagreements on Key Issues ............................................. 2-27
2.7 Identify the Need for Contract Modifications.................................................... 2-27
2.8 Document the Contract File ............................................................................... 2-28
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2.9 Provide Information to Interested Parties .......................................................... 2-28
2-10 Obtain Executed Contractual Documents, Bonds, or Insurance ........................ 2-29
Chapter 3: Basic Procedures for Successful Performance Monitoring
Vignette: Monitoring the Pallet Procurement ................................................................... 3-1

Introduction to Performance Monitoring ............................................................................ 3-4
Steps in Successful Performance Monitoring ..................................................................... 3-6
Successful Performance Monitoring ................................................................................... 3-8

3.1 Respond to Contractor Requests .......................................................................... 3-8
3.2 Monitor Assigned Technical and Other Support Personnel ................................ 3-9
3.3 Obtain Data on Contractor Performance ........................................................... 3-16
Vignette: And Away We Go! … Or Do We? .................................................................... 3-24
Vignette: Lessons Learned Pay Dividends ...................................................................... 3-30
3.4 Inform Others of Contract Status ....................................................................... 3-35
Chapter 4: Problem Resolution in Contract Administration
Vignette: Yet Another Realm for Eric ................................................................................ 4-1

Introduction to Problem Resolution in Contract Administration........................................ 4-4
Steps in Problem Resolution During Contract Administration .......................................... 4-5
Problem Resolution in Contract Administration ................................................................ 4-6

4.1 Verify and Document Known or Predictable Performance Problems ................. 4-6
4.2 Determine Impact of Problem on Requirement ................................................... 4-7
Vignette: Cause and Effect: A Two-Sided Coin................................................................ 4-9
4.3 Suspension or Stoppage of Work ....................................................................... 4-11
Vignette: To Stop or Not to Stop? … That is the Question .............................................. 4-14
Vignette: You Handle the Paperwork … I’ll Handle the Job .......................................... 4-21
4.4 Performance Delays ........................................................................................... 4-22
Vignette: Unwinding a Tangled Skein ............................................................................. 4-30
4.5 Resolve Contractor Performance Problems ....................................................... 4-38
4.6 Document Final Decision .................................................................................. 4-38
4.7 Invoke Formal Remedy...................................................................................... 4-39
4.8 Inform Requiring Activity and Other Interested Parties .................................... 4-39
Chapter 5: Contract Modifications and Options
Vignette: Another Challenging Frontier ........................................................................... 5-1

Introduction to Contract Modifications and Options .......................................................... 5-4
Steps in Modifying Contracts ............................................................................................. 5-7
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Modifications ...................................................................................................................... 5-8
5.1 Modifications ....................................................................................................... 5-8
5.1.1 Consider Contractor Requests for Modifications ................................................ 5-8
5.1.2 Consider Government Requests for Modifications ........................................... 5-10
5.1.3 Determine Impact of Change on Scope ............................................................. 5-11
5.1.4 Estimate Impact of Change ................................................................................ 5-14
5.1.5 Determine Appropriate Consideration ............................................................... 5-17
5.1.6 Provide Notice of Rejection ............................................................................... 5-18
5.1.7 Determine Type of Contract Modification ........................................................ 5-18
5.1.8 Implement Contract Modifications for Supplemental Agreements ................... 5-20
5.1.9 Implement Contract Modifications for Unilateral Changes .............................. 5-26
5.1.10 Implement Contract Modifications for Other Administrative Changes ............ 5-30
Vignette: What a Difference a Clause Makes.................................................................. 5-32
5.1.11 Implement Contract Modifications for Novation Agreements .......................... 5-33
5.1.12 Implement Contract Modifications for Name Changes ..................................... 5-36
Steps in Exercising Options .............................................................................................. 5-39

5.2 Options ............................................................................................................... 5-40
5.2.1 Identify Available Options................................................................................. 5-40
5.2.2 Determine Need for Additional Supplies or Services ........................................ 5-41
5.2.3 Determine Whether Option Requires Synopsizing ............................................ 5-41
5.2.4 Determine Whether to Exercise Options ........................................................... 5-41
5.2.5 Provide Written Notice and Exercise Option .................................................... 5-45
5.2.6 Prepare Written Determination for Contract File .............................................. 5-46
Vignette: Getting in Shape to Exercise an Option ........................................................... 5-47
Chapter 6: Contract Remedies
Vignette: Accountability When Things Go Wrong ............................................................ 6-1

Introduction to Contract Remedies ..................................................................................... 6-4
Preliminary Steps for Choosing Contract Remedies .......................................................... 6-6
Identifying Types of Remedies ........................................................................................... 6-7

6.1 Identify Types of Remedies ................................................................................. 6-7
Steps in Issuing a Delinquency Notice ............................................................................... 6-8
Delinquency Notices ........................................................................................................... 6-9
6.2 Issue Cure or Show Cause Notice........................................................................ 6-9
Steps in Implementing Liquidated Damages .................................................................... 6-17
Liquidated Damages ......................................................................................................... 6-18
6.3 Liquidated Damages .......................................................................................... 6-18
Steps in Rejecting Nonconforming Supplies or Services ................................................. 6-24
Nonconforming Supplies or Services ............................................................................... 6-25
6.4 Rejection of Nonconforming Supplies or Services............................................ 6-25
Steps in Implementing Express Warranties ...................................................................... 6-31
Express Warranties ........................................................................................................... 6-32
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6.5 Express Warranties ............................................................................................ 6-32
Steps in Implementing Implied Warranties ...................................................................... 6-40
Implied Warranties............................................................................................................ 6-41
6.6 Implied Warranties............................................................................................. 6-41
Vignette: Which is It … Warranty, Guarantee, or Guaranty? ........................................ 6-43
Steps in Determining Latent Defects, Fraud, or Gross Mistakes...................................... 6-45
Latent Defects, Fraud, or Gross Mistakes......................................................................... 6-46
6.7 Latent Defects, Fraud, or Gross Mistakes.......................................................... 6-46
6.8 Select Most Appropriate Remedy ...................................................................... 6-49
6.9 Withhold, Reduce, or Demand Payment from Contractor ................................. 6-49
Chapter 7: Contract Payment
Vignette: Quid Pro Quo … Payment for Performance...................................................... 7-1

Introduction to Contract Payment ....................................................................................... 7-4
Steps in Processing Contract Payment................................................................................ 7-8
Contract Payment ................................................................................................................ 7-9

7.1 Inspect Invoice or Voucher and Notify Contractor of Any Defects .................... 7-9
7.2 Identify Terms and Conditions Pertinent to Payment ........................................ 7-11
7.3 Obtain Documents and Determinations Pertinent to Payment .......................... 7-11
7.4 Performance-Based Payments ........................................................................... 7-14
7.5 Identify Withholdings, Deductions, or Other Corrections ................................. 7-18
7.6 Determine if Assignee is Protected From Deductions or Withholdings ............ 7-21
7.7 Determine Amount Due Contractor ................................................................... 7-22
7.8 Notify Contractor of Differences Between Invoiced or Vouchered Amounts
and Amounts to be Paid ..................................................................................... 7-22
7.9 Notify Contractor of Final Decision on Paying Lesser Amount ....................... 7-22
7.10 Forward Invoice or Voucher .............................................................................. 7-23
Chapter 8: Contract Closeout
Vignette: The Whole is Greater Than the Sum of Its Parts ............................................... 8-1
Introduction to Contract Closeout....................................................................................... 8-4
Steps in Contract Closeout .................................................................................................. 8-6
Contract Closeout ............................................................................................................... 8-7

8.1 Verify Contract is Physically Complete .............................................................. 8-7
8.2 Obtain Forms, Reports, and Clearances Required at Closeout ............................ 8-7
8.3 Verify Other Terms and Conditions Have Been Met .......................................... 8-8
8.4 Settle Any Outstanding Issues ............................................................................. 8-8
8.5 Verify No Outstanding Claims or Disputes ......................................................... 8-8
8.6 Make Final Payment or Collect Overpayment From Contractor ....................... 8-10
8.7 Identify and Recommend Deobligation of Excess Funds .................................. 8-10
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8.8 Prepare Contract Completion Statement and Dispose of Files .......................... 8-10
8.9 Determine Whether to Invoke Rights Under Continuity of Services Clause .... 8-12
Chapter 9: Disputes, Claims, and Terminations
Vignette: To Be Forewarned is to be Forearmed .............................................................. 9-1

Introduction to Disputes, Claims, and Terminations .......................................................... 9-5
Disputes and Claims ........................................................................................................... 9-7

9.1 Disputes and Claims ............................................................................................ 9-7
Terminations ..................................................................................................................... 9-28
9.2 Terminations ...................................................................................................... 9-28
9.2.1 Termination for Default ..................................................................................... 9-30
9.2.2 Termination for Convenience ............................................................................ 9-44
Vignette: Convenience, Cause, or What? ........................................................................ 9-49
Chapter 10: Consent to Subcontracts
Vignette: There’s More to It Than Meets the Eye ........................................................... 10-1

Course Learning Objectives.............................................................................................. 10-4
Introduction to Consent to Subcontracts ........................................................................... 10-5
Steps in Consenting to Subcontracts ................................................................................. 10-7
To Consent or Not to Consent .......................................................................................... 10-8

10.1 Determine Consent Requirements ..................................................................... 10-8
Vignette: Some Folks Just Don’t Get It ........................................................................... 10-9
10.2 Identify Subcontracts Requiring Consent ........................................................ 10-10
10.3 Obtain and Review Advance Notifications ..................................................... 10-12
10.4 Determine If FAR Prohibits Consent............................................................... 10-16
10.5 Determine to Withhold Consent for Other Reasons or Establish Conditions
for Consent ....................................................................................................... 10-19
10.6 Negotiate Subcontracting Changes or Corrections .......................................... 10-23
10.7 Document the Decision .................................................................................... 10-24
10.8 Monitor to Ensure Subcontracts Are Awarded Properly ................................. 10-25
Chapter 11: Limitation of Costs
Vignette: Cost Plus Whatever … A Different World ....................................................... 11-1

Introduction to Limitation of Costs .................................................................................. 11-4
Steps in Limitation of Costs.............................................................................................. 11-6
Limitation of Costs ........................................................................................................... 11-7

11.1 Determine If Contractor Nearing Estimated Cost or Limit of Funds ................ 11-7
11.2 Meet With Government Contract Administration Team ................................... 11-9
11.3 Resolve the Problem .......................................................................................... 11-9
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Vignette: When Emotions Run High .............................................................................. 11-11
11.4 Deobligate Excess Funds ................................................................................. 11-12
Chapter 12: Assignment of Claims
Vignette: The Assignment of … What? ............................................................................ 12-1

Introduction to Assignment of Claims .............................................................................. 12-4
Steps in Assigning Payments ............................................................................................ 12-7
Assignment of Claims ....................................................................................................... 12-8

12.1 Determine Contract Permits Assignment........................................................... 12-8
12.2 Determine Proper Request ................................................................................. 12-8
12.3 Determine Assignment Exists .......................................................................... 12-11
12.4 Execute and Return Assignment ...................................................................... 12-12
12.5 Approve Release of Assignment ...................................................................... 12-12
Chapter 13: Property Administration
Vignette: There Comes a Time for Action ....................................................................... 13-1

Introduction to Property Administration........................................................................... 13-4
Steps in Property Administration ...................................................................................... 13-6
Property Administration ................................................................................................... 13-7

13.1 Establish Reporting Requirements..................................................................... 13-7
13.2 Monitor Delivery of Government Property ....................................................... 13-7
13.3 Monitor Contractor Property Control System ................................................... 13-8
13.4 Determine to Decrease or Provide Substitute GFP .......................................... 13-17
13.5 Evaluate and Document Evidence of Loss, Damage, or Destruction .............. 13-18
13.6 Identify Contractor Liability ............................................................................ 13-18
Vignette: Who’s to Blame and What to Do?.................................................................. 13-19
13.7 Prepare Conclusions on Extent and Value of Loss or Damage ....................... 13-20
13.8 Issue Demand for Payment, When Appropriate .............................................. 13-20
13.9 Recover or Dispose of Government Property .................................................. 13-20
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CHAPTER 1
CONTRACT ADMINISTRATION PLANNING
ERIC’S FIRST DAY
It is Eric Schmidt’s first day on the job, and he is understandably nervous. His boss, Joanne
Davidson, is the agency’s top contracting officer. While considered extremely able, she has a
reputation for being tough. Eric had been introduced to the staff at its morning meeting, and he
has settled into his new office. Indeed, he is ready to receive his first assignment from Joanne.
Two years ago, the agency replaced some 30 small supply depots with three totally automated
warehouse facilities. Each facility has 20 bays, and each bay is 10 bins high. The material dis-
pensed at each facility is stored on pallets in individual bins. The operation of the bins is effi-
cient, and the overall warehousing system operates well. There is, however, a nagging problem
associated with the material used for pallet fabrication. The material is called out in an agency-
specific specification, and the result of its use has been troublesome because the material does
not provide sufficient flexibility to withstand the flexing caused by the continual movement of
pallets in and out of each facility. This movement is necessary, of course, to accommodate the
ongoing flow of material within the warehousing system. Both the manufacturer of the auto-
mated system and the agency’s laboratory have been working to find a solution to what has de-
veloped into an expensive problem of pallet replacement. Whatever the solution, it has to be
cost effective. Until one is found, a continuing supply of pallets will be needed at the three
warehouse facilities.
After consulting with both the warehousing system manufacturer and agency laboratory person-
nel, Joanne felt that the procurement of pallets requiring fabrication under a specified material
will not get the job done. She concluded it is both a waste of time and money. For instance,
market research had surfaced a considerable number of pallet manufacturers, and the examina-
tion of supplier literature had proved to be a real eyeopener about what might be available in
terms of currently manufactured pallets. Customary commercial practices for buyer-seller
agreements were evident, and the regular use of implied warranties of merchantability or fitness
for a particular purpose were found virtually everywhere. In considering alternatives with her
technical and contracting colleagues, all agreed that using a performance specification and ac-
quiring the pallets as commercial items would ensure some predictable benefits.
As a result of effective planning with the agency’s acquisition team, Joanne had solicited the
marketplace using the procedures of FAR Part 12 (Acquisition of Commercial Items) comple-
mented by the use of FAR Part 15 (Contracting by Negotiation) to accommodate what might be
needed to clarify the agency’s performance specification for the procurement of pallets. The de-
cision was made to solicit widely, and the procurement was labeled as unrestrictive. An appro-
priate notice was publicized in the Commerce Business Daily (CBD), competitive offers were
received, and a contract was awarded within 45 days of the procurement’s announcement.
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As Joanne explained to Eric, “Your first job is to develop a contract administration plan for the
pallet contract we awarded yesterday to Platform Industries. I realize you know nothing about
the requirement or the company. However, you may be best qualified to give me a fresh look at
a program covered by a performance specification and procured under FAR Parts 12 and 15.
It’s kind of a new experience for all of us, Eric. Read the contract file carefully and develop
your plan based on the information you find. The first thing you’ll notice is that the contract file
is diminished in size from those we generally handle for deals like this. We’ll meet tomorrow
morning with someone involved in the program and work to finalize your plan. Any questions at
this point?” added the contracting officer. Eric responded cautiously. “No, but I’m sure that
will change once I’ve gotten into the contract file, Joanne.”
As she checked her watch and began to leave, Joanne emphasized to her new contract adminis-
trator the importance of the procurement’s success in light of the longstanding pallet pliability
problem. Half smiling, she rubbed her hands together, backed out of the office, and left by say-
ing, “I’m counting on you Eric, and I know you’ll come through for us. See you tomorrow morn-
ing.”
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CHAPTER 1
COURSE LEARNING OBJECTIVES

At the end of this course, you will be able to:
Overall: Develop a contract administration plan consistent with the complexity of the ac-
quisition and instruct personnel on their respective roles and responsibilities dur-
ing the performance period.
Individual:
1.1 Review a contract file to identify critical contract clauses and requirements.
1.2 Assign a criticality designator to the contract.
1.3 From an acquisition’s history, identify previous issues and problems with an ex-
isting contractor or contracts for similar requirements.
1.4 Meet with a contract’s acquisition team to discuss performance monitoring and
surveillance.
1.5 Determine the extent of any required performance monitoring and surveillance.
1.6 Determine those contract administration functions, if any, that will be delegated
and to whom.
1.7 Develop a contract administration plan.
1.8 Provide notices containing information and instructions to technical representa-

tives and other support personnel concerning their roles, responsibilities, and li-
mitations of authority.
1.9 Provide formal notices to contractors concerning the names, roles, responsibili-
ties, and limitations of authority of government contract administration personnel.
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INTRODUCTION TO CONTRACT
ADMINISTRATION PLANNING
Contract Administra- Contract administration planning involves activity in setting up systems

tion Planning and procedures to ensure compliance with a contract’s terms and condi-
tions during performance. The administration of any contract should be
considered during an acquisition’s planning phase. Finalizing the plan for
this administration is done once a contract has been awarded.
Effective contract administration resides in tailoring its requirements to an

acquisition’s complexity, as well as recognizing the need for flexibility.
No one plan or planning device represents a panacea for contract adminis-

tration. For the acquisition of commercial items or services, the need for
administration should be minimal. For the acquisition of complex sys-
tems, the need for administration will require a considerable effort by the
Government and a contractor.
A Common Failure Failure to read and understand a contract frequently causes contract ad-
and Problems ministration problems.
Remember: A contract is a written, mutually binding legal relationship

between or among competent parties to do or not to do something not oth-
erwise prohibited by law, and its terms and conditions are enforceable un-
der law.
When contract administration monitoring or surveillance systems are

planned, they must be designed to ensure that the Government and a con-
tractor live up to their promises and fulfill agreed-to responsibilities.
Objective of Contract The principal objective of contract administration planning is twofold: to

Administration Plan- set up a system that reinforces the performance of both parties’ responsi-
ning bilities; and to provide means for the early recognition of performance
problems either before or when they occur.
The result of contract administration planning is reflected in a contract

administration plan. For acquiring commercial items, this plan should be
simple and straightforward. Large and complex acquisitions will require
more detailed plans and may call for the support of various capabilities
(e.g., quality assurance, technical monitoring, and others).
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CHAPTER 1
Steps in Performance The steps in planning for contract administration are charted on the next
page. Following the flowchart, each step is discussed in detail.
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STEPS IN CONTRACT ADMINISTRATION

PLANNING
Input: Prospective contract.
1. Review the contract file.
2-5. Determine the extent of performance

monitoring.
6. Determine which contract administration

functions will be delegated and to whom.
7. Develop a contract administration plan.
8. Provide notice and instructions to

representatives of the Contracting Officer
(e.g., CORs/COTRs).
9. Notify contractors of names, roles,

responsibilities, and limitations of authority for
Government representatives.
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CHAPTER 1

1.1 Review the Con- A thorough review of the contract file will turn up any clauses that are
tract File critical to performance and any other requirements that may influence or
have an impact on contract administration planning decisions. Exhibit 1-1
lists areas of prime importance.
Tailor to Meet the Need Remember: Effective contract administration planning tailors itself to re-
flect the need for performance monitoring and reporting. Overzealous
administrative requirements may result in an unnecessary expenditure of
Contract File Areas to Study in Detail
FAR Subpart 42.2 The assignment of contract administration functions.
FAR 42.1105 Criticality designator.
FAR Subpart 4.4 Security requirements.
FAR Subpart 42.11 Production surveillance requirements and reporting.
FAR 42.204 Supporting contract administration requirements.
When applicable, special contract requirements, including:
Specifications,
Data requirements,
First article testing,
Government property,
Inspection and acceptance,
Special Section H clauses,
Contractor’s proposal, and
Delivery schedule (or performance period).
time and money.
Exhibit 1-1
1-7
Contract File Checklist Exhibit 1-2 provides an example of a contract file checklist that simplifies
the review of any contract file.
Write in the “comment” column references to items that have particular or

unusual importance to contract administration planning. For example, you
might note a paragraph number in a preaward survey that casts doubt on
the contractor’s plant capacity, and this may warrant an increased level of
monitoring during contract administration.
Review Preaward Data Always review preaward file documentation, especially when another per-
son awarded the contract. For instance, if you had not attended a prebid or
preproposal meeting, you might find some information in the minutes of
that meeting that addresses an interpretation of a special contract clause.
You might have interpreted this clause differently.
Identify Critical Areas After completing a review of the contract file, you should have identified
all critical areas bearing on performance and monitoring. With this
knowl-edge you can determine:
How critical the requirement is to the Government, and
How much time and effort are needed to ensure success through
contract administration.
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CHAPTER 1
Contract File Checklist
FAR 4.803
Item Yes No Comment
1. Purchase request, acquisition planning information, and
other presolicitation documents.
2. Justifications and approvals, determinations and findings,
and associated documents.
3. Evidence of the availability of funds.
4. A copy of the solicitation and any synopsis published in
the Commerce Business Daily.
5. Security requirements and evidence of required clearances.
6. Contractor’s certifications and representations.
7. Preaward survey reports or other references.
8. Contracting officer’s determination of contractor
responsibility.
9. Statement of facts justifying the waiver of SBA requests to
suspend award action per FAR 19.505(f).
10. Packaging and transportation data.
11. Cost or price analysis.
12. Audit reports or reasons for their waiver.
13. Record of negotiation.
14. Authority for deviations from regulatory, statutory,
and other restrictive requirements.
15. Notice of award.
16. The original of the signed contract, all contract
modifications, and supporting documents.
17. Bid, performance, payment, or other bond documents,
or references to them, and notices to sureties.
Exhibit 1-2
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PALLET PROCUREMENT CONTRACT ADMINISTRATION PLANNING
In examining the contract file for pallets, Eric read the entire file and was taken by its
overall simplicity. As required, the Standard Form (SF) 1449 (Solicitation/Contract/
Order for Commercial Items) had been used. He noted that the contracting arrangement
called for an indefinite-delivery indefinite-quantity contract (ID/IQ) over a two-year
period with an option for one additional year. A minimum and maximum quantity of
pallets was specified for both the base and option periods. A firm-fixed price per pallet
based on the size of any single delivery order had been negotiated. Such pricing
represented customary commercial practice, and since the pallets were definably
commercial there was no requirement for the submission of cost or pricing data. In-
voicing was to occur after each delivery, and payment would be made for conforming
pallets.
Eric did take special note of the procurement’s use of the clause at FAR 52.212-4
(Contract Terms and Conditions — Commercial Items). There had been agreement to all
these terms and conditions with the exception of one, namely, the standard warranty of
merchantability had been altered to substitute for it a warranty of fitness for a particular
purpose. He reasoned that this had been done to reflect the need for the contractor’s
compliance with the performance specification and to protect the Government’s interest
at the time of inspection and acceptance. This had been covered by an appropriate
addendum to the SF 1449. The file also provided positive past performance information
on Platform Industries.
1.2 Determine Criti- The Government does not have sufficient resources to evaluate a contrac-
cality tor’s every action for each contract it awards. Prioritizing each contract
based on its criticality to the Government is one indicator that helps in the
FAR 42.1104 proper allocation of contract administration resources.
FAR 42.1105
Requirement for Use of The contracting officer is required to assign a designator based on the crit-
Designators icality of the requirement for all supplies and services contracts (except
facilities, construction, or Federal Supply Schedule contracts). Criticality
refers to the degree of overall importance that a contract has to the Gov-
ernment. The criticality designator will be shown on the contract when
this decision is made prior to the issuance of the solicitation.
Choice of Designators In a busy contract administration office, you may be called on to recom-
mend a criticality designator. Your recommended choice will be either
“A,” “B,” or “C.” The criterion for each of these designators is shown in
Exhibit 1-3.
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CHAPTER 1
The criticality designators indicate where to concentrate surveillance ef-

forts. These designators become particularly important when contract
administration resources are spread thin.
Selection of Criticality Designator
Criticality
Designator Criterion
A Critical contracts, including DX-rated contracts, contracts containing an

unusual or compelling urgency, and contracts for major systems.
B Contracts (other than those designated “A”) for items needed to maintain a
Government or contractor production or repair line, to preclude out-of-
stock conditions, or to meet user needs for nonstock items.
C All contracts other than those designated “A” or “B.”
Exhibit 1-3
Assigning Designators DoD assigns criticality designators based on the priority of the require-
DFARS 242.1105 ment, with Designator C used for unilateral purchase orders.
WHICH DESIGNATOR FOR THE PALLET PROCUREMENT?
Eric noticed that Joanne had not yet assigned a criticality designator to the contract he was
reviewing. He made a note to recommend a “B” designator. The pallets are necessary to
maintain the Government’s warehouse facilities.
DX and DO Ratings Although the criticality designator a contracting officer may assign has
significance within your office, be aware that a certain class of criticality
designated “A” contracts, those designated “DX” prior to award, also has
a potential impact for work in process within the contractor’s plant.
FAR Subpart 11.6 Persons who have special authorization under the Defense Production Act
can apply either a DX or a DO rating to a contract that supports the na-
tional defense. The rating is assigned prior to issuance of the solicitation
and will appear on the contract.
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Defense Priorities and The DoD implementation of priorities and allocations are in DoDI 4400.1,
Allocations Priorities and Allocations—Delegation of DO and DX Priorities and Allo-
cations Authorities, Rescheduling of Deliveries and Continuance of Re-
DoDI 4400.1 lated Manuals.
DFARS 211.602
Priority of Ratings DX rated contracts have first priority in the “pecking order” within a con-
tractor’s plant in the event of material shortages, strikes, or similar prob-
lems that impact the normal processing of production orders within the
plant. This “pecking order” includes any commercial work in process as
well as other Government contract requirements within the plant that are
not rated DX.
The other rating is DO. When a contractor is behind in its production

scheduling, it is legally bound to give second priority to DO rated Gov-
ernment contracts after all DX rated orders.
Legal Significance Realize that a contractor is legally bound to expedite DX and DO rated
Government contracts.
Even if you do deal with any contracts that support the national defense,
be aware that contractors may not be able to expedite delivery for your
order if they have received rated orders from other agencies. DX or DO
rated orders have preference over an unrated order.
1.3 Identify Previous Consideration must be given to the amount of time and effort that will be
Issues and Problems necessary to ensure successful performance. This depends on such factors
as:
Type of contract. (What type of contract is this? If there was a

previous procurement, did the type of contract change?)
Past experiences with this type of requirement. (Has this re-
quirement ever been purchased before? What are current problems
associated with this product or service?)
Past experience with the contractor. (Did this contractor pre-
viously deliver on time? Did the contractor perform as expected?)
Type of specification. (What type of specification was used to
describe the requirement: design, function, performance, or a
combination of types? Have there been any changes in the speci-
fication? Are there any other types of specifications that were
used on similar contracts? What monitoring does this type of spe-
cification require to ensure compliance?)
1-12
CHAPTER 1
Type of requirement. (Does this type of requirement—service or

supply—necessitate extensive monitoring to ensure compliance?)
Warranty provisions. (Does the contract include any warranty
provisions? Are they the same as offered commercially? Were
there problems in the past with reliability beyond the warranty pe-
riod?)
Urgency of the requirement. (How soon is this requirement
needed and what would happen if delivery was delayed? Were
there any previous problems with contractors meeting the delivery
terms? Has this contractor established that it can expedite deli-
very, if needed?)
Consider Information to If applicable, focus your review on:

Review
Patterns of past performance,
Previously applied remedies and the contractor’s reaction to them,

and
Key personnel for the immediate contract that are identified as ei-
ther good or poor performers in past performance data.
Identify indicators of a contractor’s past performance by:
Reviewing files in your office covering the contractor’s perfor-

mance history, and
Reviewing an existing contract file itself.
Reviewing Past Per- Reviewing past performance should involve the following two steps.
formance
Step 1 Review the contractor’s performance history. An important source of
information for identifying potential problem areas is a contractor’s per-
FAR 4.801
formance file. The data included in this file are considered confidential
FAR Subpart 42.15 and not available to non-Government personnel. Such files should include
the following information:
Contracts awarded and dollar amounts,
Items/services purchased,
Key personnel involved with the contract,
Delivery/performance results, and
1-13
Contractor-provided past performance information.
This file represents a history of the contractor’s performance over a period

of time on individual contracts, if one exists, plus other information on the
contractor’s past performance from other sources.
If your office has had previous experience with the contractor, past prob-
lem areas would be documented within this file. These areas will require
special attention on a current contract. Generally, when a contractor has
demonstrated an inadequacy on a past contract, it will have a tendency
toward similar deficiencies in future work.
Deficiencies in a contractor’s performance include:
Missed delivery dates,
Labor problems,
Shortfalls in technical performance capabilities,
Financial difficulties, and
Reporting requirements (progress reports, submission of subcon-

tracting reports, etc.).
You should find any remedies that were used and the contractor’s reac-
tions to them documented within this file.
Step 2 Review other available indicators of past performance. Normally,

records of past performance within your office will be sufficient for plan-
ning efforts. If your office has not had any previous experience with the
contractor, you may want to look for other indicators of past performance.
The contract file itself is the best place to look for other indicators. Past
performance or responsibility determination data in the contract file may
contain information from:
Other Government offices, and/or
A contractor’s commercial clients.
This information may indicate some problem areas, even though it may
not have been of sufficient magnitude to warrant a negative past perfor-
mance rating or a nonresponsibility determination.
Keep information provided by both Government and non-Government

per-sonnel strictly confidential. The contractor should never be given
1-14
CHAPTER 1
access to these records, told of their contents, or told of those who pro-
vided the information.
JOANNE’S CONCERN
Platform Industries was not new to the Government contracting arena. A check on its
provided references, four related to government contracts and five to private-sector
work, proved a valuable source of information. The record related a history of
performance over the past five years that covered different kinds of work ranging from
interior design and construction for a large retail establishment to providing large
orders of pallets for two government agencies. One of those agencies noted some
problems associated with timely deliveries to multiple locations, but they also related the
contractor’s willingness to replace an order of several hundred pallets, each of which
had been cut several inches short of what the Government’s specification required. A
determination of responsibility found the company financially stable with a good backlog
of work. Joanne was pleased to have found a viable firm, but she suspected that its
capability to deal with a per-formance specification and varying indefinite quantities of
pallets to ensure timely deliveries would require some careful monitoring.
1.4 Meet to Discuss Meet with the requiring activity to discuss requirements for contract ad-
Performance Monitor- ministration. This discussion should include:
ing
Sharing of any acquisition history concerning the contractor and
the required supplies or services, and
Identifying and ranking the requiring activity’s priorities regarding

the contract.
Focus on User Priorities Focus your discussion for contract monitoring on the requisitioner’s
priorities. Do not spend too much time on contract requirements that the
user is not overly concerned about and, thereby, ignore the user’s vital
concerns. The ultimate goal of any contract, Government or commercial,
is to satisfy the needs of the user. So fashion your contract administration
plan, as much as possible, to meet user priorities.
Meeting Objectives In sophisticated or complex requirements, the use of meetings with requir-
ing activity personnel is beneficial to ensure that:
The Government is working as a team.
Priorities or potential problem areas are understood by all.
Contract progress is measured by foresight, not hindsight.
1-15
1.5 Determine the Ex- A contract is a tool the Government uses to acquire goods and services,
tent of Performance and contract administration is an attempt to manage this tool effectively.
Monitoring A vital part of this management is the monitoring of contractor perfor-
mance. There are two steps involved in determining the extent of moni-
FAR 42.1104 toring that is necessary, given the criticality designator:
Step 1 Assess factors that indicate the appropriate monitoring level. Many
factors are involved in determining how much monitoring is necessary.
FAR 42.1104(a) Some are listed in Exhibit 1-4.
Factors in Determining the Level of Monitoring
♦ Level of the contractor’s own inspection system.
♦ Criticality of the requirement.
♦ Contract requirements for reporting progress and performance.
♦ Contract performance schedule.
♦ Contractor’s production or performance plan.
♦ Contractor’s history of contract performance.
♦ Contractor’s experience with providing the contract’s supplies or services.
♦ Contractor’s financial capability.
♦ Contractor’s risks involved in performance (e.g., type of contract).
Exhibit 1-4
Commercial Items and When acquiring commercial items, the Government is to rely on the con-
Monitoring tractor’s existing quality assurance systems as a substitute for Government
inspection and testing before delivery, unless customary market practices
FAR 12.208 for what is being acquired include in-process inspection. If such inspec-
tion is customary, the Government’s inspection must be consistent with
FAR 46.202-1 commercial practices.
The Government must not rely on inspection by the contractor if the con-
tracting office determines that the Government has a need to test what is
1-16
CHAPTER 1
being acquired before delivery or to pass judgment on the adequacy of the

contractor’s internal work processes.
Even though customary commercial practices may permit virtually no

Commercial Items and
contract administration in the acquisition of a commercial item, the Gov-
Protecting the Public
ernment reserves the right to inspect or test the item as tendered for ac-
Interest
ceptance and to require its repair or replacement (or reperformance if a
service) at no increase in contract price.
FAR 52.212-4
Contractor Inspection When required, standard Government clauses specify the type of inspec-
tion system that the contractor is to maintain for the performance of the
FAR 46.202-1 contract. For example:
FAR 46.202-2 FAR 52.246-1, Contractor Inspection Requirements, which relies
on the contractor’s own internal inspection procedures and indus-
FAR 46.202-3 try standards.
FAR 52.246-2, Inspection Supplies—Fixed Price, which requires a

contractor to establish and maintain an inspection system not oth-
erwise defined except that it must be acceptable to the Govern-
ment. This standard clause can be the only inspection clause in a
contract, or it can be the foundation upon which other Government
inspection specifications are based. It contains the Government’s
basic rights of inspection.
FAR 52.246-11, Higher-Level Contract Quality Requirement

(Government Specification), which requires a contractor to comply
with a specific Government inspection system or quality control
system or quality program.
Contractor Reporting Determine what type of inspection system is required by the contract to
decide whether you want to rely solely on it for monitoring a contractor’s
performance.
Note that the third factor listed in Exhibit 1-4 is reporting data on progress
and performance. The Government has no right to require the contractor
to submit data for monitoring purposes when the contract does not provide
for it. Any required data must be specifically authorized within the sche-
dule, specification, or by a contract clause.
Contract Risks The risks of performance, the last factor listed in Exhibit 1-4, determine in
part your level of monitoring and administrative effort. Because both the
FAR 16.103 Government and the contractor promise to do something or keep from
doing something, both are potentially “at risk” if either, for whatever rea-
son, fails to live up to a contract’s terms.
1-17
Government Risk The Government stands to lose the benefit of a product or service at the
price it agreed to pay, if, for example, required performance is physically
impossible or if the contractor does not have the capability to complete the
work.
Contractor Risk The contractor may lose money if, for example, its performance costs ex-
ceed the price it agreed to, or if it is assessed damages for its failure to
perform. It may also lose good standing if it fails to live up to a contract’s
terms.
Recognize and Allocate A contract is basically an instrument that allocates and defines risks be-
Risks tween the parties. Its terms and conditions set forth each party’s obliga-
tions, as well as each party’s rights if the other should fail to carry out its
obligations. Understand how its terms and conditions—those that are
standard and those that are unique—affect the contractor’s risks. When
those risks are identified, you will understand what the contractor might
do to cover them, and what might have to be done through monitoring to
ensure protection of the Government’s interests.
For instance, if stiff liquidated damages for late delivery are to be assessed
in a production contract and you know progress is lagging in the last
month of the contract, a stepped up level of inspection is probably war-
ranted to ensure that the contractor will not cut corners on quality proce-
dures to make the delivery.
Step 2 Select the most appropriate monitoring method(s). The appropriate

type of monitoring effort depends on the complexity and scope of the con-
tract, as well as the contract’s specific requirements for the submission of
progress reports, schedules, and other reports.
Ways to Monitor Per- Numerous techniques and procedures for determining whether satisfactory
formance delivery or contract completion will take place include:
Reliance on the contractor’s inspection system,
100 percent inspection,
Sample inspection,
Inspection by exception,
Monitoring production or delivery schedules, and
Monitoring schedules devised by Government personnel to meas-

ure contract performance.
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Predelivery Telephone DoD minimum rules on surveillance means that predelivery telephone
Surveillance surveillance is used, with on-site surveillance as required for:
DFARS 242.1104(a) Designator A contracts,
Contracting officer directed on-site surveillance, and
Contracts where your telephone check indicates a problem, unless

the contract administrative officer and the contracting officer de-
cide that an on-site check is not required.
Key Factors for Moni- Make your choice for a monitoring method based on two key considera-
toring tions:
How much you can rely on the contractor’s own system, and
How much you can assume contract problems will receive neces-
sary management attention.
Monitoring Related to Progress on production work is generally easier to measure than progress
the Requirement on a research and development contract. For production work, an inspec-
tor can visit the plant to see if the widgets are, in fact, coming off the as-
sembly line as scheduled and examine one or more for contract com-
pliance.
In the developmental phase of a research and development acquisition,

many of the unknowns inherent in the research phase are gone. Although
the work is not yet repetitive and detailed specifications are still lacking,
the experience gained on earlier contracts, if such existed, provides some
standard for comparison. Nevertheless, the work still depends on the con-
tractor’s ability to cope with obstacles not encountered before. Monitor-
ing is necessary.
Interim Monitoring of Generally, interim monitoring of standard commercial and commercial-

Commercial Items and like items and services is not administratively cost-effective. You need
Services only monitor timely delivery or performance and inspect the delivered
items or work performed. Maximum use of and reliance on the contrac-
tor’s inspection system, production control, or data management system
FAR 42.1104(c)
for these types of items or services is the standard.
Goals of Monitoring Select a method that is most likely to surface the following:
Actual or potential default situations. Act promptly and careful-

ly to initiate immediate improvements while preserving the Gov-
ernment’s right to future remedies available under the contract.
1-19
The need for Government action. Although Government action

may supplement but not supplant the contractor’s own efforts to
solve performance problems, you need to be aware early if Gov-
ernment action will be required.
1.6 Delegate Contract Having determined how the contract will be monitored, the next question
Administration Func- is who will be responsible for its administration. This effort may be per-
tions formed by the contracting officer, the contract administrator, or other ap-
pointed Government representatives. Some are authorized to perform
contractual actions, others are limited to technical direction and clarifica-
tion.
Contracting Officers The contracting officer (CO) is the official authorized to enter into, admi-
nister, and terminate contracts, and make related determinations and find-
FAR 2.101 ings. A single contracting officer may be responsible for delegating duties
to specialized contracting officers, that is:
Administrative Contracting Officer (ACO): The official autho-

rized to perform any postaward contractual action assigned by the
CO. Some agencies have set up separate offices called a Contract
Administrative Office (CAO) to handle postaward functions as
prescribed by that agency. An ACO would be assigned to the
CAO.
Termination Contracting Officer (TCO): The official authorized to

perform postaward actions limited to the termination of contracts.
Your office may refer to the contracting officer as the Procuring (or Prin-
cipal) Contracting Officer (PCO).
For purposes of clarity, all text references to a “contracting officer” refer

to the PCO, that is, the contracting officer responsible for all duties, re-
gardless of whether those duties have been delegated to other contracting
officers.
Contract Administration The contracting officer determines how contract administration will be
Decision handled. The contracting officer must determine whether or not to:
Retain the contract and perform all applicable contract administra-

tion functions,
Retain the contract and perform administrative functions with the

assistance of other Government personnel,
Assign the contract to a contract administration office (CAO), or
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CHAPTER 1
Assign the contract to a CAO with specific limitations and/or spe-

cific additions.
CO Retention of Con- The contracting officer retains a contract and is responsible for the per-
tract Administration formance of all administrative functions unless such performance:
FAR 42.203 Must be performed at or near the contractor’s facility, or
Is required of other organizations by agency-specific regulations

and may be based on such issues as:
Ê Dollar thresholds. (Some agency’s CAOs may not have to ac-

cept contracts below an established amount.)
Ê Type of requirement. (CAOs may not accept contracts cover-

ing off-the-shelf commercially available products.)
Ê Organization. (Agencies may require administration by CAOs

available to an agency.)
Substantial assistance for the support of contract administration beyond an

organization’s normal contract administration functions has to be re-
viewed for its validity above the CO’s level.
When DoD COs May The overall rule is that DoD activities are prohibited from retaining con-
Retain Administration tract administration functions that require the performance of those func-
tions at or near contractor facilities. Consequently, CAOs perform the
DFARS 242.203(a)(i) contract administration of many DoD contracts. However, there are cir-
cumstances when DoD will not relinquish contract administration to a
CAO. Those circumstances involve contracts for:
The National Security Agency,
Research and development performed at universities,
Flight training,
Consultant services,
Base, post, camp, and station purchases,
Operation, maintenance, or installation of radar or communication

equipment at network sites,
Architect-engineer services,
Airlift and sealift services,
1-21
Ballistic missile sites (although CAOs can perform supporting ad-

ministration at missile activation sites) and
Operation and maintenance, or installation of equipment, at mili-

tary test ranges, facilities, and installations.
CAO Responsibilities When a contracting officer assigns a contract to a contract administration

office, the CAO is responsible to:
FAR 42.202(e)
Perform 69 baseline functions to the extent they apply,
Serve as the focal point for inquiries,
Advise the contracting office of all pertinent matters,
Request supporting contract administration when required, and
Reassign contract administration, if required.
Typical Functions The 69 functions listed in the FAR represent the baseline functions of a
contract administration office. Some typical functions are:
FAR 42.302(a)
Conduct postaward orientation conferences;
Perform production support, surveillance, and status reporting;
Ensure timely submission of required reports;
Consent to the placement of subcontracts;
Issue administrative changes; and
Determine whether disclosure statements are in compliance with

Cost Accounting Standards (CAS).
Overseas contract administration should be accomplished under FAR

Administration Outside
42.301, unless the overseas need is not specifically addressed in the FAR.
the U.S.
In this case, you should coordinate contract administration requirements
FAR 42.301 with the U.S. country team or the commander of the unified or specified
command for policy and procedure guidance.
DFARS 242.301
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CHAPTER 1
Additional DoD CAO DoD authorizes CAOs to:

Functions
Review and evaluate contractor estimating systems,
FAR 42.302(a)
Monitor contractor costs,
DFARS 242.302(a)
Perform and negotiate schedules on industrial readiness and mobi-
lization production planning field surveys, and
Issue, negotiate, and execute orders under BOAs for overhaul,

maintenance, and repair.
Withholding Functions The contracting officer may withhold any of the FAR-specified functions
when:
The CO determines the contracting office can better handle the

performance of the function(s), or
Required by agency regulations or interagency cross-servicing

agreements.
Any decision to withhold administrative functions should be made after

consulting with the CAO.
Additional Functions Beyond the 69 baseline functions, the contracting officer may also assign
additional functions, including their administration, such as the following:
FAR 42.302(b)
Supplemental agreements incorporating contractor proposals sub-
mitted under a clause addressing contract changes,
Prices and priced exhibits for unpriced orders under basic ordering
agreements (BOAs),
Supplemental agreements changing contract delivery schedules,
Supplemental agreements providing for the deobligation of un-

spent dollar balances considered excess to known contract re-
quirements,
Changes to interim billing prices,
Adjustments to contract prices resulting from the exercise of an

economic price adjustment clause,
Changes under contracts for ship construction, conversion, or re-

pair, and
1-23
Reduced quantities on firm-fixed-price contracts based on incon-

sequential delivery shortages.
Unless specifically assigned, these functions cannot be performed by the

CAO.
Tailor the Assignment Keep in mind that these functions comprise a potential menu that can be
of Functions assigned to a CAO. Rarely would any contracting officer be required to
actually perform all of them. In fact, some of the functions may not even
be applicable to the contract involved, such as monitoring industrial labor
relations matters on a contract for commercial products or maintaining
surveillance of flight operations on a contract that does not involve air-
craft.
There are also functions that are dependent, to some extent, on events that
occur during contract performance. For example, your office may have
the responsibility of negotiating supplemental agreements changing con-
tract delivery schedules. However, if no change in contract delivery sche-
dules is required during contract performance, then this function will not
be performed.
Additional Support The CAO also has the authority to request supporting contract administra-
tion from another CAO for any function that has been assigned by the con-
tracting officer. The CAO can even reassign the contract when another
office is in a better position to perform administrative functions.
Terminating Support The contracting officer may recall a contract or function previously as-
signed for administration when:
Warranted by a change in circumstances, and
The recall has been approved by a higher level.
Other Government Per- In addition to specialized contracting officers, delegations of contract ad-
sonnel ministration functions can be made to other Government personnel, result-
ing in the formation of a contract administration team.
Team Concept The contracting officer always heads up the contract administration team.
The definition of contracting officer contained at FAR 2.101 “...includes
certain authorized representatives of the contracting officer acting within
the limits of their authority as delegated by the contracting officer.” FAR
is silent on designating these authorized representatives as contracting of-
ficer’s representatives (CORs), contracting officer’s technical representa-
tives (COTRs), or whatever the case may be.
1-24
CHAPTER 1
It is also silent on how technical and nontechnical representatives are to be

addressed, as well as when or how they should be officially designated.
The result is that these issues are covered by individual agency supple-
ments to the FAR, but they are not considered in light of a uniform stand-
ard. They generally reflect organizational practicality.
Contracting Officer’s In practice, the only contracting officer’s representative that is always of-
Technical Representa- ficially designated is the “contracting officer’s technical representative”
tive (COTR) (COTR). Some agencies use the term “contracting officer’s representa-
tive” (COR) instead of COTR. Most agencies use one term or the other to
Contracting Officer’s identify that individual who is specifically given the chief role in monitor-
Representative (COR) ing aspects of the contract that relate to the statement of work or specifica-
tion. However, a few agencies reserve the COTR designator for these
representatives, while using the COR label for individuals who have other
contract administration duties.
This course uses the designators COR and COTR interchangeably to pa-
rallel the practice within the majority of Government agencies. CORs/
COTRs generally perform their contract administration duties as second-
ary responsibilities to their primary job which is in a functional area not
related to contract administration.
Follow your own agency’s practice. The most common places for listing
this practice is in your agency’s supplement to FAR Subpart 1.6 or 42.2.
DoD Definition of the The contracting officer’s representative (COR), as defined by DoD, is an
Contracting Officer’s individual that the contracting officer has designated and authorized in
Representative writing to perform specific technical or administrative functions.
DFARS 202.101
Team Members Although they may not be specifically designated, other Government offi-
cials available to perform various contract administration tasks include:
Contract administrators and contract specialists,
Engineers and scientists,
Project inspectors,
Quality assurance specialists,
Property control administrators,
Legal counsel, and
Auditors.
1-25
Various key players of a contract administration team are depicted in Ex-

hibit 1-5.
Contract Administration Team

Contracting Officer
ACO
TCO
Contracting Officer’s
Inspector Other Personnel Representative
- Project Inspector - Paying Official - Technical Representative
- Quality Assurance - Legal Counsel - Project Manager
Specialist - Auditors - Task Manager
- Engineer
- Scientist
Exhibit 1-5
Team Roles The roles and authorities of these team players depend on the size of the
Government organization and the size of the contract. For instance, an
engineer may be the representative for the requiring activity for a contract
for testing services, one who may not only have written the technical spe-
cifications but also may perform COR/COTR functions, project inspector
functions, and property control administrator functions.
Notifications of Team The delegation of contract administration responsibilities to key team

Roles and Responsibili- members should be made in writing (e.g., letter of delegation to a COR/
ties COTR). While signed by the contracting officer, the designee should
countersign the letter of delegation and a copy of the completed letter
should be placed in the contract file. One should be provided to the de-
signee, and one forwarded to the contractor requesting its written ac-
knowledgment and placement in its contract file.
Team Member Respon- Typical responsibilities of key contract administration personnel are gen-
sibilities erally as follows:
Contracting officer responsibilities. The contracting officer is principal-

ly responsible for the existing business relationship between the Govern-
ment and a contractor, including the following:
Interpreting and implementing contractual terms and conditions,
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CHAPTER 1
Analyzing costs,
Providing for the auditing of the contractor’s books and records,
Issuing changes and negotiating modifications to the contract, and
Organizing and coordinating the efforts of all the functional spe-

cialists who comprise the contract administration team.
Being an effective contracting officer involves more than the application

of expertise to specific problems. A successful contracting officer must
also demonstrate leadership qualities to ensure that the Government’s rep-
resentatives work well together as a team and do not exceed their dele-
gated authorities.
Responsibilities of a COR/COTR. A COR/COTR is usually an official

with expertise in the area of the contracted effort who possesses the neces-
sary background to monitor technical aspects of contract performance.
Typical primary responsibilities of a COR/COTR include:
Monitoring performance,
Evaluating work as it progresses,
Exercising appropriate technical direction within the scope of the

contract, and
Inspecting and accepting completed work for the Government.
Exhibit 1-6 provides more specific COR/COTR duties related to individu-

al contract performance that may be assigned.
Project inspector responsibilities. Project inspectors can report to either

a contract administrator, contracting officer, or COR/COTR, depending on
the contract administration plan for each project, or on how an agency has
set up these reporting procedures among its organizations. In any event,
their responsibilities are usually restricted to monitoring and inspection
duties such as:
Reviewing the contractor’s progress reports;
Inspecting all work performed by the contractor for contract com-

pliance;
Advising the contracting officer or COR/COTR of any unusual

problems—such as schedule slippages, requests for changes, or
nonconformance with technical specifications or quality control
1-27
requirements that actually or potentially affect contract com-

pliance;
Performing on-site checks to ensure that the contractor and any

subcontractors are complying with labor standards and practices;
Maintaining a list of subcontractors on the project; and
If required, submitting periodic or daily reports to the contracting

officer or COR/COTR.
Roles of other government personnel. Depending on the complexity of

the contract, other people may also become involved in contract adminis-
tration. They include:
Program or requiring activity personnel,
Administrative support personnel,
Legal counsel,
Cost and price analysts, and
Auditors.
These individuals provide input as requested by the contracting officer.
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CHAPTER 1
COR/COTR Delegations
Administration:
— Act as the Government technical representative for contract administration.
— Supervise all technical and clerical personnel assigned to assist the COR/COTR.
— Assist the contracting officer in conducting a postaward orientation conference.
— Represent the Government in conferences with the contractor and prepare memo-
randums of pertinent facts for the record.
— Confer with representatives of the requiring office and other user groups on per-
formance matters.
— Maintain a file system.
— Prepare a project diary.
— Keep a current set of drawings and specifications by noting all changes or devia-
tions.
Labor:
— Ensure that equal opportunity in employment posters are prominently displayed at
the job site.
— Report violations of labor standards provisions to the contracting officer.
— Monitor time and record keeping.
Inspection and Acceptance:

— Inspect all work for full compliance with contract requirements.
— Promptly reject all work that does not comply with contract requirements and
immediately notify the CO.
— Advise the contracting officer if the contractor fails to remove, correct, or replace
rejected work promptly.
— Provide appropriate technical direction, advising the contractor of its formal ap-
peal rights when there is disagreement.
— Prepare and maintain a running list of items that remain at variance with contract
requirements, apprising both the contractor and the contracting officer of correc-
tive action or the need for it.
— Maintain a master copy of the official list of defects and omissions.
— Ensure that all defects and omissions are corrected or completed.
Changes:
— Administer contract modifications previously authorized and issued by the CO.
— Ensure that the contractor provides formal proposals for contemplated changes.
Exhibit 1-6 (continued on next page)
1-29
COR/COTR Delegations
Payments:
Review and verify the contractor’s invoices or vouchers, determining the Government’s
agreement or nonagreement with the contractor’s percentage of physical completion for
progress reports or costs incurred.
Schedule:
— Review and forward to the contracting officer the contractor’s schedule or project
management chart with a recommendation for acceptance or rejection.
— Require the contractor to submit, if specified in the contract, a progress chart
showing the actual progress at the end of each accounting or payment period.
— Advise the contracting officer of any delay factors (strikes, weather, etc.) and
record their impact.
Submissions:
— Determine (from the contract) and list the number and types of submittals re-
quired from the contractor.
— Monitor the contractor’s submission of required samples, shop drawings, reports,
etc. for timeliness.
— Monitor the Government’s timely and complete response to the contractor’s sub-
mission of samples, shop drawings, reports, etc.
— Maintain a record of submittals on a current basis.
— Approve or reject submittals as provided in contract documents.
Safety:
Enforce all safety and health requirements.
Exhibit 1-6 (continued)
Prohibited Delegations While other Government personnel can be assigned many surveillance and
acceptance duties, there are some functions that are prohibited from dele-
gation to them. Some of these actions, reserved for a contracting officer,
are shown in Exhibit 1-7.
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CHAPTER 1
Actions Not to be Delegated
♦ Award, agree to, or execute a contract or contract modification.
♦ Authorize work outside the scope of the contract.
♦ Obligate, in any way, the payment of money by the Government.
♦ Give direction to the contractor except as provided in the contract.
♦ Make a final decision on any matter that would be subject to appeal under the Disputes
clause of the contract.
♦ Resolve any dispute concerning a question of law or fact arising under the contract.
♦ Redelegate any assigned duties unless specifically authorized to do so.
♦ Cause the contractor to incur costs not specifically covered by the contract with the ex-
pectation that such costs will be reimbursed by the Government.
♦ Terminate for any cause the contractor’s right to proceed.
Exhibit 1-7
1.7 The Contract Although the FAR does not require the preparation of a formal contract
Administration Plan administration plan, the CO is responsible for ensuring that the parties
have complied with all terms and conditions of the contract. At a mini-
mum, contracting officers track the receipt of deliverables (or the perfor-
mance of services), acceptance, and payment under the contract.
Formal Plan A formal contract administration plan is essential when the contract in-
volves large dollar amounts or complex technical requirements. Such con-
tracts typically place many duties and responsibilities on both parties.
Such a plan should be implemented immediately after award. The plan
should provide for:
An appropriate level of surveillance or monitoring of contractor

performance, and
Timely and proper performance of the Government’s responsibili-

ties.
1-31
Advance Planning and All members of the Government’s team should keep in mind the problems
Key Elements of contract administration and make key contract administration decisions
even before a solicitation is issued. Some implementation of these key
decisions may be necessary in the solicitation. Any decision to monitor
through a contractor reporting procedure would need an implementing
procedure in the contract itself. Key elements of a contract administration
plan are identified in Exhibit 1-8.
Need for Flexibility and Although finalized at contract award, the contract administration plan
Possible Alteration needs to be a flexible, working document to fulfill its purpose in provid-
ing:
A baseline for project management and scheduling,
A simple way of tracking the extent of contract completion, and
An aid for any postaward orientation conference.
As the contract progresses, it may be necessary to shift responsibilities or

add tasks that could not have been anticipated at the time of award. Over
the life of the contract, therefore, a contract administration plan may re-
quire periodic updating.
Need for Simplicity Determine what actions are essential to effective and efficient contract
administration. Overreaching to create needless and costly contract ad-
ministration requirements serves neither the Government’s nor the con-
tractor’s best interests. Tailor your contract administration plan to reflect
the acquisition’s requirement. Don’t provide for administering a system
acquisition when the need is for far less complex items or services.
1-32
CHAPTER 1
Key Elements of a Contract Administration Plan
A listing of contractual terms and conditions related to administration.
Contract milestones.
Contractor reporting procedures.
Quality assurance guidelines (from requiring activity).
Inspection and acceptance process (from requiring activity).
Names, roles, authorities, and limitations of authority for contract administration team
members.
Milestones for reports from contract administration team members.
Exhibit 1-8
Planning Steps Devising a workable contract administration plan requires adherence to

the following six steps.
Step 1 Identify contract terms and conditions related to administration. You

must identify and outline all major tasks that arise from the terms and
conditions of the contract. You can enhance this process by dividing it
into four parts.
Part 1—Contract administration preliminaries (e.g., delegations of

responsibility, postaward orientation conference).
Part 2—Contract performance (e.g., monitoring payment provi-

sions).
Part 3—Inspection and acceptance (e.g., where and conditions for).
Part 4—Post-contract activity (e.g., duties under warranty or patent

provisions, transmittal of final technical data, audit, contract close-
out activities).
Be sure to list only major tasks. If you decide to hold a postaward orienta-
tion conference, for instance, you would want to list it as a major task, but
would not list as a major task the subtask of preparing an official record of
the orientation. Design checklist formats comprised of key tasks within
these four phases, if they fit. Remember to tailor your checklist formats.
1-33
Your goal is to identify what must be done, when it must take place, who
must do it, and, as necessary, how and where it is to be accomplished.
Exhibit 1-9 enumerates some common areas you should consider. Note,
however, that you may wish to expand the checklist—particularly in the
quality assurance area—tailoring it to unique contract requirements, as de-
tailed in Step 3.
Step 2 Identify contractor reporting procedures. Some agencies use a special

form as an attachment in Section J of the contract to identify contract deli-
verables including reports. Others insist that all contract deliverables, in-
cluding reports and technical data submissions, be given distinct contract
line-items in the contract schedule. If your agency does either or both of
these, identification of contractor reports will be much simpler. Other-
wise, you must compile your own list.
Note procedures and due dates that are pertinent to reports. It will be a
part of your contract administration plan to ensure that these are complete,
on time, and otherwise comply with contract terms.
Step 3 Ensure that the plan provides for an inspection and acceptance
process and calls for conformance to quality assurance requirements.
The requisitioner will have had some input to the inspection and accep-
tance process by identifying unique requirements that affect it. These
unique requirements will be in the contract’s terms and conditions. For
example, a unique inspection requirement might be a performance test.
This is not covered by most agency’s standard inspection and acceptance
procedures. So your contract administration plan would include a check-
list of required performance test parameters as well as when and where the
test would be performed and by whom.
1-34
CHAPTER 1
Common Elements of a Contract Administration Checklist
After you have reviewed your contract and identified major tasks for your checklist, run
through this list of common contract administration functions to see if there are others you
wish to include.
Does not
Applies Apply
______ ______ Hold a postaward orientation conference.

______ ______ Furnish Equal Employment Opportunity poster.
______ ______ Ensure contractor submits insurance and bond certifications to
the CO.
______ ______ Provide Government-furnished property.
______ ______ Monitor contractor material submittals.
______ ______ Verify subcontracting plan submission.
______ ______ Verify first article submission.
______ ______ Obtain OSHA standards certification.
______ ______ Give first article approval.
______ ______ Obtain quarterly reports of prime contractor subcontracts with
small, small disadvantaged, and women-owned small business
concerns.
______ ______ Monitor contractor-conducted testing procedures.
______ ______ Monitor Government-conducted testing procedures.
______ ______ Review and approve contractor technical deliverables and
reports.
______ ______ Review and approve deliverables required for interim payment.
______ ______ Establish acceptance procedures and conduct acceptance.
______ ______ Obtain instruction/maintenance manuals on newly acquired
equipment.
______ ______ Arrange for/participate in contract audit.
______ ______ Notify contractor of decision on exercising options.
______ ______ Obtain warranty.
Exhibit 1-9
1-35
Acceptable Quality Re- Examples of some areas that should be addressed are:
quirements
The standard in the contract that establishes an acceptable item or
service, such as:
Ê The piece of equipment “must run for 100 hours at a specific

level of operating efficiency” establishes that operating effi-
ciency as the standard.
Ê Food on cafeteria lines “set up no more than 30 minutes before

opening” establishes 30 minutes as a performance standard.
Ê The contractor “must respond to on-call repair service within 6

hours from receipt of a telephone call from an authorized Gov-
ernment representative” establishes six hours as a performance
standard.
Allowable variations from the standard authorized by the specifi-

cation or other contract terms, such as:
Ê Establish calibration requirements that contain a range within

which calibration is acceptable.
Ê Many service contracts, which recognize human error as a fact

of life for some kinds of service, state an “acceptable quality
level” of, for example, 5 percent, meaning that if a contractor
only meets the performance standard 95 percent of the time, it
will still provide “acceptable” service.
A required or otherwise reasonable method to document test re-

sults using, for example:
Ê An outside testing laboratory, or
Ê A standard agency form or format.
Deviations that would indicate “conditional” approval rather than

FAR 52.209-3(b) rejection, for such things as:
FAR 52.209-4(b) Ê The use of tests on a first article of production that cite easily
correctable defects as an unacceptable reason for rejection.
1-36
CHAPTER 1
Step 4 Identify contract administration team members and define their roles.
The roles and authorities of these team players depend on the size of the
FAR 2.101 Government organization and the size of the contract.
In the previous steps you identified all the necessary tasks for administer-
ing the contract. Now identify who will have responsibility for those
tasks. Make sure that each task is clearly defined and any overlapping of
functions will not result in confusion among team members. In addition to
specific tasks associated with the contract, you need to identify who has
been delegated overall responsibility for normal contract administration
functions. Each member of the team should receive a copy of the list of
participants and their roles and responsibilities. This will help avoid dup-
lication of effort or confusion.
Step 5 Develop key milestones. Assign a time frame for the completion of each
task. These tasks include those performed by both Government and con-
tractor personnel from contract award to contract closeout. You need to
identify which tasks are crucial to the performance of another task. This is
especially true when the tasks are assigned to different team members.
Exhibit 1-10 provides a typical format for documenting answers to other

questions concerning what, when, and by whom.
Step 6 Document your decisions. You are now ready to present your decisions
in a formal plan. There is no set format you must follow in preparing your
contract administration plan. At a minimum, you need to cover all issues
necessary to ensure that all parties understand their roles and due dates for
assigned tasks. Remember: Keep it as simple and precise as possible. A
suggested format is shown in Exhibit 1-11.
1-37
A Format for Phase I Milestones
Task Milestone Date Person Responsible

Write COR delegation letters. Jan. 15, 1997 Ida Juan, Contract
Administrator
Notify contractor of delegations. Jan. 15, 1997 Ida Juan, Contract
Administrator
Submit quality control plan. Jan. 23, 1997 The ABC Company,
Contractor
Review quality control plan. Jan. 31, 1997 Sherlock Holmes,
Inspector
Hold postaward orientation Jan. 31, 1997 Jane Justice,
conference. Contracting Officer
Provide Government-furnished Feb. 6, 1997 Harry Altogether,
property. Program Manager
Note: As necessary, additional columns could be added to specify where and how tasks are
to be carried out, as well as a column for when the tasks were actually completed.
Exhibit 1-10
1-38
CHAPTER 1
Typical Contract Administration Plan Format
Title of the contract, related identifiers, and criticality designator.

Identity of the contractor and key contractor personnel.
Location of files on the contract and the contractor.
Brief description of the work to be performed.
Place of performance and/or delivery points.
Reporting requirements.
The contractor’s milestones for such critical events as:
— First article testing and reporting.
— Performance or delivery.
— Submission of progress reports.
— Submission of invoices/vouchers and other data related to payment.
Identity of the CO’s Representative (COR/COTR).
Tasks to be performed by Government personnel and milestones for each task for such
functions as:
— Monitoring the contractor’s quality assurance program.
— Furnishing Government property and monitoring its use.
— Reviewing and responding to contractor reports/requests.
— Receiving, inspecting, and accepting the work.
— Certifying costs incurred or physical progress for payment purposes.
— Monitoring compliance with the small business subcontracting plan.
Tasks delegated to each COR/COTR (including any limits on their authority).
Potential problem areas.
Exhibit 1-11
1.8 Provide Notices The following three steps will ensure providing appropriate notices and
and Instructions adequate instructions.
1-39
Step 1 Review qualifications of COR/COTR prior to issuing notices. Make

sure any individual proposed as a COR/COTR has the training, qualifica-
tions, and experience commensurate with the authority the contracting of-
ficer is delegating. Some agencies require that a copy of the COTR’s
training record be kept in the contract file. If not, recommend that the
contracting officer request a qualified substitute, unless immediate train-
ing is available to qualify the proposed individual for the COR/COTR ap-
pointment. For example, avoid having an organization nominate an
administrative coordinator to administer a highly technical service con-
tract. The technical adviser to the administrative coordinator may be a
better choice as the COR/COTR.
Step 2 Write designation letters. There is only one Governmentwide notice to

individual Government employees that contains instructions and outlines
specific responsibilities in relation to a single contract: the COR/COTR
designation letter. The essential elements of such a letter are outlined in
Exhibit 1-12. Only the contracting officer can sign delegation letters to a
COR/COTR, project inspector, or other contract administration team
Essential Elements of a Letter of Designation
Address the individual by name and position title.

Specify the contract number that applies to the delegation.
Specify the authorities being delegated.
Specify the tasks being delegated.
Emphasize the limitations of the delegation.
Specify any record-keeping requirements and the disposition of those records.
Specify if the designee may redesignate any authority or task.
Include a requirement for certifying that the individual has read and will abide by your
agency’s procurement integrity or conflict of interest requirements.
members.
Exhibit 1-12
1-40
CHAPTER 1
Need for Specific In- When the designee is to act for the contracting officer on more than one
structions contract, write a separate designation for each contract. Do this because
limitations, authorities, and tasks will vary depending on differing con-
tractual terms and conditions.
When instructions and responsibilities addressed to individuals in the con-

tract administration process are contained in regulations, office proce-
dures, and job descriptions of contract administration team players, you
may not need to prepare any designation letters.
COR/COTRs are from a wide variety of organizations whose main func-

tion is usually not to act in a contract administration supporting role.
Therefore, guidelines and other instructional documentation within their
organizations do not normally cover contract administration support activ-
ities.
Project inspectors may also be in organizations where contract administra-

tion duties are secondary to their normal responsibilities. When such is
the case, general instructions for COR/COTR notices apply to project in-
spectors as well. More typically, however, contract administration inspec-
tion duties are the main job functions of a project inspector.
Exhibit 1-13 provides a sample of a COR appointment letter. A COTR

appointment letter would be quite the same.
Step 3 Set up a system for changing or terminating designations. You will

probably need to set up a system to make sure you are aware of when
changes or terminations need to be made on lower priority projects. This
is particularly true when you have no routine contact with the COR/
COTR. So you might, for example, make it a point to call each COR/
COTR each Friday. If you have too many to call, you may arrange to
have the COR’s/COTR’s supervisor provide you with copies of personnel
reassignments, long-term travel, or extensive leave approvals that affect
your COR/COTR.
Whatever the method, assure that you are aware of any situation having a
potential effect on the performance of contract administration duties that
have been delegated to others.
Terminate or change designation letters in writing. When possible, issue

the termination letter before the termination and specify the date on which
it will become effective. Send the contractor either a copy of the termina-
tion letter or a separate letter advising of the termination.
1-41
Sample COR Designation Letter
TO: Tom Jones, Project Engineer

FROM: Jan Justice, Contracting Officer
SUBJECT: Contracting Officer’s Representative (COR) Designation, Contract No.
ARN 97-7028
I am hereby designating you as contracting officer’s representative (COR) on Contract No.

ARN 97-7028 awarded to the ABC Corporation, Our Town, WI, for the production of a new
concept in Super Duper Widgets.
In this capacity you are delegated the specific responsibilities detailed below, but perhaps the
most important aspect of this authority is its limitations. Under no circumstances are you to
make changes that would affect the cost or duration of the contract. You will have the fol-
lowing responsibilities that may not be redelegated to any other individual:
1. To furnish the contractor with technical assistance and guidance in all aspects of the
contract. You may formalize your guidance to the contractor by written technical di-
rection, provided the direction does not affect price or duration of the contract and that
it contains both a signed acknowledgment from the contractor and the following state-
ment:
In accepting this technical direction, the contractor agrees that the price and all other
terms and conditions of the contract remain unchanged.
2. To provide me with a copy of all technical direction issued under paragraph 1, above,
within 48 hours of its issuance.
3. To provide me with written notification of any dispute that cannot be resolved between
you and the contractor regarding performance of the contract.
4. To keep accurate records of all interim and final contract testing procedures outlined in
the statement of work, and send a report within five working days of any tests to the
contractor’s project manager and to me.
5. To keep a daily log of all contract-related activities while you are onsite at the contrac-
tor’s plant.
6. To verity invoices and, upon receipt, promptly certify them for prompt payment. After
verification, send me a copy of the certified invoice and send the original to Finance.
1-42
CHAPTER 1
7. To turn over all records pertaining to this contract to the successor COR if this COR
designation is terminated for any reason before completion of the contract, and to notify
me that you have taken such action.
Please note that you may not redelegate any of the contractual authority listed above, except
for clerical tasks associated with that authority.
I am providing you with two copies of this letter of designation. Please sign one copy in the
space provided below to indicate your acceptance and return that copy to me. In addition,
please sign the following certification to indicate that you have read and will abide by the
Code of Ethical Conduct (copy attached).
ACCEPTED: __________________________________
Contracting Officer’s Representative
DATE: ________________________________
I have read the Integrity Awareness Act for Government Employees and will abide by its re-
quirements in conducting all my responsibilities as a contracting officer’s representative.
CERTIFIED: __________________________________
Contracting Officer’s Representative
DATE: ________________________________
Attachment: Agency’s Code of Ethical Conduct
1.9 Provide Formal Notify the contractor, in writing, of the names of the individual(s) desig-
Notice to Contractor nated as a COR/COTR. Include in this notification what authority the
COR/COTR has in relation to this particular contract. Provide a similar
written notice outlining the roles of any other Government employees hav-
ing a direct contract administration role. This is especially necessary
when the contract itself has not identified these officials.
Such a notice must include some key information. This is found in Exhi-
bit 1-14.
1-43
Essential Elements of a Contractor’s Notice

of a Contracting Officer’s Delegation
♦ Specify the name and position title of the COR/COTR or other person receiving a del-
egation.
♦ Cite the contract number for which authority has been delegated.
♦ Specify the extent of the delegation.
♦ Emphasize any limitations of the delegation.
♦ Request a written acknowledgment of the notice from the contractor.
Exhibit 1-14
Sample Contractor No- Exhibit 1-15 provides a sample COR notification letter to the contractor.
tification
1-44
CHAPTER 1
Notification Letter to the Contractor
TO: Alvin Johnson, Chief Project Officer

The ABC Corporation
123 Main Street
Our Town, WI 12345-6789
FROM: Jane Justice, Contracting Officer
SUBJECT: Contracting Officer’s Representative (COR) Designation, Contract No.
ARN-97-7028
This officially notifies you that Tom Jones, Project Engineer, Government Agency, will be
my onsite representative for this contract.
His authority has limitations. Under no circumstances can he make changes that would af-
fect price or the duration of the contract. Please contact me directly at (123-987-6543) when
you anticipate changes that would affect price or overall time of performance.
Mr. Jones is authorized to act on my behalf in:
1. Furnishing technical assistance and guidance to you in all aspects of the contract and
formalizing this guidance in written technical direction, so long as the direction does not
affect price or duration of the contract.
2. Verifying and certifying all invoices. You should submit invoices directly to Mr. Jones.
I am providing you with two copies of this notice and request that you acknowledge one
copy in the space provided below and return it. Thank you for your cooperation.
ACKNOWLEDGED: _______________________________
Contractor
DATE: ______________________________
Exhibit 1-15
1-45
PUTTING THE PALLET PROCUREMENT IN PERSPECTIVE
Eric had reviewed the pallet procurement contract file and was contemplating his
upcoming session with Joanne and whoever else. He had considered alternatives to a
contract administration plan and knew that current initiatives throughout the
Government sought to minimize—if it was realistic to do so—the expenditure of
resources in administering postaward contractor performance. Certainly the pallet
procurement did not require the detailed administration that otherwise would be
required of a production contract tied to an agency-peculiar specification.
Yet even though the pallets were being procured as commercial items, he felt there were
elements that required attention and monitoring during performance. For instance, the
use of a performance specification that provided Platform Industries with a description
of function had to be monitored to some extent. A failure to do so might leave the
Government with an unacceptable risk associated with the warranty of fitness for a
particular purpose agreed to by the contractor. He was concerned about the company’s
past performance for timely deliveries, nothing major, mind you, but he felt that
something should be done to reinforce the criticality of any delivery order’s delivery
schedule.
Indeed, Eric had isolated some issues that should be discussed and resolved at tomorrow
morning’s meeting with Joanne and someone else involved in the program.
1-46
CHAPTER 2
POSTAWARD ORIENTATIONS
ASSESSING THE NEED TO GET STARTED
Joanne convened a morning meeting of the team for the pallet procurement in her office at eight
o’clock. Knowing her penchant for timeliness, Eric arrived a bit early and found his boss on the
phone. Waiting outside her office, he looked over his notes and awaited the arrival of Harry
Carmichael, the requiring activity’s technical representative for the procurement. Cradling a
cup of hot coffee in one hand and a folder of papers in the other, Harry arrived a few minutes
after eight. After the two had exchanged amenities, Joanne appeared in the doorway and sig-
naled for them to come in.
Seated at a conference table perpendicular to her desk, Joanne was quick to begin the meeting.
“Well, Eric,” she started, “I see that you and Harry have met. He represents our customer or-
ganization for the pallet procurement, and he’s the one that’s been living with the expensive re-
placement problem for some time. We trust that we can do a good job for him with this procure-
ment, and I wanted him here to listen to what you came up with concerning the need for plan-
ning to administer our contract with Platform Industries. So, what have you got to share with
us?”
Shuffling his papers while clearing his throat, Eric responded. “The first thing I did, Joanne,
was read the contract file and take note of its terms and conditions relative to the requirement
for pallets.”
“That’s a start,” she interrupted, “and what did you find?”
“Actually, not very much,” Eric retorted, “that lends itself to what I’ve always considered to be
the basis for a comprehensive contract administration plan. Buying under FAR Part 12 stream-
lines the acquisition process and, or so it seems to me, we can minimize the need for any in-
volved postaward administration.”
Harry was quick to jump in. “Whoa, Eric, are you saying that we should let Platform Industries
run with the ball and then come see us if it scores? We’ve got to do more than that or we’ll end
up in the same mess we had with the last contractor, mostly promises and few results that car-
ried a big price tag. We’ve got to solve this pallet pliability dilemma or all kinds of criticism
will fall on us.”
Peering at Eric, Joanne seemed to reflect Harry’s sentiment. “Are you suggesting a hands-off
posture for this one, Eric? And if so, what leads you to believe the contractor can follow-
through without some handholding?”
2-1
POSTAWARD ORIENTATION
Sensing he was off to a bad start, Eric tried to recover quickly. “I’m suggesting nothing of the
sort. For starters, I’m saying that the contract file, particularly since it represents a FAR Part 12
acquisition, gives us good cause to abide by some of the customary commercial practices that
are inherent in the use of FAR 52.212-4. But not all of them.”
At this point, Harry looked puzzled and jumped in. “You’re way ahead of me, Eric. I haven’t
the foggiest idea about what you’re saying, and I’m not anxious to mount some huge contract
administration effort with Platform Industries. After all, we’re not buying some exotic product
here, but we do have a considerable risk if this contractor fails to perform.”
“Let’s get down to specifics, Eric,” said Joanne. “What do we need, why do we need it, and
who’s going to do it in administering this contract?”
Eric leaned forward in his chair, looked at both Joanne and Harry, and responded forthrightly.
“First, we need to agree among ourselves, especially with Harry’s input, what it will take to
monitor Platform’s implementation of the performance spec to see that we’re not running in cir-
cles. Second, we have to make certain, as much as we can, that before we issue any delivery or-
ders for pallets that the contractor has demonstrated an outcome that we can hold it to in terms
of the agreed-to warranty of fitness for a particular purpose. Third, given what we’ve ascer-
tained about Platform meeting delivery schedules, we’ve got to drive home the point that on-time
delivery is essential.”
Joanne seemed to get the message. “Sounds good to me, Eric, for starters. What do you suggest
to get the ball rolling, and what do you see for Harry and his staff in all this?”
“I suggest that Harry and I sit down,” said Eric, “to isolate his concerns representing the user
community and mine from a contractual perspective. Then we assess those concerns in terms of
what the contract says. Once we’ve done that, we can determine Harry’s role in the contract
administration process, shape a reasonable agenda for a postaward meeting with Platform In-
dustries, and get the job underway.”
Joanne looked at the technical representative and responded with a sense of finality. “Is that
okay with you, Harry?” “You bet!” he shot back. “Better now than trying to figure it all out
later.”
“Do it Eric,” concluded his boss, “and get back to me first thing tomorrow morning with an
agenda for a postaward meeting with Platform Industries.”
2-2
CHAPTER 2

Overall: Conduct postaward orientations for contractors.
Individual:
2.1 Determine the need for a postaward orientation.
2.2 Determine the appropriate type of orientation.
2.3 Plan an orientation.
2.4 Conduct an orientation.
2.5 Prepare a report on an orientation.
2.6 Select a course of action when agreement on a key issue cannot be reached.
2.7 Identify the need for unilateral or bilateral contract modifications.
2.8 Document the contract file.
2.9 Provide contractual information to interested parties.
2.10 Obtain from a contractor any executed contractual documents or bonds within the
time specified.
2-3
INTRODUCTION TO POSTAWARD
ORIENTATIONS
Purpose of Postaward Conducted in person, through correspondence, or by teleconferencing, a

Orientations postaward orientation aids both the Government and the contractor in
achieving a clear and mutual understanding of all contract requirements
and identifying and resolving potential problems. It is neither a substitute
for the contractor’s understanding of requirements at the time offers were
submitted, nor is it to be used to alter the final agreement reached in any
negotiation leading to contract award.
Focus of Postaward As a planned, structured discussion between the Government and the con-
Orientations tractor, a postaward orientation focuses on:
♦ Understanding the technical aspects of the contract,
♦ Identifying and resolving oversights,
♦ Preventing problems,
♦ Averting misunderstandings,
♦ Determining how to solve problems that may occur later, and
♦ Reaching agreement on common issues.
Policy on Postaward The contracting officer decides whether a postaward orientation (and the
Orientations form it might take) is necessary. Such orientations are especially encour-
aged to assist small, small disadvantaged, and women-owned small busi-
FAR 42.501 ness concerns. When used, a postaward orientation should be conducted
promptly after contract award to achieve maximum benefits.
Steps in Performance The steps in planning for a postaward orientation are charted on the next
2-4
CHAPTER 2
STEPS IN POSTAWARD ORIENTATION

PLANNING
Input: The contract and contract

administration plan.
1. Determine the need for a postaward

orientation.
No
Needed?
Yes
2-5. Plan, conduct, and document

postaward orientations.
6-8. Take any necessary follow-up action

(e.g., a contract modification).
9. Provide information on the contract to

interested parties.
10. Obtain any executed contractual

documents or bonds from the contractor within
time specified after award.
2-5
POSTAWARD ORIENTATION PLANNING
2.1 Determine the For contracts awarded under simplified acquisition procedures or for the
Need acquisition of commercial items or services, contractor performance and
its administration by the Government can begin smoothly and proceed
FAR 42.502 without incident.
Other contracts require immediate administrative action to ensure that per-

formance starts off on the right track. Such action may signal the need for
a postaward orientation.
Identify Performance The success of a postaward orientation rests on the contract administra-
Issues or Concerns tor’s ability to identify issues or concerns that may (or will) impact con-
tract performance. These are three steps to follow in identifying issues or
concerns.
Step 1 Identify a need to review specific key contract requirements and mi-
lestones. Postaward orientations are most vital when potential risks to the
contractor or the Government have not been addressed within the contract
itself. In these cases, a postaward orientation identifies these risks and
considers ways to reduce the probability of their resulting in serious prob-
lems during contract performance.
Reduce or Eliminate Risk is diminished, for example, when the contract states that Govern-
Risks ment-furnished Equipment (GFE) will be “available 60 days after contract
award at the contractor’s plant.” Failure to do this presents an additional
risk if the contractor assumed the GFE would be available within the first
couple of weeks of contract performance. Were that the case, the Gov-
ernment’s failure to provide the GFE would delay and disrupt the contrac-
tor’s planned schedule. If the contract had not specified when and where
GFE would be delivered, it would be a discussion item for a postaward
orientation. You would want to learn when the contractor needed the
GFE, determine if the Government could provide it at that time, and inves-
tigate what the impact would be if it arrived at a later time.
Analyzing Contract Re- Analyze any requirement identified from contract administration planning
quirements to determine if you really need some form of a postaward orientation.
Consider such issues as:
♦ Did the contract fully explain the requirement?
♦ Would an incorrect interpretation of a performance requirement

damage the Government?
2-6
CHAPTER 2
♦ Would potential problems endanger tight scheduling?
♦ Do contract requirements rely on close interaction between Gov-

ernment and contractor personnel?
♦ What is the extent of any subcontracting requirements, and might

these be clarified by a postaward subcontractor conference?
♦ Are financing arrangements given to complexities such as progress

or interim financing payments?
Step 2 Identify the need for a general briefing on one or more aspects of con-
tract administration. The postaward goals of any contract are to assure
that supplies or services are:
♦ Delivered or performed when and where specified in the contract,
♦ Acceptable in terms of conforming to the contract’s specification

or statement of work, and
♦ Furnished in compliance with other terms and conditions of the

contract.
Compliance with other terms and conditions includes requirements such

FAR 4.403 as:
FAR Subpart 4.7 ♦ Security classifications and requirements,
FAR Subpart 22.10 ♦ Record-retention requirements,
FAR 22.1001 ♦ Service Contract Act requirements,
FAR 22.1002 ♦ Federal and state labor requirements, and

FAR Subpart 22.9 ♦ Federal policies on nondiscrimination because of age.
Even though ignorance of contract terms does not excuse responsibility

for complying with them, many contractors overlook the finer points of a
requirement in the preaward stage. Postaward orientations ensure that a
contractor fully understands all the details of the Government’s require-
ment, including those incorporated by reference, that it agreed to perform
when it signed the contract.
2-7
Extent of Orientation The extent of information provided or discussed at an orientation depends

on:
♦ A contractor’s past experience with Government contracts (small,

small disadvantaged, and women-owned small business concerns
with little Government experience will generally need more guid-
ance); and
♦ The degree of difficulty encountered by experienced contractors on

similar requirements.
Exhibit 2-1 provides a menu of items to consider in your analysis.
Step 3 Document the decisions you make. Include the Exhibit 2-1 checklist as
a part of your contract file. It provides an easy way to record the basis for
your decision to hold a postaward orientation. This is particularly impor-
tant if you decide that you don’t want to hold an orientation. If things go
wrong later, it demonstrates that you exercised good judgment in your ear-
ly contract administration decisions. If you do hold a conference or con-
duct some other form of postaward orientation, you will supply additional
documentation to the file on these activities. See Section 2-8 below.
2.2 Determine the You may accomplish a postaward orientation in three ways:
Type of Orientation
Hold a face-to-face orientation conference when you believe the contrac-
tor does not have a clear understanding of the:
Face-to-Face
♦ Scope of the contract,
FAR 42.502
♦ Contract’s technical requirements, or
♦ Rights and obligations of the parties in any area.
2-8
CHAPTER 2
Should I Hold a Postaward Orientation Conference?
Some common considerations in deciding whether to hold a postaward orientation confe-

rence are listed below. This checklist will help you crystallize your thoughts. The “Yes”
answers favor a conference.
Yes No
____ ____ Is this the contractor’s first Government contract?
___ ____ Has the contractor had little or no previous experience with this type of
product or service?
____ ____ If the contractor has had previous Government contracts, were an unusual
number of problems associated with them?
_____ ____ Can you foresee specific potential problems for this contract?
____ ____ Is any aspect of this contract urgent or critical to the Government?
____ ____ Does the contract type require a relatively high degree of administration?
____ ____ Is the requirement relatively complex and of a relatively high-dollar val-
ue?
____ ____ Have you had little previous conversation with the contractor about this
contract? (In contrast, you may have had detailed conversations during an
onsite preaward survey or during negotiation sessions.)
____ ____ Is there any indication that misunderstandings exist?
____ ____ Does the procurement history of the required supplies or services reveal
recurring problem areas?
____ ____ Is a lengthy production cycle planned?
____ ____ Does the contract involve spare parts and related equipment?
____ ____ Is the contractor a small, small disadvantaged, or women-owned business
concern?
____ ____ Is extensive subcontracting involved?
____ ____ Are safety factors involved in the performance of work?
____ ____ Are progress payments or other interim financing arrangements involved?
____ ____ Can you anticipate contract changes that would require the contractor to
use specialized accounting procedures?
Exhibit 2-1
2-9
Letter Generally, you can use a letter as an alternative to a formal postaward con-
ference when:
FAR 42.504
♦ Only minor details need to be conveyed to the contractor,
♦ The contractor has had previous experience in producing the items

or providing the services, and
♦ The procurement is not particularly complex.
For example, a letter may suffice if you need only communicate specifics
about onsite availability, instructions for paperwork submissions, or such
other fairly straightforward elements. You can include a notice of the
COR’s/COTR’s designation within this letter as well.
Exhibit 2-2 provides a sample postaward orientation letter.
Phone A telephone conference is usually sufficient when:
♦ You have had good prior experience with the contractor,
♦ Matters for discussions are relatively straightforward, or
♦ You do not anticipate problems for good reasons.
Combining Orientation A postaward orientation may represent a combination of these methods.

Methods You may have an uncomplicated procurement with a new contractor for
which performance is not required at your installation. In this case, espe-
cially if the contractor is not located near your installation, you may find it
useful to have a letter convey a few important points. You may also de-
cide to use a telephone conference to establish a personal working rela-
tionship.
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CHAPTER 2
An Alternative: The Postaward Orientation Letter
TO: Gary Green, Project Manager, XYZ Power Co.

FROM: Al Jones, Contracting Officer
SUBJECT: Contract No. 104230-97-C-1234
To avoid any potential difficulties, I am writing to point out a requirement of the subject con-
tract that has led to problems in other contracts. Also, I would like to clarify the contract
completion date and identify the Government personnel who will play a role in the contract’s
administration.
To install the four pieces of equipment required in contract line item #4, you will need to
have a power outage in the west wing of Building 569, a heavily populated office building.
Please note the paragraph 2.a(1) of the statement of work requires that this power outage take
place on Sunday, a Federal holiday, between the hours of midnight and 6:00 a.m. In addi-
tion, paragraph 2.a(5) of the statement of work requires that you provide me with seven ca-
lendar days’ notice of your need for this outage. (Send the original notice to Mr. Smith —
see below.)
The reason for the preceding requirement is that we have computers on-line 24 hours a day in
that wing of the building, as well as other operations, that cannot be disrupted.
Since performance time is expressed in the contract as 120 calendar days after contract
award, I want to affirm the date for contract completion as January 30, 1997.
Mr. Howard Smith is my representative for the technical aspects of this contract. According-
ly, he is referred to as the contracting officer’s representative (COR). He is not authorized to
make any changes to the contract as written. He does have the authority to inspect and ac-
cept the equipment for the Government.
You will receive any change to the contract as an official modification signed by me or
another Government official.
2-11
The list below summarizes your paperwork submissions and identifies the individuals to
whom you should send them:
Final quality control plan. Ms. Jane Doe
(You provided a draft plan Quality Assurance
at the preaward survey.) Specialist
Dept. DEF - Room 829
Your Agency
123 Main Street
Our Town, PA 10000-9876
Request notice for the Mr. Howard Smith
power outage, request Plant Manager
for interim inspection Your Agency
required by paragraph Dept. XYZ - Room 117
10.a(7) of the statement 123 Main Street
of work, and technical Our Town, PA 10000-9876
reports required by
contract line item #7.
All other submissions Mr. Al Jones
and correspondence (in- Contracting Officer
including nontechnical Dept. ABC - Room 401
questions) should be Your Agency
addressed to me. 123 Main Street
Our Town, PA 10000-9876
Don’t hesitate to call me if you want to discuss any aspect of this contract. My telephone
number is 100-123-1234, and I’m usually in my office between the hours of 7:30 a.m. and
4:00 p.m.
2.3 Planning Orienta- Once the need for an orientation is established, plan it carefully to make
tions certain that its goals are accomplished. Detailed planning is particularly
important when you use a formal postaward conference. It is also impor-
tant to plan what will be addressed in a letter or telephone orientation.
Addressing the steps listed in Exhibit 2-3 ensures that you are thoroughly
prepared for the orientation and have considered all potential problem
areas.
2-12
CHAPTER 2
The Planning Process The following seven steps identify basic activities associated with plan-
ning a postaward orientation conference.
Step 1 Prepare the Government’s position. You may recognize the need to
make judgments on issues such as:
♦ Government-furnished property procedures (if the contract does

not outline them),
♦ Ambiguous or unclear contractual specifications or clauses, or
♦ Testing or quality control procedures (if they are incomplete in the

contract or otherwise need to be supplemented).
Postaward problems in these areas might affect the quality of the product
or work, cause delays in delivery, increase the scope of work and cost, and
Orientation Planning Tasks
♦ Prepare the Government’s position and its understanding on key issues.

♦ Prepare a conference agenda and determine the time and place for meeting.
♦ Designate the Government’s participants and name the chairperson.
¾ Traditionally the CO is the chairperson.
♦ Brief the Government’s chairperson and participants on their roles.
♦ Provide the contractor with a copy of the conference agenda.
♦ Obtain the contractor’s response to the agenda.
♦ Finalize the conference agenda.
require a contract modification to remedy the situation.
Exhibit 2-3
2-13
ACQUISITION TEAM PLANNING
Recall that Joanne asked Eric to provide an agenda for a postaward orientation meeting
with Platform Industries. In doing so, Eric met with Harry to isolate and iron out key
technical and contractual issues and concerns that both felt would affect contract per-
formance.
During their meeting, Harry pointed out the need for making sure that Platform’s pursuit
of a performance specification effort was monitored effectively. He suggested that an
early understanding with Platform about reporting the results of its effort was very
important, since any delivery orders for pallets had to await the successful completion of
the company’s effort to meet the performance functions set forth in the specification.
Eric expressed his concern about making sure that Platform understood the basis for the
issuance of delivery orders under an indefinite-quantity arrangement, and he wanted to
drive home the point that delivery order schedules had to be met. Both Eric and Harry
agreed that Platform’s warranty of fitness for a particular purpose was a front-burner
item that had to be strongly reinforced.
To ensure reasonable monitoring of the contractor’s effort, Eric determined that Harry
should have a contract administration role in representing the contracting officer as a
designated technical representative. Harry agreed with this. Yet again, Eric reviewed
the contract clauses under FAR 52.212-4 to determine those that needed to be stressed
with Platform at a postaward orientation meeting.
Step 2 Prepare the agenda and set the time and place for the conference. In-
clude in the agenda all matters needing clarification or otherwise requiring
discussion with the contractor to avoid later misunderstandings.
Possible Agenda Items Items for the agenda should consider:
♦ Special contract clauses,
♦ Critical milestones,
♦ Contractor quality control procedures,
♦ Contractor reporting requirements,
♦ Billing and payment procedures,
♦ Roles of the Government’s contract administration team members,

and
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CHAPTER 2
♦ Roles of the contractor’s contract administration team members.
Tailor the Agenda Use the checklist at Exhibit 2-4 as the basis for outlining your agenda.
The less complex the procurement, the more you will use the “N/A” col-
umn. If necessary, add any item(s) that do not appear on the checklist.
Remember: Tailor your agenda to fit the orientation’s needs. Discuss

those topics that are most important to reinforcing mutual obligations and
contractor performance requirements.
Items that may only affect Government team members and not what the
contractor is required to do can be discussed at a separate in-house ses-
sion. (See Step 4.)
Length of Orientation The complexity of an agenda will influence the length of any orientation.
In the case of a conference, you may need to convene more than one ses-
sion. Resorting to multiple sessions, however, should occur only for the
most complex contracts. When an agenda addresses both high- and low-
priority items, it may be more efficient to cover the high-priority items at a
formal conference and deal with those of lower priority via a teleconfe-
rence, letter, or facsimile transmission.
When Time. There are really only two concerns about the timing of the confe-
rence:
FAR 42.501(d)
♦ Hold the conference as soon as possible after contract award.
♦ Make sure the time is mutually agreeable before you firm it up.
Where Location. Be sensible in your choice of a conference site. Certain loca-

tions will typically have advantages, for example:
♦ Contract performance sites offer ready access to physical condi-

tions that may have a bearing on issues being discussed.
♦ Conference rooms near or within your office area offer conveni-

ence for your contract administration team’s busy schedule.
Sometimes you will have to analyze one site’s advantages relative to those
of another to make the best choice. Try to minimize travel time for all
participants.
2-15
Number of Attendees Before you finalize your choice of a site, determine the number of contrac-
tor attendees and the number of participants among your own contract
administration team. Make sure the site can accommodate the group’s
size.
Productive Versus Unless you can guarantee no interruptions, always discard the temptation
Convenient Sites to have smaller conferences in your own or the contracting officer’s of-
fice. The convenience will not be worth the ill will and frustration felt by
other attendees, both Government and contractor, for wasting their time
with your other unrelated business.
2-16
CHAPTER 2
Checklist/Record for Postaward Orientation Conference
PART I—GENERAL
1. Contract No. 2. Total Amount 3. Type of Contract 4. Date of Conference
5. Preaward Survey? 6. Contractor Name 7. Contractor Address
YES NO
PART II—CONFEREES
1. Government 2. Contractor
PART III—CONFERENCE PROGRAM

Check if Clause No. Significant conclusions, further action to be
Subject applicable if applicable taken (attach additional sheets if necessary
A. GENERAL
1. Function and authority of assigned
personnel
2. Routing of correspondence
3. Omissions or conflicting provisions
4. Other (specify)
B. REPORTS: PREPARATION AND
SUBMITTAL
1. Work progress
2. Financial
3. Other (specify)
C. SUBCONTRACTS
1. Consent to placement
2. Prime’s responsibility for administration
3. Cost or pricing data
4. Source inspection
5. Other (specify)
D. SB, SDB, and WOSB Subcontracting
1. Contractual requirements
2. Program to facilitate
E. CONTRACT MODIFICATIONS
F. GOVERNMENT PROPERTY
1. Use of facilities and tooling
2-17

Subject Applicable if Applicable taken (attach additional sheets if necessary
2. Maintenance and preservation
3. Property procedure approval
4. Property disposal procedures
5. Other (specify)
G. SPECIAL CLAUSES
1. Repricing
2. Liquidated damages
3. Government financing
4. Special tooling
5. Overtime
6. Bill of materials
7. Data rights
8. Warranties
9. Work performed at government instal-
lations
10. Other (specify)
H. GENERAL CLAUSES
1. Limitation of cost
2. Allowability of cost
3. Other (specify)
I. DELIVERY SCHEDULES
J. TRANSPORTATION
K. INVOICING AND BILLING
INSTRUCTIONS
l. PROCESSING OF COST AND PRICE
PROPOSALS
M. LABOR
1. Actual and potential labor disputes
2. Davis-Bacon Act
3. Work Hours Act
4. Walsh-Healey Act
5. Copeland Anti-Kickback Act
2-18
CHAPTER 2

N. QUALITY ASSURANCE AND
ENGINEERING
1. Quality control system
2. Waivers and deviations
3. Drawing/design approval
4. Manuals
5. Preproduction sample
6. Qualifications and environmental tests
7. Inspection and acceptance
8. Specification interpretation
9. Laboratory facilities
10. Value engineering clause
11. Other (specify)
O. PRODUCTION
1. Production planning
2. Milestones and other monitoring
devices
3. Production surveillance
4. Safety
(Additional Notes)
2-19
Step 3 Designate Government participants to attend a preliminary meeting.

Invite Government representatives to attend who will interact with the
contractor during performance. Invite only people who will have a signif-
icant role such as:
♦ COR/COTR,
♦ Program manager,
♦ Project inspector,
♦ Quality assurance specialist, and
♦ Other appropriate subject matter experts.
One preliminary group meeting is usually sufficient. However, if you, the

ACO, anticipate lengthy discussions with one Government representative,
hold a separate one-on-one meeting with that person.
You might invite using organizations if the work will take place in their
office area and if one of their office employees is not participating in
another capacity. If the conference would result in a discussion of price or
cost issues, invite your cost/price analyst. For a smooth transition from
preaward to postaward when contract administration functions are dele-
gated, invite the procuring contracting officer. Questions might be raised
that only the procuring contracting officer could answer adequately.
Step 4 Brief Government participants on their roles. On larger contracts, it

may be useful to hold a preliminary meeting with appropriate Government
personnel to ensure that the Government’s expectations are clearly ex-
pressed and understood. You may have some strong personalities on your
contract administration team. Emphasize who is in charge and chairing
the meeting. It is either you (the contract administrator) or the contracting
officer. The COR/COTR might also chair the meeting if the contract ad-
ministrator and the contracting officer could not attend. Also, the COR/
COTR could chair a preliminary meeting covering only technical issues.
Final decisions affecting contract terms and conditions must be made by
the contracting officer.
Purpose of Internal Distribute your contract administration plan at the preliminary meeting
Briefings and conduct a page-by-page review of its contents. The purpose of this
preliminary meeting, or individual briefings, is to:
♦ Identify all actions that must be taken by the Government,
2-20
CHAPTER 2
♦ Ensure that all Government personnel involved have a clear under-

standing of the contract’s terms and conditions and their respective
responsibilities,
♦ Establish a “common front” relative to the contractor’s responsibil-

ities,
♦ Identify which Government participants will be making a presenta-

tion at the postaward orientation conference and restrict the time
and subject matter of each, and
♦ Otherwise finalize agenda items with Government participants.
HARRY’S CONTINUING CONCERN
Eric received a call from Harry about an hour after their meeting. “I’m not left with a
warm, fuzzy feeling, Eric, about the business of monitoring Platform’s effort to get after
the procurement’s performance specification. I mean I can visit them periodically. After
all, their factory is only 100 miles or so down the road. My concern runs to what
alternative methodologies they’ll utilize to conclude that they have whipped the pallet
pliability problem.”
“Well, I share your concern,” Eric said, “and perhaps we should have been more
specific about all this in Platform’s contract. Actually, the contractor’s responsibility is
to meet the functional conditions of the spec. We didn’t set forth any specific reporting
or progress requirements about all that, except that meeting the spec’s functions was to
be done not later than 40 calendar days after award.”
“Okay,” Mike joined in, “but can’t we just ask Platform to provide us with a modest
written report on its progress, say weekly? I sure want to understand what they’re doing
and why they’re doing it.”
Eric winced a bit and was quick to share his understanding. “Hey, I’m with you, Mike,
on what you want, but we’ve got a fixed-price arrangement here, and I can’t require the
submission of any information that’s not set forth in the contract. Unless, of course, you
want to pay for it.”
Mike took a deep breath. “We’re already on the hook for a lot of bucks in this deal, Eric,
if it happens the way we trust it will. Can’t we just ask Platform to stretch itself a bit in
accommodating our need to let us know what they’re doing?”
“Maybe so,” responded Eric. “I’ll have to raise that one with Joanne and see what we
can do.”
2-21
Step 5 Provide a copy of the agenda to the contractor. When you do this, ask
for feedback by a specific calendar date.
Step 6 Obtain the contractor’s response to the agenda. If you don’t get a re-
sponse by the time you asked for feedback, provide the contractor with a
written or oral notice that the agenda provided earlier is final. If the con-
tractor responds, discuss its input. Make changes to your agenda as neces-
sary. Provide the contractor and Government attendees with copies of the
final agenda.
Step 7 Finalize the agenda. If preliminary conference discussions point out the
need for a possible change to the contract or to the Government’s normal
method of operations, get agreement among appropriate Government per-
sonnel prior to the meeting. Also discuss and finalize the handling of po-
tential problems you identify. You need to show a united Government
front at the orientation meeting.
2.4 Conduct the Goals for conducting a postaward orientation, whether by letter, tele-
Orientation
Your Orientation Goals
♦ Clarify any procedures to implement contract requirements smoothly.

♦ Clarify roles of both Government and contractor key personnel.
♦ Detail the more critical or complex requirements to ensure understanding.
♦ Invite questions from the contractor on any requirement needing clarification.
phone, or in person are the same. See Exhibit 2-5.
Exhibit 2-5
Steps to Attain Goals Any orientation conference agenda should permit a logical step-by-step
approach to fulfill its goals. The following six steps allow this to occur.
2-22
CHAPTER 2
Step 1 Introduce the participants. At the opening of the conference, the chair-
person introduces each attendee by name and title, along with a one-
sentence explanation of the role that person will play in contract adminis-
tration. You can detail these roles later, but first make sure that that eve-
ryone knows who is speaking during the session. If you are the chair-
person and don’t know all the contractor’s attendees, ask the contractor to
make those introductions.
Step 2 Explain the purpose of the conference. Go over the points outlined in
Exhibit 2-5, but also emphasize that the conference is not intended to
FAR 42.503-2 change or alter the contract in any way. Emphasize that the only way the
contract will be changed or altered is by a written modification signed by
DoD Post-award Proce- DoD publishes a post-award conference procedure program, outlined in
dure DD Form 1484, Post-Award Conference Record.
DFARS 242.503-2
DD Form 1484
Step 3 Summarize the roles of Government key personnel. Clarify the limits,
authorities, roles, and responsibilities of each Government representative.
Ask the contractor to advise the Government of the roles, responsibilities,
limits, and authorities of each contractor representative.
Emphasize that the contracting officer is the Government’s agent to

change or alter the contract. Any exception to this must be specified
clearly. Affirm that conference participants without authority to bind the
Government must take no action that in any way changes or alters the con-
tract.
Further advise the contractor that the Government is not obligated to make
any contract adjustments as a result of an action taken by a Government
representative unless the action has been specifically authorized in the rep-
resentative’s letter of designation or by the contract itself.
Step 4 Provide general instructions. General contract administration instruc-

tions include information necessary for the contractor to understand its
risks as well as the Government’s, and they address contractor responsibil-
ities for:
♦ Management and supervision of the work force,
♦ Protection and control of Government property, data, and reports,
♦ Compliance with contract clauses, and
2-23
♦ Other appropriate areas of concern.
Advise contractors of the proper routing of correspondence. Explain that

matters pertaining to technical performance may be addressed directly to
the COR/COTR or project officer, but that matters pertaining to questions
of fact dealing with contractual terms and conditions must be sent to the
contracting officer.
Step 5 Provide the contractor with posters, notices, and other data. Labor law
implementation will sometimes require that the contractor post equal em-
FAR 22.805(b) ployment opportunity posters at the job site, including posters that outline
the rights of handicapped persons. If the contract requires posting labor-
FAR 22.1020
related notices, the Government is responsible for providing them. The
FAR 22.1304 Government may also need to provide seniority lists from incumbent ser-
vice contractors ranking its current employees to new follow-on contrac-
FAR 22.1404 tors for new service periods. Often Government publications are listed as
Government-furnished material. Consider distributing these and other da-
ta you need to provide at this orientation conference.
Step 6 Secure agreement on milestones or interpretation of terms and condi-

tions. For milestones that require the contractor’s input, seek the contrac-
tor’s agreement now. If you identified ambiguities in key contract terms
when drawing up your contract administration plan, get agreement on
these now. If not, emphasize significant and critical terms. Key discus-
sion items would be any uncertainty about terms that would affect:
♦ Performance,
♦ Interim delivery, and
♦ Payment.
During the conference, request any information or response from the con-
tractor to ensure a mutually uniform understanding of key terms and con-
ditions.
2-24
CHAPTER 2
IT NEVER HURTS TO ASK
When Eric took Harry’s continuing concern about the performance specification to
Joanne, the contracting officer threw the ball back to her contract administrator.
“Well,” she asked, “what’s your recommendation about that?”
Eric was quick and decisive in his response. “I say we should ask Platform what its cus-
tomary commercial practice is in reporting to its customers on dealing with a
performance spec. If the answer is favorable to Harry, then let’s record it in our post-
award orientation memo, and leave it at that. If the answer is unfavorable, then let’s
press the issue and see if Platform will ‘buy’ a reporting requirement, which I’ll put
together for the meeting, at no cost to the government. In any event, let’s not agree to
pay for something until we exhaust all that we can do to bargain for a reasonable
delivery from the contractor without increasing the price. That’s just good business prac-
tice.”
Joanne flashed one of her infrequent smiles. “Okay, Eric, let’s do that. After all,
nothing ventured, nothing gained.”
2.5 Prepare Post- Use any convenient format for an orientation report as long as it contains
award Orientation all the information necessary to document the events of the meeting.
Report Common key elements of a report are contained in Exhibit 2-6.
FAR 42.503-3 Make sure that the contracting officer, the COR/COTR, the contractor,
and others as appropriate, receive copies of the report. Include a copy in
the contract file. If the contracting officer does not write this report, it is a
good practice to have that person review it initially to ensure an awareness
Key Elements of a Postaward Orientation Report
♦ The names and affiliations of all participants.

♦ The main points discussed and all agreements reached.
♦ Areas requiring resolution.
♦ Names of participants assigned responsibility for further actions.
♦ Completion dates for the actions.
2-25
of any problems or the need for future action.
Exhibit 2-6
DoD Report Form You may use DD Form 1484, Post-Award Conference Record, for the re-
DFARS 242.503-3 port.
DD Form 1484
Report for the Record Exhibit 2-7 is an example of a brief memorandum that can be attached to
the checklist in Exhibit 2-4. It may also be used to record specific prob-
Report for the Record
February 1, 1997
I chaired a postaward orientation conference on Contract NO. ISR 97-2498-NR for repairs to
a conveyor system in the Federal Building on Main Street in Our Town, PA. A detailed list
of the points we covered and the names of those in attendance is attached to this record.
The most pressing problem that surfaced was that none of the Government attendees knew
the location of the Government-furnished replacement parts that the Government is to pro-
vide, per paragraph 1.2.3a of the statement of work. The building superintendent, Mr. How-
ard Ames, one of the attendees, went back to check his records after the conference. He
advised me on this date that the parts in question had been ordered through the Federal
Supply Schedule and had not yet been received. Our supervisor of simplified acquisition
procedures, Ms. Janet Doe, found the order (Order ISN 97-9424-SP) and advised me today
that the replacement parts were shipped on January 20, so Mr. Ames should be receiving
them any day.
Since the parts will not be needed until the second week in March, their near-term delivery is
not holding up performance.
Sam Smart
Contract Administrator
Concurred: Jane Justice
Contracting Officer
2-26
CHAPTER 2
lems resolved during the orientation.
Exhibit 2-7
2.6 Actions to Resolve Events that occur when the Government and the contractor discover a
Disagreements on Key point of disagreement during an orientation conference reflect the nature
Issues of the problem. A key factor is whether the problem can be resolved easi-
ly. Remember: Each contractual problem is different, and no one ap-
proach can be used to resolve every disagreement that may arise. In
general, four steps may be used to resolve points of disagreement.
Step 1 Document the contractor’s position in detail. During the conference,

delve into the reasons for the contractor’s position and include it in the
conference report. If disagreement results in an emotionally charged at-
mosphere, consider deferring its resolution, but assure the contractor that
it will be resolved, if possible. If the problem requires joint contractor/
Government problem solving, set up an early time for a separate meeting
with only those who need to be in attendance.
Step 2 Take appropriate action to resolve the problem. Seek technical or le-
gal advice when necessary. Look at all possible solutions.
Step 3 Select the best solution to the problem and seek agreement on it. It is
important that you resolve each issue in a fair and equitable manner and as
quickly as possible. Although not always practicable, it is best to resolve
all problems before the contractor begins any work under the contract. In
seeking mutual agreement, your actions can include:
♦ Further discussions with the contractor’s top management, or
♦ Consideration and negotiation of a contract modification.
Step 4
When agreement cannot be reached, take appropriate unilateral ac-
FAR 43.103(b) tion. If a contract clause allows the contracting officer to issue a unilater-
al modification, this action is a likely Government solution to the
FAR Subpart 43.2 stalemate.
2-27
2.7 Identify the Need If a contract change seems necessary, you must clearly define the extent of
for Contract Modifi- the proposed change and implement it promptly. The contracting officer
cations must sign a contract modification in all cases. Chapter 5 addresses con-
tract modifications.
FAR 43.103
FAR Subpart 43.2
2.8 Document the Include the conference report detailed in 2.5, above, as well as all other
Contract File material, correspondence, or actions from the postaward orientation.
In the event of any subsequent disagreements with the contractor, this ma-
terial can be used to reconstruct facts and events as they occurred. A well-
documented contract file will identify and verify the Government’s initial
position on any performance problems that were anticipated during the
orientation or in the early steps of implementation.
2.9 Provide Informa-
tion to Interested Par- Provide any documentation to members of your contract administration
ties team as well as the contractor when that information affects their role in
contract performance.
FAR 24.202
You may also get requests for information from other interested parties,
such as other companies that have proposed but were evaluated and de-
termined to be unsuccessful offerors. Release of any information is sub-
ject to the Freedom of Information Act (FOIA). Examples of information
you may not release are:
♦ Classified information, and
♦ Contractor’s proprietary data, including trade secrets.
Your agency will have an organization tasked with providing advice on

information that is or is not releasable under FOIA. Your own procure-
ment organization may have a staff analyst to help you in these decisions.
FOIA imposes a response time on answering requests for information. So
initiate action on them quickly.
DoD FOIA Policy You can find DoD’s FOIA procedures in DoDD 5400.7, DoD Freedom of
Information Act Program, and DoD 5400.7-R, DoD Freedom of Informa-
DoDD 5400.7
tion Act Program.
DoD 5400.7-R
DFARS 224.203
2-28
CHAPTER 2
Generally, nonconstruction contracts do not require payment or perfor-

mance bonds. The contracting officer may include bonds in solicitations
for services under certain circumstances.
Another contract requirement may call for the submission of insurance

certificates.
2.10 Obtain Executed Since bonds and certificates of insurance must be executed before perfor-
Contractual Docu- mance begins, the deadline for submission should be stated in the contract.
ments, Bonds, or In- It is usually within 10 days after award. When bonds and certif-icates are
surance required, request them immediately, normally in the letter accompanying
contract award. Reference the contract clause that requires the submission
FAR 28.103 and establish a time for receipt, if the contract does not provide a date.
FAR 28.301 When you receive the forms, review them and, in the case of bonds, check
the Treasury Department list to be sure the surety company has the requi-
FAR 28.103-3 site bonding authority. Bonding companies have limits on the amount
they may bond.
FAR 28.202
2-29
CHAPTER 2
POSTAWARD ORIENTATIONS
ASSESSING THE NEED TO GET STARTED
Joanne convened a morning meeting of the team for the pallet procurement in her office at eight
o’clock. Knowing her penchant for timeliness, Eric arrived a bit early and found his boss on the
phone. Waiting outside her office, he looked over his notes and awaited the arrival of Harry
Carmichael, the requiring activity’s technical representative for the procurement. Cradling a
cup of hot coffee in one hand and a folder of papers in the other, Harry arrived a few minutes
after eight. After the two had exchanged amenities, Joanne appeared in the doorway and sig-
naled for them to come in.
Seated at a conference table perpendicular to her desk, Joanne was quick to begin the meeting.
“Well, Eric,” she started, “I see that you and Harry have met. He represents our customer or-
ganization for the pallet procurement, and he’s the one that’s been living with the expensive re-
placement problem for some time. We trust that we can do a good job for him with this procure-
ment, and I wanted him here to listen to what you came up with concerning the need for plan-
ning to administer our contract with Platform Industries. So, what have you got to share with
us?”
Shuffling his papers while clearing his throat, Eric responded. “The first thing I did, Joanne,
was read the contract file and take note of its terms and conditions relative to the requirement
for pallets.”
“That’s a start,” she interrupted, “and what did you find?”
“Actually, not very much,” Eric retorted, “that lends itself to what I’ve always considered to be
the basis for a comprehensive contract administration plan. Buying under FAR Part 12 stream-
lines the acquisition process and, or so it seems to me, we can minimize the need for any in-
volved postaward administration.”
Harry was quick to jump in. “Whoa, Eric, are you saying that we should let Platform Industries
run with the ball and then come see us if it scores? We’ve got to do more than that or we’ll end
up in the same mess we had with the last contractor, mostly promises and few results that car-
ried a big price tag. We’ve got to solve this pallet pliability dilemma or all kinds of criticism
will fall on us.”
Peering at Eric, Joanne seemed to reflect Harry’s sentiment. “Are you suggesting a hands-off
posture for this one, Eric? And if so, what leads you to believe the contractor can follow-
through without some handholding?”
2-1
Sensing he was off to a bad start, Eric tried to recover quickly. “I’m suggesting nothing of the
sort. For starters, I’m saying that the contract file, particularly since it represents a FAR Part 12
acquisition, gives us good cause to abide by some of the customary commercial practices that
are inherent in the use of FAR 52.212-4. But not all of them.”
At this point, Harry looked puzzled and jumped in. “You’re way ahead of me, Eric. I haven’t
the foggiest idea about what you’re saying, and I’m not anxious to mount some huge contract
administration effort with Platform Industries. After all, we’re not buying some exotic product
here, but we do have a considerable risk if this contractor fails to perform.”
“Let’s get down to specifics, Eric,” said Joanne. “What do we need, why do we need it, and
who’s going to do it in administering this contract?”
Eric leaned forward in his chair, looked at both Joanne and Harry, and responded forthrightly.
“First, we need to agree among ourselves, especially with Harry’s input, what it will take to
monitor Platform’s implementation of the performance spec to see that we’re not running in cir-
cles. Second, we have to make certain, as much as we can, that before we issue any delivery or-
ders for pallets that the contractor has demonstrated an outcome that we can hold it to in terms
of the agreed-to warranty of fitness for a particular purpose. Third, given what we’ve ascer-
tained about Platform meeting delivery schedules, we’ve got to drive home the point that on-time
delivery is essential.”
Joanne seemed to get the message. “Sounds good to me, Eric, for starters. What do you suggest
to get the ball rolling, and what do you see for Harry and his staff in all this?”
“I suggest that Harry and I sit down,” said Eric, “to isolate his concerns representing the user
community and mine from a contractual perspective. Then we assess those concerns in terms of
what the contract says. Once we’ve done that, we can determine Harry’s role in the contract
administration process, shape a reasonable agenda for a postaward meeting with Platform In-
dustries, and get the job underway.”
Joanne looked at the technical representative and responded with a sense of finality. “Is that
okay with you, Harry?” “You bet!” he shot back. “Better now than trying to figure it all out
later.”
“Do it Eric,” concluded his boss, “and get back to me first thing tomorrow morning with an
agenda for a postaward meeting with Platform Industries.”
2-2
CHAPTER 2

Overall: Conduct postaward orientations for contractors.
Individual:
2.1 Determine the need for a postaward orientation.
2.2 Determine the appropriate type of orientation.
2.3 Plan an orientation.
2.4 Conduct an orientation.
2.5 Prepare a report on an orientation.
2.6 Select a course of action when agreement on a key issue cannot be reached.
2.7 Identify the need for unilateral or bilateral contract modifications.
2.8 Document the contract file.
2.9 Provide contractual information to interested parties.
2.10 Obtain from a contractor any executed contractual documents or bonds within the
time specified.
2-3
INTRODUCTION TO POSTAWARD
ORIENTATIONS
Purpose of Postaward Conducted in person, through correspondence, or by teleconferencing, a

Orientations postaward orientation aids both the Government and the contractor in
achieving a clear and mutual understanding of all contract requirements
and identifying and resolving potential problems. It is neither a substitute
for the contractor’s understanding of requirements at the time offers were
submitted, nor is it to be used to alter the final agreement reached in any
negotiation leading to contract award.
Focus of Postaward As a planned, structured discussion between the Government and the con-
Orientations tractor, a postaward orientation focuses on:
♦ Understanding the technical aspects of the contract,
♦ Identifying and resolving oversights,
♦ Preventing problems,
♦ Averting misunderstandings,
♦ Determining how to solve problems that may occur later, and
♦ Reaching agreement on common issues.
Policy on Postaward The contracting officer decides whether a postaward orientation (and the
Orientations form it might take) is necessary. Such orientations are especially encour-
aged to assist small, small disadvantaged, and women-owned small busi-
FAR 42.501 ness concerns. When used, a postaward orientation should be conducted
promptly after contract award to achieve maximum benefits.
Steps in Performance The steps in planning for a postaward orientation are charted on the next
2-4
CHAPTER 2
STEPS IN POSTAWARD ORIENTATION

PLANNING
Input: The contract and contract

administration plan.
1. Determine the need for a postaward

orientation.
No
Needed?
Yes
2-5. Plan, conduct, and document

postaward orientations.
6-8. Take any necessary follow-up action

(e.g., a contract modification).
9. Provide information on the contract to

interested parties.
10. Obtain any executed contractual

documents or bonds from the contractor within
time specified after award.
2-5
POSTAWARD ORIENTATION PLANNING
2.1 Determine the For contracts awarded under simplified acquisition procedures or for the
Need acquisition of commercial items or services, contractor performance and
its administration by the Government can begin smoothly and proceed
FAR 42.502 without incident.
Other contracts require immediate administrative action to ensure that per-

formance starts off on the right track. Such action may signal the need for
a postaward orientation.
Identify Performance The success of a postaward orientation rests on the contract administra-
Issues or Concerns tor’s ability to identify issues or concerns that may (or will) impact con-
tract performance. These are three steps to follow in identifying issues or
concerns.
Step 1 Identify a need to review specific key contract requirements and mi-
lestones. Postaward orientations are most vital when potential risks to the
contractor or the Government have not been addressed within the contract
itself. In these cases, a postaward orientation identifies these risks and
considers ways to reduce the probability of their resulting in serious prob-
lems during contract performance.
Reduce or Eliminate Risk is diminished, for example, when the contract states that Govern-
Risks ment-furnished Equipment (GFE) will be “available 60 days after contract
award at the contractor’s plant.” Failure to do this presents an additional
risk if the contractor assumed the GFE would be available within the first
couple of weeks of contract performance. Were that the case, the Gov-
ernment’s failure to provide the GFE would delay and disrupt the contrac-
tor’s planned schedule. If the contract had not specified when and where
GFE would be delivered, it would be a discussion item for a postaward
orientation. You would want to learn when the contractor needed the
GFE, determine if the Government could provide it at that time, and inves-
tigate what the impact would be if it arrived at a later time.
Analyzing Contract Re- Analyze any requirement identified from contract administration planning
quirements to determine if you really need some form of a postaward orientation.
Consider such issues as:
♦ Did the contract fully explain the requirement?
♦ Would an incorrect interpretation of a performance requirement

damage the Government?
2-6
CHAPTER 2
♦ Would potential problems endanger tight scheduling?
♦ Do contract requirements rely on close interaction between Gov-

ernment and contractor personnel?
♦ What is the extent of any subcontracting requirements, and might

these be clarified by a postaward subcontractor conference?
♦ Are financing arrangements given to complexities such as progress

or interim financing payments?
Step 2 Identify the need for a general briefing on one or more aspects of con-
tract administration. The postaward goals of any contract are to assure
that supplies or services are:
♦ Delivered or performed when and where specified in the contract,
♦ Acceptable in terms of conforming to the contract’s specification

or statement of work, and
♦ Furnished in compliance with other terms and conditions of the

contract.
Compliance with other terms and conditions includes requirements such

as:
FAR 4.403 ♦ Security classifications and requirements,
FAR Subpart 4.7 ♦ Record-retention requirements,
FAR Subpart 22.10 ♦ Service Contract Act requirements,

FAR 22.1001 ♦ Federal and state labor requirements, and
FAR 22.1002 ♦ Federal policies on nondiscrimination because of age.
FAR Subpart 22.9 Even though ignorance of contract terms does not excuse responsibility
for complying with them, many contractors overlook the finer points of a
requirement in the preaward stage. Postaward orientations ensure that a
contractor fully understands all the details of the Government’s require-
ment, including those incorporated by reference, that it agreed to perform
when it signed the contract.
2-7
Extent of Orientation The extent of information provided or discussed at an orientation depends

on:
♦ A contractor’s past experience with Government contracts (small,

small disadvantaged, and women-owned small business concerns
with little Government experience will generally need more guid-
ance); and
♦ The degree of difficulty encountered by experienced contractors on

similar requirements.
Exhibit 2-1 provides a menu of items to consider in your analysis.
Step 3 Document the decisions you make. Include the Exhibit 2-1 checklist as
a part of your contract file. It provides an easy way to record the basis for
your decision to hold a postaward orientation. This is particularly impor-
tant if you decide that you don’t want to hold an orientation. If things go
wrong later, it demonstrates that you exercised good judgment in your ear-
ly contract administration decisions. If you do hold a conference or con-
duct some other form of postaward orientation, you will supply additional
documentation to the file on these activities. See Section 2-8 below.
2.2 Determine the You may accomplish a postaward orientation in three ways:
Type of Orientation
Hold a face-to-face orientation conference when you believe the contrac-
tor does not have a clear understanding of the:
Face-to-Face
♦ Scope of the contract,
FAR 42.502
♦ Contract’s technical requirements, or
♦ Rights and obligations of the parties in any area.
2-8
CHAPTER 2
Should I Hold a Postaward Orientation Conference?
Some common considerations in deciding whether to hold a postaward orientation confe-

rence are listed below. This checklist will help you crystallize your thoughts. The “Yes”
answers favor a conference.
Yes No
____ ____ Is this the contractor’s first Government contract?
___ ____ Has the contractor had little or no previous experience with this type of
product or service?
____ ____ If the contractor has had previous Government contracts, were an unusual
number of problems associated with them?
_____ ____ Can you foresee specific potential problems for this contract?
____ ____ Is any aspect of this contract urgent or critical to the Government?
____ ____ Does the contract type require a relatively high degree of administration?
____ ____ Is the requirement relatively complex and of a relatively high-dollar val-
ue?
____ ____ Have you had little previous conversation with the contractor about this
contract? (In contrast, you may have had detailed conversations during an
onsite preaward survey or during negotiation sessions.)
____ ____ Is there any indication that misunderstandings exist?
____ ____ Does the procurement history of the required supplies or services reveal
recurring problem areas?
____ ____ Is a lengthy production cycle planned?
____ ____ Does the contract involve spare parts and related equipment?
____ ____ Is the contractor a small, small disadvantaged, or women-owned business
concern?
____ ____ Is extensive subcontracting involved?
____ ____ Are safety factors involved in the performance of work?
____ ____ Are progress payments or other interim financing arrangements involved?
____ ____ Can you anticipate contract changes that would require the contractor to
use specialized accounting procedures?
Exhibit 2-1
2-9
Letter Generally, you can use a letter as an alternative to a formal postaward con-
ference when:
FAR 42.504
♦ Only minor details need to be conveyed to the contractor,
♦ The contractor has had previous experience in producing the items

or providing the services, and
♦ The procurement is not particularly complex.
For example, a letter may suffice if you need only communicate specifics
about onsite availability, instructions for paperwork submissions, or such
other fairly straightforward elements. You can include a notice of the
COR’s/COTR’s designation within this letter as well.
Exhibit 2-2 provides a sample postaward orientation letter.
Phone A telephone conference is usually sufficient when:
♦ You have had good prior experience with the contractor,
♦ Matters for discussions are relatively straightforward, or
♦ You do not anticipate problems for good reasons.
Combining Orientation A postaward orientation may represent a combination of these methods.

Methods You may have an uncomplicated procurement with a new contractor for
which performance is not required at your installation. In this case, espe-
cially if the contractor is not located near your installation, you may find it
useful to have a letter convey a few important points. You may also de-
cide to use a telephone conference to establish a personal working rela-
tionship.
2-10
CHAPTER 2
TO: Gary Green, Project Manager, XYZ Power Co.

FROM: Al Jones, Contracting Officer
SUBJECT: Contract No. 104230-97-C-1234
To avoid any potential difficulties, I am writing to point out a requirement of the subject con-
tract that has led to problems in other contracts. Also, I would like to clarify the contract
completion date and identify the Government personnel who will play a role in the contract’s
administration.
To install the four pieces of equipment required in contract line item #4, you will need to
have a power outage in the west wing of Building 569, a heavily populated office building.
Please note the paragraph 2.a(1) of the statement of work requires that this power outage take
place on Sunday, a Federal holiday, between the hours of midnight and 6:00 a.m. In addi-
tion, paragraph 2.a(5) of the statement of work requires that you provide me with seven ca-
lendar days’ notice of your need for this outage. (Send the original notice to Mr. Smith —
see below.)
The reason for the preceding requirement is that we have computers on-line 24 hours a day in
that wing of the building, as well as other operations, that cannot be disrupted.
Since performance time is expressed in the contract as 120 calendar days after contract
award, I want to affirm the date for contract completion as January 30, 1997.
Mr. Howard Smith is my representative for the technical aspects of this contract. According-
ly, he is referred to as the contracting officer’s representative (COR). He is not authorized to
make any changes to the contract as written. He does have the authority to inspect and ac-
cept the equipment for the Government.
You will receive any change to the contract as an official modification signed by me or
another Government official.
2-11
The list below summarizes your paperwork submissions and identifies the individuals to
whom you should send them:
Final quality control plan. Ms. Jane Doe
(You provided a draft plan Quality Assurance
at the preaward survey.) Specialist
Dept. DEF - Room 829
Your Agency
123 Main Street
Our Town, PA 10000-9876
Request notice for the Mr. Howard Smith
power outage, request Plant Manager
for interim inspection Your Agency
required by paragraph Dept. XYZ - Room 117
10.a(7) of the statement 123 Main Street
of work, and technical Our Town, PA 10000-9876
reports required by
contract line item #7.
All other submissions Mr. Al Jones
and correspondence (in- Contracting Officer
including nontechnical Dept. ABC - Room 401
questions) should be Your Agency
addressed to me. 123 Main Street
Our Town, PA 10000-9876
Don’t hesitate to call me if you want to discuss any aspect of this contract. My telephone
number is 100-123-1234, and I’m usually in my office between the hours of 7:30 a.m. and
4:00 p.m.
2.3 Planning Orienta- Once the need for an orientation is established, plan it carefully to make
tions certain that its goals are accomplished. Detailed planning is particularly
important when you use a formal postaward conference. It is also impor-
tant to plan what will be addressed in a letter or telephone orientation.
Addressing the steps listed in Exhibit 2-3 ensures that you are thoroughly
prepared for the orientation and have considered all potential problem
areas.
2-12
CHAPTER 2
The Planning Process The following seven steps identify basic activities associated with plan-
ning a postaward orientation conference.
Step 1 Prepare the Government’s position. You may recognize the need to
make judgments on issues such as:
♦ Government-furnished property procedures (if the contract does

not outline them),
♦ Ambiguous or unclear contractual specifications or clauses, or
♦ Testing or quality control procedures (if they are incomplete in the

contract or otherwise need to be supplemented).
Postaward problems in these areas might affect the quality of the product
or work, cause delays in delivery, increase the scope of work and cost, and
require a contract modification to remedy the situation.
Orientation Planning Tasks
♦ Prepare the Government’s position and its understanding on key issues.

♦ Prepare a conference agenda and determine the time and place for meeting.
♦ Designate the Government’s participants and name the chairperson.
¾ Traditionally the CO is the chairperson.
♦ Brief the Government’s chairperson and participants on their roles.
♦ Provide the contractor with a copy of the conference agenda.
♦ Obtain the contractor’s response to the agenda.
♦ Finalize the conference agenda.
Exhibit 2-3
2-13
ACQUISITION TEAM PLANNING
Recall that Joanne asked Eric to provide an agenda for a postaward orientation meeting
with Platform Industries. In doing so, Eric met with Harry to isolate and iron out key
technical and contractual issues and concerns that both felt would affect contract per-
formance.
During their meeting, Harry pointed out the need for making sure that Platform’s pursuit
of a performance specification effort was monitored effectively. He suggested that an
early understanding with Platform about reporting the results of its effort was very
important, since any delivery orders for pallets had to await the successful completion of
the company’s effort to meet the performance functions set forth in the specification.
Eric expressed his concern about making sure that Platform understood the basis for the
issuance of delivery orders under an indefinite-quantity arrangement, and he wanted to
drive home the point that delivery order schedules had to be met. Both Eric and Harry
agreed that Platform’s warranty of fitness for a particular purpose was a front-burner
item that had to be strongly reinforced.
To ensure reasonable monitoring of the contractor’s effort, Eric determined that Harry
should have a contract administration role in representing the contracting officer as a
designated technical representative. Harry agreed with this. Yet again, Eric reviewed
the contract clauses under FAR 52.212-4 to determine those that needed to be stressed
with Platform at a postaward orientation meeting.
Step 2 Prepare the agenda and set the time and place for the conference. In-
clude in the agenda all matters needing clarification or otherwise requiring
discussion with the contractor to avoid later misunderstandings.
Possible Agenda Items Items for the agenda should consider:
♦ Special contract clauses,
♦ Critical milestones,
♦ Contractor quality control procedures,
♦ Contractor reporting requirements,
♦ Billing and payment procedures,
♦ Roles of the Government’s contract administration team members,

and
2-14
CHAPTER 2
♦ Roles of the contractor’s contract administration team members.
Tailor the Agenda Use the checklist at Exhibit 2-4 as the basis for outlining your agenda.
The less complex the procurement, the more you will use the “N/A” col-
umn. If necessary, add any item(s) that do not appear on the checklist.
Remember: Tailor your agenda to fit the orientation’s needs. Discuss

those topics that are most important to reinforcing mutual obligations and
contractor performance requirements.
Items that may only affect Government team members and not what the
contractor is required to do can be discussed at a separate in-house ses-
sion. (See Step 4.)
Length of Orientation The complexity of an agenda will influence the length of any orientation.
In the case of a conference, you may need to convene more than one ses-
sion. Resorting to multiple sessions, however, should occur only for the
most complex contracts. When an agenda addresses both high- and low-
priority items, it may be more efficient to cover the high-priority items at a
formal conference and deal with those of lower priority via a teleconfe-
rence, letter, or facsimile transmission.
When Time. There are really only two concerns about the timing of the confe-
rence:
FAR 42.501(d)
♦ Hold the conference as soon as possible after contract award.
♦ Make sure the time is mutually agreeable before you firm it up.
Where Location. Be sensible in your choice of a conference site. Certain loca-

tions will typically have advantages, for example:
♦ Contract performance sites offer ready access to physical condi-

tions that may have a bearing on issues being discussed.
♦ Conference rooms near or within your office area offer conveni-

ence for your contract administration team’s busy schedule.
Sometimes you will have to analyze one site’s advantages relative to those
of another to make the best choice. Try to minimize travel time for all
participants.
2-15
Number of Attendees Before you finalize your choice of a site, determine the number of contrac-
tor attendees and the number of participants among your own contract
administration team. Make sure the site can accommodate the group’s
size.
Productive Versus Unless you can guarantee no interruptions, always discard the temptation
Convenient Sites to have smaller conferences in your own or the contracting officer’s of-
fice. The convenience will not be worth the ill will and frustration felt by
other attendees, both Government and contractor, for wasting their time
with your other unrelated business.
2-16
CHAPTER 2
PART I—GENERAL
1. Contract No. 2. Total Amount 3. Type of Contract 4. Date of Conference
5. Preaward Survey? 6. Contractor Name 7. Contractor Address
YES NO
PART II—CONFEREES
1. Government 2. Contractor
PART III—CONFERENCE PROGRAM

Subject applicable if applicable taken (attach additional sheets if necessary
A. GENERAL
1. Function and authority of assigned
personnel
2. Routing of correspondence
3. Omissions or conflicting provisions
4. Other (specify)
B. REPORTS: PREPARATION AND
SUBMITTAL
1. Work progress
2. Financial
3. Other (specify)
C. SUBCONTRACTS
1. Consent to placement
2. Prime’s responsibility for administration
3. Cost or pricing data
4. Source inspection
5. Other (specify)
D. SB, SDB, and WOSB Subcontracting
1. Contractual requirements
2. Program to facilitate
E. CONTRACT MODIFICATIONS
F. GOVERNMENT PROPERTY
1. Use of facilities and tooling
2-17

2. Maintenance and preservation
3. Property procedure approval
4. Property disposal procedures
5. Other (specify)
G. SPECIAL CLAUSES
1. Repricing
2. Liquidated damages
3. Government financing
4. Special tooling
5. Overtime
6. Bill of materials
7. Data rights
8. Warranties
9. Work performed at government instal-
lations
10. Other (specify)
H. GENERAL CLAUSES
1. Limitation of cost
2. Allowability of cost
3. Other (specify)
I. DELIVERY SCHEDULES
J. TRANSPORTATION
K. INVOICING AND BILLING
INSTRUCTIONS
l. PROCESSING OF COST AND PRICE
PROPOSALS
M. LABOR
1. Actual and potential labor disputes
2. Davis-Bacon Act
3. Work Hours Act
4. Walsh-Healey Act
5. Copeland Anti-Kickback Act
2-18
CHAPTER 2

N. QUALITY ASSURANCE AND
ENGINEERING
1. Quality control system
2. Waivers and deviations
3. Drawing/design approval
4. Manuals
5. Preproduction sample
6. Qualifications and environmental tests
7. Inspection and acceptance
8. Specification interpretation
9. Laboratory facilities
10. Value engineering clause
11. Other (specify)
O. PRODUCTION
1. Production planning
2. Milestones and other monitoring
devices
3. Production surveillance
4. Safety
(Additional Notes)
2-19
Step 3 Designate Government participants to attend a preliminary meeting.

Invite Government representatives to attend who will interact with the
contractor during performance. Invite only people who will have a signif-
icant role such as:
♦ COR/COTR,
♦ Program manager,
♦ Project inspector,
♦ Quality assurance specialist, and
♦ Other appropriate subject matter experts.
One preliminary group meeting is usually sufficient. However, if you, the

ACO, anticipate lengthy discussions with one Government representative,
hold a separate one-on-one meeting with that person.
You might invite using organizations if the work will take place in their
office area and if one of their office employees is not participating in
another capacity. If the conference would result in a discussion of price or
cost issues, invite your cost/price analyst. For a smooth transition from
preaward to postaward when contract administration functions are dele-
gated, invite the procuring contracting officer. Questions might be raised
that only the procuring contracting officer could answer adequately.
Step 4 Brief Government participants on their roles. On larger contracts, it

may be useful to hold a preliminary meeting with appropriate Government
personnel to ensure that the Government’s expectations are clearly ex-
pressed and understood. You may have some strong personalities on your
contract administration team. Emphasize who is in charge and chairing
the meeting. It is either you (the contract administrator) or the contracting
officer. The COR/COTR might also chair the meeting if the contract ad-
ministrator and the contracting officer could not attend. Also, the COR/
COTR could chair a preliminary meeting covering only technical issues.
Final decisions affecting contract terms and conditions must be made by
Purpose of Internal Distribute your contract administration plan at the preliminary meeting
Briefings and conduct a page-by-page review of its contents. The purpose of this
preliminary meeting, or individual briefings, is to:
♦ Identify all actions that must be taken by the Government,
2-20
CHAPTER 2
♦ Ensure that all Government personnel involved have a clear under-

standing of the contract’s terms and conditions and their respective
responsibilities,
♦ Establish a “common front” relative to the contractor’s responsibil-

ities,
♦ Identify which Government participants will be making a presenta-

tion at the postaward orientation conference and restrict the time
and subject matter of each, and
♦ Otherwise finalize agenda items with Government participants.
HARRY’S CONTINUING CONCERN
Eric received a call from Harry about an hour after their meeting. “I’m not left with a
warm, fuzzy feeling, Eric, about the business of monitoring Platform’s effort to get after
the procurement’s performance specification. I mean I can visit them periodically. After
all, their factory is only 100 miles or so down the road. My concern runs to what
alternative methodologies they’ll utilize to conclude that they have whipped the pallet
“Well, I share your concern,” Eric said, “and perhaps we should have been more
specific about all this in Platform’s contract. Actually, the contractor’s responsibility is
to meet the functional conditions of the spec. We didn’t set forth any specific reporting
or progress requirements about all that, except that meeting the spec’s functions was to
be done not later than 40 calendar days after award.”
“Okay,” Mike joined in, “but can’t we just ask Platform to provide us with a modest
written report on its progress, say weekly? I sure want to understand what they’re doing
and why they’re doing it.”
Eric winced a bit and was quick to share his understanding. “Hey, I’m with you, Mike,
on what you want, but we’ve got a fixed-price arrangement here, and I can’t require the
submission of any information that’s not set forth in the contract. Unless, of course, you
want to pay for it.”
Mike took a deep breath. “We’re already on the hook for a lot of bucks in this deal, Eric,
if it happens the way we trust it will. Can’t we just ask Platform to stretch itself a bit in
accommodating our need to let us know what they’re doing?”
“Maybe so,” responded Eric. “I’ll have to raise that one with Joanne and see what we
can do.”
2-21
Step 5 Provide a copy of the agenda to the contractor. When you do this, ask
for feedback by a specific calendar date.
Step 6 Obtain the contractor’s response to the agenda. If you don’t get a re-
sponse by the time you asked for feedback, provide the contractor with a
written or oral notice that the agenda provided earlier is final. If the con-
tractor responds, discuss its input. Make changes to your agenda as neces-
sary. Provide the contractor and Government attendees with copies of the
final agenda.
Step 7 Finalize the agenda. If preliminary conference discussions point out the
need for a possible change to the contract or to the Government’s normal
method of operations, get agreement among appropriate Government per-
sonnel prior to the meeting. Also discuss and finalize the handling of po-
tential problems you identify. You need to show a united Government
front at the orientation meeting.
2.4 Conduct the Goals for conducting a postaward orientation, whether by letter, tele-
Orientation phone, or in person are the same. See Exhibit 2-5.
Your Orientation Goals
♦ Clarify any procedures to implement contract requirements smoothly.

♦ Clarify roles of both Government and contractor key personnel.
♦ Detail the more critical or complex requirements to ensure understanding.
♦ Invite questions from the contractor on any requirement needing clarification.
Exhibit 2-5
Steps to Attain Goals Any orientation conference agenda should permit a logical step-by-step
approach to fulfill its goals. The following six steps allow this to occur.
Step 1 Introduce the participants. At the opening of the conference, the chair-
person introduces each attendee by name and title, along with a one-
sentence explanation of the role that person will play in contract adminis-
tration. You can detail these roles later, but first make sure that that eve-
2-22
CHAPTER 2
ryone knows who is speaking during the session. If you are the chair-
person and don’t know all the contractor’s attendees, ask the contractor to
make those introductions.
Step 2 Explain the purpose of the conference. Go over the points outlined in
Exhibit 2-5, but also emphasize that the conference is not intended to
FAR 42.503-2 change or alter the contract in any way. Emphasize that the only way the
contract will be changed or altered is by a written modification signed by
DoD Post-award Proce- DoD publishes a post-award conference procedure program, outlined in
dure DD Form 1484, Post-Award Conference Record.
DFARS 242.503-2
DD Form 1484
Step 3 Summarize the roles of Government key personnel. Clarify the limits,
authorities, roles, and responsibilities of each Government representative.
Ask the contractor to advise the Government of the roles, responsibilities,
limits, and authorities of each contractor representative.
Emphasize that the contracting officer is the Government’s agent to

change or alter the contract. Any exception to this must be specified
clearly. Affirm that conference participants without authority to bind the
Government must take no action that in any way changes or alters the con-
tract.
Further advise the contractor that the Government is not obligated to make
any contract adjustments as a result of an action taken by a Government
representative unless the action has been specifically authorized in the rep-
resentative’s letter of designation or by the contract itself.
Step 4 Provide general instructions. General contract administration instruc-

tions include information necessary for the contractor to understand its
risks as well as the Government’s, and they address contractor responsibil-
ities for:
♦ Management and supervision of the work force,
♦ Protection and control of Government property, data, and reports,
♦ Compliance with contract clauses, and
♦ Other appropriate areas of concern.
Advise contractors of the proper routing of correspondence. Explain that

matters pertaining to technical performance may be addressed directly to
2-23
the COR/COTR or project officer, but that matters pertaining to questions

of fact dealing with contractual terms and conditions must be sent to the
Step 5 Provide the contractor with posters, notices, and other data. Labor law
implementation will sometimes require that the contractor post equal em-
FAR 22.805(b) ployment opportunity posters at the job site, including posters that outline
the rights of handicapped persons. If the contract requires posting labor-
FAR 22.1020 related notices, the Government is responsible for providing them. The
Government may also need to provide seniority lists from incumbent ser-
FAR 22.1304
vice contractors ranking its current employees to new follow-on contrac-
FAR 22.1404 tors for new service periods. Often Government publications are listed as
Government-furnished material. Consider distributing these and other da-
ta you need to provide at this orientation conference.
Step 6 Secure agreement on milestones or interpretation of terms and condi-

tions. For milestones that require the contractor’s input, seek the contrac-
tor’s agreement now. If you identified ambiguities in key contract terms
when drawing up your contract administration plan, get agreement on
these now. If not, emphasize significant and critical terms. Key discus-
sion items would be any uncertainty about terms that would affect:
♦ Performance,
♦ Interim delivery, and
♦ Payment.
During the conference, request any information or response from the con-
tractor to ensure a mutually uniform understanding of key terms and con-
ditions.
IT NEVER HURTS TO ASK
2-24
CHAPTER 2
When Eric took Harry’s continuing concern about the performance specification to
Joanne, the contracting officer threw the ball back to her contract administrator.
“Well,” she asked, “what’s your recommendation about that?”
Eric was quick and decisive in his response. “I say we should ask Platform what its cus-
tomary commercial practice is in reporting to its customers on dealing with a
performance spec. If the answer is favorable to Harry, then let’s record it in our post-
award orientation memo, and leave it at that. If the answer is unfavorable, then let’s
press the issue and see if Platform will ‘buy’ a reporting requirement, which I’ll put
together for the meeting, at no cost to the government. In any event, let’s not agree to
pay for something until we exhaust all that we can do to bargain for a reasonable
delivery from the contractor without increasing the price. That’s just good business prac-
tice.”
Joanne flashed one of her infrequent smiles. “Okay, Eric, let’s do that. After all,
nothing ventured, nothing gained.”
2.5 Prepare Post- Use any convenient format for an orientation report as long as it contains
award Orientation all the information necessary to document the events of the meeting.
Report Common key elements of a report are contained in Exhibit 2-6.
FAR 42.503-3 Make sure that the contracting officer, the COR/COTR, the contractor,
and others as appropriate, receive copies of the report. Include a copy in
the contract file. If the contracting officer does not write this report, it is a
good practice to have that person review it initially to ensure an awareness
of any problems or the need for future action.
Key Elements of a Postaward Orientation Report
♦ The names and affiliations of all participants.

♦ The main points discussed and all agreements reached.
♦ Areas requiring resolution.
♦ Names of participants assigned responsibility for further actions.
♦ Completion dates for the actions.
Exhibit 2-6
2-25
DoD Report Form You may use DD Form 1484, Post-Award Conference Record, for the re-
DFARS 242.503-3 port.
DD Form 1484
Report for the Record Exhibit 2-7 is an example of a brief memorandum that can be attached to
the checklist in Exhibit 2-4. It may also be used to record specific prob-
lems resolved during the orientation.
Report for the Record
February 1, 1997
I chaired a postaward orientation conference on Contract NO. ISR 97-2498-NR for repairs to
a conveyor system in the Federal Building on Main Street in Our Town, PA. A detailed list
of the points we covered and the names of those in attendance is attached to this record.
The most pressing problem that surfaced was that none of the Government attendees knew
the location of the Government-furnished replacement parts that the Government is to pro-
vide, per paragraph 1.2.3a of the statement of work. The building superintendent, Mr. How-
ard Ames, one of the attendees, went back to check his records after the conference. He
advised me on this date that the parts in question had been ordered through the Federal
Supply Schedule and had not yet been received. Our supervisor of simplified acquisition
procedures, Ms. Janet Doe, found the order (Order ISN 97-9424-SP) and advised me today
that the replacement parts were shipped on January 20, so Mr. Ames should be receiving
them any day.
Since the parts will not be needed until the second week in March, their near-term delivery is
not holding up performance.
Sam Smart
Contract Administrator
Concurred: Jane Justice
Contracting Officer
Exhibit 2-7
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CHAPTER 2
2.6 Actions to Resolve Events that occur when the Government and the contractor discover a
Disagreements on Key point of disagreement during an orientation conference reflect the nature
Issues of the problem. A key factor is whether the problem can be resolved easi-
ly. Remember: Each contractual problem is different, and no one ap-
proach can be used to resolve every disagreement that may arise. In
general, four steps may be used to resolve points of disagreement.
Step 1 Document the contractor’s position in detail. During the conference,

delve into the reasons for the contractor’s position and include it in the
conference report. If disagreement results in an emotionally charged at-
mosphere, consider deferring its resolution, but assure the contractor that
it will be resolved, if possible. If the problem requires joint contractor/
Government problem solving, set up an early time for a separate meeting
with only those who need to be in attendance.
Step 2 Take appropriate action to resolve the problem. Seek technical or le-
gal advice when necessary. Look at all possible solutions.
Step 3 Select the best solution to the problem and seek agreement on it. It is
important that you resolve each issue in a fair and equitable manner and as
quickly as possible. Although not always practicable, it is best to resolve
all problems before the contractor begins any work under the contract. In
seeking mutual agreement, your actions can include:
♦ Further discussions with the contractor’s top management, or
♦ Consideration and negotiation of a contract modification.
Step 4 When agreement cannot be reached, take appropriate unilateral ac-

tion. If a contract clause allows the contracting officer to issue a unilater-
FAR 43.103(b) al modification, this action is a likely Government solution to the
stalemate.
FAR Subpart 43.2
2.7 Identify the Need If a contract change seems necessary, you must clearly define the extent of
for Contract Modifi- the proposed change and implement it promptly. The contracting officer
cations must sign a contract modification in all cases. Chapter 5 addresses con-
tract modifications.
FAR 43.103
FAR Subpart 43.2
2-27
2.8 Document the Include the conference report detailed in 2.5, above, as well as all other
Contract File material, correspondence, or actions from the postaward orientation.
In the event of any subsequent disagreements with the contractor, this ma-
terial can be used to reconstruct facts and events as they occurred. A well-
documented contract file will identify and verify the Government’s initial
position on any performance problems that were anticipated during the
orientation or in the early steps of implementation.
2.9 Provide Informa- Provide any documentation to members of your contract administration
tion to Interested Par- team as well as the contractor when that information affects their role in
ties contract performance.
FAR 24.202 You may also get requests for information from other interested parties,
such as other companies that have proposed but were evaluated and de-
termined to be unsuccessful offerors. Release of any information is sub-
ject to the Freedom of Information Act (FOIA). Examples of information
you may not release are:
♦ Classified information, and
♦ Contractor’s proprietary data, including trade secrets.
Your agency will have an organization tasked with providing advice on

information that is or is not releasable under FOIA. Your own procure-
ment organization may have a staff analyst to help you in these decisions.
FOIA imposes a response time on answering requests for information. So
initiate action on them quickly.
DoD FOIA Policy You can find DoD’s FOIA procedures in DoDD 5400.7, DoD Freedom of
Information Act Program, and DoD 5400.7-R, DoD Freedom of Informa-
DoDD 5400.7 tion Act Program.
DoD 5400.7-R
DFARS 224.203
2-28
CHAPTER 2
2.10 Obtain Executed Generally, nonconstruction contracts do not require payment or perfor-
Contractual Docu- mance bonds. The contracting officer may include bonds in solicitations
ments, Bonds, or In- for services under certain circumstances.
surance
Another contract requirement may call for the submission of insurance
FAR 28.103 certificates.
FAR 28.301 Since bonds and certificates of insurance must be executed before perfor-
mance begins, the deadline for submission should be stated in the contract.
FAR 28.103-3 It is usually within 10 days after award. When bonds and certif-icates are
required, request them immediately, normally in the letter accompanying
contract award. Reference the contract clause that requires the submission
and establish a time for receipt, if the contract does not provide a date.
When you receive the forms, review them and, in the case of bonds, check
FAR 28.202 the Treasury Department list to be sure the surety company has the requi-
site bonding authority. Bonding companies have limits on the amount
they may bond.
2-29
CHAPTER 3
BASIC PROCEDURES FOR SUCCESSFUL

PERFORMANCE MONITORING
MONITORING THE PALLET PROCUREMENT
After a brief period on the job, Eric had been assigned responsibility for monitoring the perfor-
mance of nine contracts, one of which was the pallet procurement awarded to Platform Indus-
tries. Having met with Joanne to discuss her expectations of how he should undertake his
expanded responsibility, he decided to unscramble some notes he had taken at their meeting.
Joanne had provided Eric with a good deal to think about. As he worked to put his notes in
some reasonable order, he listed the following points as a summary of their conversation:
Monitoring contractor performance comes in a variety of sizes; not every contract re-
quires the same amount of effort.
When all else fails and people start pointing fingers in several different directions, it’s
time to go back and read the contract.
Contractors are frequently unaware that what the big print giveth in a Government con-
tract the small print can taketh away.
Any contract of any size should have a contract administration plan; some may be less
than a page in length, and others may be of considerable size.
Keep the contract administration team advised about contractor performance and a con-
tract’s status.
Make certain that technical and other support personnel understand the limitations of
any delegated authorities.
Remember that it takes two to tango; consider the contractor a partner, even though one
at arm’s-length.
Eric felt fortified with some good, basic maxims. “Right from the mouth of one” he said to
himself, “who has the experience and insights.”
Reflecting on the pallet procurement, he took out the record of the postaward orientation confe-
rence with Platform Industries. It seemed to be a good tool to use for assessing the need to
mon-itor the contractor’s performance. Having used the procedures of FAR Parts 12 and 15 to
acquire the pallets, Eric knew that he could streamline the contract administration process.
3-1
BASIC PROCEDURES FOR SUCCESSFUL PERFORMANCE MONITORING
The postaward orientation record noted that several points had been made to the contractor
concerning the terms and conditions of FAR 52.212-4 (Contract Terms and Condi-
tions—Commercial Items). For instance, Eric had invited Platform’s attention to the terms and
conditions for inspection and acceptance, those covering risk of loss, and the importance of
meeting prescribed delivery schedules. Both Eric and Harry Carmichael, who had been desig-
nated as the COTR for the procurement, had been very specific in dealing with the warranty
provision for the pallets. Eric had explained that Platform’s warranty was one of fitness for a
particular purpose. Harry had further explained the importance of the performance spec under
which Platform would develop and test a process for wood preservation that would ensure the
required pliability of the pallets.
Eric had made it very clear at the postaward orientation that the Government wanted to stay on
top of the development and test of a process for wood preservation. He had requested that
Platform provide the COTR with a weekly written report on its progress and permit the COTR to
visit and review the work of those involved in the wood preservation effort. Platform’s pur-
chasing agent had responded almost unhesitatingly. “Sure, we’ll provide Harry with a weekly
report, and he can come see us anytime he wants.” Then, as Eric recalled, Platform’s technical
representative at the orientation leaned forward and interrupted. “Excuse me, Eric,” he had
interjected, “but remember that you’ve ‘bought’ our in-house inspection system for this pro-
curement under FAR 52.246-1.”
“You bet we have,” Eric had replied, “and we’ll abide by that.” But then he placed an impor-
tant condition on the postaward table. “May we assume,” he had asked, “that the weekly re-
port you’re willing to provide is a no-cost item to the Government?” The purchasing agent had
smiled and shrugged his shoulders. “Sure!” he had blurted out. “Why not? Doing that re-
flects our company’s customary practice in dealing with its customers. It’s no big deal, so long
as you’re not expecting something the size of a metropolitan phone book.”
At the time, Eric seemed delighted and Harry looked visibly relieved. “Tell you what we’ll do,”
Eric had said, “we’ll draw up a brief requirement for the weekly progress report, you can review
it, and if it’s okay we’ll issue a modification to incorporate it into your basic indefinite-quantity
contract.” Again shrugging his shoulders, the purchasing agent had agreed. “Sure, that
makes good business sense,” he had responded. “I see no problem in doing it that way.”
After the postaward orientation, Eric and Harry met to confirm their understanding of what had
been explained to Platform Industries, and to set a time for getting together to draw up a re-
porting requirement for the wood preservation process and to discuss the monitoring of Plat-
form’s contract. And Harry’s comment to Eric after the postaward orientation had stuck in the
contract administrator’s mind. “Hey, Eric,” the COTR had said, “so far so good. Let’s hope
it stays that way.”
3-2
CHAPTER 3

Overall: Monitor performance under a contract of both contractor and Government per-
sonnel as well as any actions required by the contracting officer.
Individual:
3.1 Respond to contractor requests.
3.2 Monitor actions of assigned Government technical and other support personnel.
3.3 Obtain data on contractor performance from the commencement of work through
final inspection and acceptance.
3.4 Inform a requiring activity and other interested parties of a contract’s status.
3-3
CHAPTER 3
INTRODUCTION TO PERFORMANCE
MONITORING
Performance Moni- Performance monitoring involves contract administration activities that

toring contracting officers and other Government personnel use to ensure that
supplies or services acquired under contracts conform to prescribed quali-
ty, quantity, and other requirements. Monitoring activities include, but
are not limited to, inspection and acceptance as well as quality assurance
techniques.
Objectives of Per- Under a contract, both parties are obligated to perform as each has prom-
for-ance Monitoring ised to do under specified terms and conditions. Not all contracts, how-
ever, are performed according to their terms and conditions or within
required time frames. Poor performance or late deliveries may cause
costly delays in a program. Thus the Government monitors contract per-
formance to ensure that required supplies or services are delivered on
time.
Performance monitoring supports many objectives, including those given

to the following:
Identifying potential delinquencies,
Isolating specific performance problems,
Supporting contractor requests,
Pointing out the need for Government assistance,
Revealing actual or anticipated default, and
Identifying Government-caused delays.
Policy on Performance Governmentwide policy requires agencies to ensure that:

Monitoring
Deliverables tendered by contractors meet contract requirements,
FAR 46.102
Procedures are in place for assuring that contract requirements are
met before the acceptance of deliverables,
No contract precludes the Government from performing appropri-
ate inspection, and
Inspection and acceptance services by other agencies are used
when it is more practical or beneficial to the Government.
3-4
CHAPTER 3
Quality Program Pol- DoD policy requires:

icy
Cost-effective quality programs,
DFARS 246.102
Quality audits,
Quality assurance functions tailored to the specific acquisition, and
Contractors provided maximum flexibility to establish quality pro-

grams in meeting contract requirements.
Monitoring Contracts Contracts for commercial items rely on a contractor’s existing quality as-
for Commercial Items surance system as a substitute for compliance with Government inspection
and testing before:
FAR 46.102(f)
The tender of items for acceptance, unless
Customary market practices for the items permit a buyer’s

in-process inspection.
Any Government in-process inspection must be conducted in a manner

consistent with customary commercial practice.
Steps in Performance The steps in executing successful performance monitoring are charted on
the next page. Following the flowchart, each step is discussed in detail.
3-5
STEPS IN SUCCESSFUL PERFORMANCE

MONITORING
Input: Contract and delegations

authority to contracting officer’s
representatives.
1. Respond to contractor
2. Monitor CORs/COTRs and other

ment personnel.
3-4. Obtain feedback on contractor

mance or deliverables (including first
tests, if applicable).
No
Any problems? 12-13. Document the file and
status of contract.
Yes
With
Yes
deliverables from 14. Investigate and resolve
FAR Part 8 as prescribed in FAR Part
sources?
No
5-8. Investigate actual or potential

ance problems, constructive changes, or
breaches.
3-6
CHAPTER 3
(Flowchart continued from prior page)
5-8. Investigate actual or potential

performance problems, constructive changes,
or other breaches.
Yes
9. Determine whether to modify the
Constructive
contract or to satisfy constructive
change?
changes.
No
10. Informally resolve problems.
No
Problem 11. Invoke formal contractual remedies.
resolved?
Yes
12-13. Document the file and report status of

contract.
SUCCESSFUL PERFORMANCE MONITORING
3-7
3.1 Respond to Con- The Government will be called on to review, approve, make decisions, or
tractor Requests take other actions during the performance of a contract. Most Govern-
ment actions are based on contract requirements. For instance:
The interpretation of technical specifications,
Obtaining approval for contractor entry to or on a Government site,
Providing an escort in controlled areas,
Arranging for utility outages when required by the contractor for

maintenance or installation purposes,
Authorizing the use of overtime under certain types of contracts,

and
Authorizing used or surplus material as a substitute for new ma-

terial.
Track and Respond to Since the contractor is responsible for direction of the work, it is in the
Requests best position to determine when to submit requests to the Government.
As a contract administrator, you should be prepared to handle requests by
establishing a system to:
Track contractor requests, and
Provide timely responses in accordance with the contract or other

regulatory prescriptions.
Tracking Requests Many requests a contractor submits require input from other Government
officials. Use a tracking system, manual or automated, so that requests
that might be “out of sight” are not also “out of mind.” Remember: A
request may be crucial to contract performance. In fact, the contractor
may not even be able to proceed until the Government responds.
For instance, a specification might call for the submission of a material

sample for the Government’s approval of color. While the program
manager may be charged with overall responsibility for approving the
color, other officials may have to concur. The contractor may be at a
complete standstill until approval is received. If you have not set up a
tracking system, it may take days just to locate the sample. You can use a
tracking sheet such as shown in Exhibit 3-1 to monitor all such material
approval requests, including those for used surplus or reconditioned ma-
terial.
3-8
CHAPTER 3
Timeliness Respond to contractor requests in a timely and efficient manner. Timely

responses set the tone for a relationship with the contractor and pay divi-
dends by minimizing the amount of contract administration required for
contracts that are running smoothly.
Untimely responses may have major consequences. The contractor may

legitimately point to an inability to act on its request as the reason for not
meeting a delivery or performance schedule. Contracts should specify
both the requests a contractor must make and the amount of time the Gov-
ernment has to respond. If a contract does not specify a time, the Gov-
ernment should establish one. An effective tracking system will identify
not only who is handling the response but also its due date.
Unforeseen Circums- Contractors may submit requests to the Government based on unforeseen
tances circumstances. For some, the contractor may be entitled to delay delivery
or performance. A timely response to these requests ensures that the con-
tractor is held accountable for delivery or performance requirements.
3.2 Monitor Assigned Unintended modifications to an existing contract often result from the ac-
Technical and Other tion or inaction of Government personnel, frequently without their being
Support Personnel aware of the effect of such action or inaction. This can create trouble-
some situations that result in a contractor’s efforts requiring the expendi-
ture of time and money. That is, the contractor may claim that it
construed such action or inaction to have required the performance of
compensable work. Such actions are often called “constructive change
orders.”
Meaning of Construc- A “constructive change order” may be defined as an oral or written act, or
tive Change Order omission, provided by a presumably authorized government official that is
construed to have the same effect as a formal, written change order.
Despite the longstanding history of what is called “the doctrine of con-

structive changes,” the FAR contains no definition of the term
“con-structive change.” The adjective “constructive” is grounded in the
verb “to construe.” That tells us that a “constructive change” is one that
infers or implies that an appropriate course of action is (or was) required
to be taken. It can result from either a specific action or a failure to act.
3-9
Material Approval Tracking Sheet
Contract Number: ______________________
Contractor: ___________________________
Submittal ID Contract Pa- Description of Date Approval Date Previous

No.* ragraph Material or Request Needed by or Date Review Returned to Approved or Submittal
Number Submittal Received Due by Completed Contractor Rejected ID No.
*Give each resubmittal its own ID number, then cite the previous submittal number in the column on the far right.
Exhibit 3-1
3-10
CHAPTER 3
Indicative Situations for Constructive change orders are often attributed to letters, telegrams, or
Constructive Changes other documents from Government personnel that are misconstrued as di-
recting the performance of changed or additional work. But a caution is
in order: Simple suggestions, advice, comments, or opinions by Gov-
ernment personnel are, more often than not, held to be baseless grounds
for pursuing compensation associated with alleged constructive change
orders.
Indicative situations that serve as the basis for constructive changes in-
clude the following:
Specifications that are “impossible to perform,” either in whole or

part,
Specification provisions that are defective because of conflicting

or excessive requirements,
The acceleration of work or performance despite a contractor’s va-

lid claim of an excusable delay,
Government inspection that exceeds any reasonable interpretation

of what a contract may require,
Government failure to disclose its superior knowledge when such

knowledge is essential to the performance of required work, and
Unauthorized technical direction by Government personnel.
Resolution of Construc- Given, for example, the determination that an alleged constructive change
tive Changes order was “issued” by a contract administration official, the Government’s
avenues for resolution may be to issue a formal change order under the
contract’s Changes clause, or to pursue some kind of ratification proce-
dure. In both instances, a costly and time-consuming process has to oc-
cur, and the virtual impossibility of any prepricing puts the Government in
a disadvantageous negotiation position.
Monitor for Construc- Monitoring for constructive changes can be achieved through one or more
tive Changes of the following methods:
Obtain copies of correspondence from technical and other support

personnel.
Instruct contractors to submit notices for constructive changes and

other potential changes.
3-11
Obtain feedback on meaningful oral communications with the

con-tractor.
Periodically contact CORs/COTRs and other support personnel.
Make unscheduled site visits.
Include Appropriate With few exceptions, a Government contract must include an appropriate
Changes Clause Changes clause or its applicable alternate. Each of these clauses pre-
scribes for the issuance of change orders by the Government under speci-
fied conditions. The following clauses are required when certain types of
contracts are used:
FAR 43.205 FAR 52.243-1 Changes—Fixed Price.
FAR 52.243-2 Changes—Cost Reimbursement.
FAR 52.243-3 Changes—Time-and-Materials or Labor-Hours.
FAR 52.243-4 Changes (for dismantling, demolition, or removal of

improvements, and for construction when a firm-fixed-price con-
tract is contemplated and the amount is not expected to exceed the
simplified acquisition threshold).
FAR 52.243-5 Changes and Changed Conditions (for construction

when the contract amount is not expected to exceed the simplified
acquisition threshold).
Contract Modifications Use the following clause when you plan and use a fixed price contract:
DFARS 243.205-71 DFARS 252.243-7001, Pricing of Contract Modifications.
Contractor Notices of When used, the clause at FAR 52.243-7, Notification of Changes, requires
Potential Changes a contractor to notify the Government in writing, as soon as possible (a
specific time frame for which is to be negotiated), when the contractor de-
FAR 43.104 termines that the Government has effected or may effect a change in the
contract.
FAR 43.107
FAR 52.243-7 This clause is not intended to be universally applied. Its use is primarily
available for negotiated research and development or supply contracts for
the acquisition of major systems or principal subsystems. While not pro-
hibited from use for smaller procurements, the prescribed threshold for its
optional application is $1,000,000.
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CHAPTER 3
Contracting Officers DoD defines the “specifically authorized representative” (SAR) refe-
Representative renced in FAR 52.243-7, Notification of Changes, as a “contracting offic-
ers representative” as defined in FAR 202.101.
DFARS 243.107
FAR 52.243-7
FAR 202.101
Substantial Impact on If a modification of a major contract or subcontract will have a substantial

Employment impact on employment, the Secretary of Defense has to notify the Secre-
tary of Labor. DoD’s procedures require that contractors provide the
DFARS 243.107-70 specific impact information in all major defense program contracts. The
notification procedures are established in DFARS 252.249-7002, Notifica-
DFARS 249.7003 tion of Anticipated Contract Termination or Reduction.
Benefits of Notification When appropriate, the use of the Notification of Changes clause permits
of Changes the Government to (1) evaluate an alleged change and confirm that it is
one, direct further performance resulting from the change, and plan for its
funding; (2) countermand the alleged change; or (3) notify the contractor
that no change is considered to have been made.
Contractor and Gov- The Notification of Changes clause specifies the responsibilities of the
ernment Responsibili- contractor and the Government concerning any notification of changes.
ties The basic content requirements for the contractor’s notice of change are
shown in Exhibit 3-2. The Government’s responsibilities for responding
FAR 52.243-7(b) and
to a contractor’s notice of change are shown in Exhibit 3-3.
(d)
3-13
Notice of Change Content Requirements
The date, nature, and circumstances of the conduct or action regarded as a change.
The name, function, and activity of Government or contractor personnel who know
about such conduct.
The identification of any documents and the substance of any oral communication in-
volved.
The basis for any allegation of accelerated performance or delivery.
Any element of contract performance that the contractor may use as a basis for an
equitable adjustment (a change in time or money), including:
Ê Contract line-items affected.
Ê Specific labor or material categories affected.
Ê To the extent practicable, what delay and disruption in the manner and sequence
of performance and their effect on continued performance have been or may be
caused by the alleged change.
Ê Contractor estimates of adjustments to contract price, estimated cost, delivery
schedule, or other contract terms.
The contractor’s estimate of a reasonable response time by the Government that would
minimize cost, delay, or disruption of performance.
Exhibit 3-2
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CHAPTER 3
Responsibilities in Responding to a Notice of Change
Either:
♦ Confirm that the circumstances constitute a contract change.

♦ Countermand any communication regarded as a change.
♦ Deny that the alleged Government conduct constitutes a change and direct further per-
for-mance.
Or:
♦ If additional information is needed from the contractor to make a decision, advise the
contractor what information is required and establish a date for its submission and a date
by which the Government will respond.
♦ If it is determined that the alleged change did in fact occur, prepare to make an equitable
adjustment in price, estimated cost, and/or delivery schedule and in such other provisions
as may be affected, including the funding of the change.
♦ Modify the contract in writing.
Exhibit 3-3
Importance of Commu- All Government officials involved in contract administration must report
nications to a contract administrator any meaningful communications they have held
directly with the contractor. Meaningful communications would include
FAR 42.1104(d) any information that might potentially affect:
Performance,
Price, cost, or
Other contract requirements.
Meaningful communications help control actions that are otherwise in-

consistent with contract requirements.
Contact Other Govern- A contract administration plan may require a designated COR/COTR or
ment Personnel other support personnel to provide periodic progress reports or daily logs
of contract activity. Follow up immediately when these are not received.
Analyze them for constructive changes.
3-15
If a contract administration plan does not include the submission of re-

ports from support personnel, contact them on a regular basis and ask how
things are going. Sometimes they will not “bother” you with something
they think is insignificant. However, you want to have an early warning
of any contract performance difficulties. Often these “insignificant”
events can cause major future headaches.
Use Other Monitoring Sometimes an unannounced site visit is the most effective way to find out
Methods what is really happening. When both contractor and government person-
nel are there to listen to the other’s answers to a contract administrator’s
questions, the result is less likely to portray a one-sided picture of events
that have taken place or are currently happening.
Monitoring may uncover more direct evidence of such problems as con-

structive changes. For instance:
Requests for change orders from the contractor, and
Invoice or voucher items or amounts that are not consistent with

contract requirements.
Remember: The more quickly you identify contract administration prob-

lems, the easier it will be to resolve them.
3.3 Obtain Data on In addition to monitoring the actions of Government officials, you should
Contractor Perfor- obtain sufficient data to verify satisfactory performance. You need to
mance recognize any evidence of potential performance problems by either the
contractor or the Government. Sources for obtaining information on po-
tential contractor performance difficulties are summarized in Exhibit 3-4.
3-16
CHAPTER 3
Sources of Contract Performance Status
FAR 42.1106
♦ Progress and other monitoring reports.

♦ Requiring activity personnel and end users.
♦ Personal site visits and/or observations of work.
♦ Inspection and acceptance officials.
♦ Other data supporting acceptance or rejection.
♦ Other persons (both Government and contractor officials).
Exhibit 3-4
Progress and Other Daily logs or progress reports required by a contract administration plan
Monitoring Reports or the contract itself often provide early warning indicators of potential
changes, delays, or other problems in contractor performance. Reports
may be provided by Government officials or the contractor.
CORs/COTRs may initiate written reports identifying potential or actual

delays in performance. They should be advised to provide such reports:
In sufficient time for necessary action by the contracting office,

and
With a specific recommendation for action.
Submission Require- The required submission of written data from a contractor must be covered
ments by a contract. However, some well-timed questions may produce valua-
ble oral information. If your information needs are not simple enough to
be answered by a brief question-and-answer session, you probably have
(or should have) a contract submission requirement to fulfill that need. A
contract may call for, among other things, the following:
Shop plans,
Shop travellers,
Blueprints,
3-17
Stick drawings,
Wiring diagrams,
Reprocurement data packages,
Identification of subcontractor sources, and
Progress reports.
Remember: Progress reports will be the long-term contract administra-

tion monitoring tool for a contract administrator.
Progress Report Con- Because the information needs of different contracts vary widely, there are
tent Requirements no standard FAR clauses addressing content requirements for progress
reports. However, progress reports do tend to have some common ele-
ments. These are listed in Exhibit 3-5.
Common Elements of Contractor Progress Reports
♦ Actual deliveries or performance milestones met.

♦ Scheduled deliveries or projected performance milestones.
♦ Factors causing delays.
♦ Status of the work in general and by specific element.
♦ Reasons for any difficulties or delay factors.
♦ Actions taken or proposed to overcome difficulties or delay factors.
♦ Assistance needed from the Government.
Exhibit 3-5
CAO Review and The contract administration office (CAO) has to review the contractor’s
Comment progress reports, and then has to provide comments to the contracting of-
ficer within four working days. If the report states that the contractor is
DFARS 242.1106(b) on schedule, and the CAO agrees, the CAO does not have to add com-
ments. In all other cases, the CAO has to include comments and recom-
mend corrective actions.
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CHAPTER 3
Progress Report Ac- Normally, the COR/COTR reviews and verifies the contractor’s progress
tions reports, but some contracts require direct submission to the contracting
office. In this case, your contract administration plan should include a
separate report from the COR/COTR. Make a comparison of similar re-
ports and resolve any discrepancies.
The fact that a monthly progress report is required does not relieve the
contractor of its obligation to report anticipated or actual delays to the
COR/COTR or the contracting office as soon as such delays are recog-
nized. Once an initial analysis is made and reported, the contractor does
not need to repeat the analysis in regularly scheduled progress reports, but
progress toward correction must be tracked if correction was indicated in
the analysis.
In contracts for maintenance and overhaul, progress generally is reported

and measured by the percentage of work completed.
Production Contract Production progress reports are generally required unless the work is per-
Reports formed under a Federal Supply Schedule, a construction contract, or a fa-
cilities contract. Delays in furnishing production reports allow the
FAR 42.1107 contracting officer to withhold from payment an amount not exceeding
$25,000 or 5 percent of the total contract amount, whichever is less.
FAR 52.242-2
Some production contracts require a phased schedule for reporting
progress. There is no standard format, but these schedules are often cha-
racterized by reporting associated with various stages of the production
cycle, such as:
Planning,
Purchasing,
Plant rearrangements,
Tooling,
Component manufacture,
Subassembly and final assembly,
Testing, and
Shipping.
3-19
R&D Contract Reports Since the primary purpose of research and development (R&D) contracts
is to advance scientific and technical knowledge, they represent some
FAR 35.002 unique monitoring problems. The Government must closely monitor
technical progress. Therefore, progress reports are often required from
the contractor and may include such things as:
Number and names of key personnel working on the project during

the reporting period,
Facilities currently set aside for the work,
Direction of the work,
Experiments being conducted,
Other work in process,
Negative results of work or experimentation,
Problems encountered, and
Efforts taken to resolve problems in terms of costs, schedules, and

technical objectives.
FAR 35.010 These progress reports are normally in addition to the scientific and tech-
nical reports that become a permanent record of the work accomplished
under the contract.
Scientific and Technical DoD’s Defense Technical Information Center (DTIC) collects all scientif-
Reports ic and technical reports from DoD and contracted efforts.
DFARS 235.010
Graphic Progress Pres- Production and other contracts may require a contractor to submit graphic
entations displays comparing actual with scheduled progress. In the past, this was
a time-consuming task, but now computer graphic software programs can
create these comparison graphics with relative ease.
Bar charts and milestone charts represent more simple graphic displays.
An example of a milestone chart is shown as Exhibit 3-6. However, these
kinds of charts do have limitations. They do not show complex interrela-
tionships among:
Events,
Tasks,
Time, and
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CHAPTER 3
Contractor progress.
Moreover, bar and milestone charts are difficult to revise when changes
take place.
Complex Graphic When a contract involves a complex web of interdependent relationships

Presentations between tasks, decisions, and resources, the contractor may be required to
prepare a more elaborate graphic display—one that shows what has to be
done and when. This usually will help a contractor perceive the relation-
ship among various tasks, the order in which events and decisions take
place, and the need for specific resources (e.g., material, equipment, and
labor). This kind of chart can serve as both a planning and a contract
performance and management tool.
Examples of techniques used as a basis for more elaborate display systems

include:
Program Evaluation Review Technique (PERT), and
Critical Path Method (CPM).
PERT and CPM charts detail interrelationships. A contract may require

the contractor to submit such a chart with its offer or after contract award.
On occasion, a contractor will submit them voluntarily, because it uses
them for internal project management purposes. When these charts are
available to the Government, they are important contract monitoring tools.
(More detail on these methods is provided in Appendix A.)
Meet With Requiring Hold periodic meetings with requiring activity and end users to obtain, as
Activity well as provide, pertinent information on a contract’s status. These
meetings help foster a team approach to contract administration. When a
contractor performs on-site work, they can provide early warnings of any
potential performance problems.
Monitoring Required The acquisition of supplies or services from or through Government

Sources of Supplies and supply sources are not exempt from requirements for appropriate moni-
Services toring. These sources include:
FAR 8.001 Federal Prison Industries;
The Committee for Purchase From People Who Are Blind or Se-
verely Disabled;
Wholesale supply sources (General Services Administration, De-

fense Logistics Agency, the Department of Veterans Affairs, and
military inventory control points);
3-21
Mandatory Federal Supply Schedules; and
Optional use Federal Supply Schedules.
Acquiring Agency Under the DoD Coordinated Acquisition Program, where contracting re-
Monitoring Under sponsibilities are assigned to one or more of the departments, agencies, or
Coordinated Acquisi- the General Services Administration, the “Acquiring Department” is the
tion one that has contracting responsibility under the coordinated program.
DFARS 208.7001 The acquiring department also performs or assigns contract administra-
tion, including follow-up and expediting of inspection and transportation.
DFARS 208.7002-1
FAR 8.405 While regulatory requirements vary for remedies arising from the non-
compliance or nonperformance of Government supply sources, the admin-
FAR 8.407 istration of contracts with these sources should include appropriate
monitoring and oversight.
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CHAPTER 3
Sample Milestone Chart
PROJECT PHASES AND

KEY ACTIVITIES PROJECT SCHEDULE (WEEKS AFTER START)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
PERFORMANCE APPRAISAL
DESIGN
1. Interview staff to
determine training
needs and specifications.
2. Review state-of-the-art
training designs and those
used in other federal
agencies.
3. Identify all materials

needed for data base.
4. Present concept, including

linkages with other training
efforts and publications.
TRAINING PROGRAM DESIGN
5. Develop briefing materials.
6. Develop training materials

for workshops.
7. Prepare and produce

manuals.
TRAINING DELIVERY
8. Develop program schedule;

register participants.
9. Conduct briefings and

workshops.
10. Train trainers.
11. Develop trainer manual.
12. Support trainers during

initial sessions.
FOLLOW-UP EVALUATION
13. Develop evaluation design.
14. Assist with evaluation.
= Project milestone event
Exhibit 3-6
3-23
AND AWAY WE GO! ... OR DO WE?
About ten days after the postaward orientation for the pallet procurement, Harry
Carmichael decided to visit Platform Industries’ facility where work had gotten
un-derway on the wood preservation effort. He called ahead to Clyde Ruskin, the
facility’s manager who had attended the postaward orientation, to make an appointment.
Harry was determined to get things off to a good start.
The facility’s manager was most cooperative. “Seems like we’re open from dawn to
dusk around here, Harry. Come when you want to. I’d suggest that early morning
might be a good time.” That sounded good to Harry, who indicated he would drive to
Platform’s location the next day. He added that perhaps two or three hours onsite
would be suf-ficient time for him to see what was being done and to talk with those on the
job.
Harry left early the next morning, arrived at Platform’s facility about nine o’clock, and
was in Clyde Ruskin’s office soon thereafter. The manager seemed most
accommodating. “Trust you had a pleasant drive down here, Harry. And now that
you’re hear, what can we do for you?”
Harry took a folder from his briefcase and asked Clyde if he had a copy of the postaward
orientation conference report. “Well, uh ... no, Harry, I don’t. Purchasing keeps all the
paperwork. But let me get Caroline Moore to join us. She’s the one who heads up our
laboratory for materials testing. Been here for years, does a fine job, and works well with
everybody.” Clyde called Caroline to join them, and she was there in no time.
Wanting to make sure that Platform’s team understood what the COTR had in mind,
Harry began somewhat slowly. “Appreciate the opportunity to meet with you folks to
confirm what we expect of Platform in administering its contract and the orders that will
be placed under it. What I want to do this morning is make certain that we’re all in sync
as far as your weekly progress report is concerned. And beyond that, I’d like you,
Caroline, to show me your laboratory area and, if you will, explain how you’re going
about conforming to the performance spec we provided for dealing with the pallet
Clyde and Caroline looked at each other and then at Harry. They appeared somewhat
perplexed. “Sure, Harry,” said Clyde. “We’re glad to do what you want and show you
what we can, but maybe we ought to get purchasing in here, since they’re the ones who
handle all the paperwork.” Harry sat back in his chair and said he thought that was a
fine idea.
In calling purchasing, Clyde found that the cognizant purchasing agent was off for the
day. With an apologetic tone, he told Harry that no one else in purchasing would really
know the details of Platform’s contract. And as he carried on about that, Caroline
interrupted him saying that she had to be at a corporate meeting in Building 1 at ten
o’clock. “What do you want to do, Harry?” asked Clyde. “It looks like we’re short on
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CHAPTER 3
people to get after things today. Maybe we can schedule all this for a later visit over the
next few days.”
With a sense of embarrassed self-reflection, the COTR realized that he was in the middle
of wasting almost an entire day. That was his problem. But as he prepared to accept
Clyde’s suggestion for rescheduling the meeting, he was beset by a gnawing feeling that
Platform’s approach to administering its contract left something to be desired. Maybe he
was wrong, but he sensed a feeling of benign indifference on the part of Platform after
his virtually useless meeting with Clyde and Caroline. He hoped that wasn’t the case, but
something had to be done and he would take this up with Eric later in the day on his
return to the agency.
Personal Site Visits Hold periodic site meetings with contractor and Government technical
personnel who have contract administration responsibility. Your goal is
not only to identify potential change situations, as discussed earlier, but to
obtain monitoring data through your own observations. On-site meetings
allow both Government and contractor personnel to surface, as well as re-
solve, technical problems at the operating level.
Visits to Contractor’s There are certain rules that must be followed before making a site visit
Facilities when your contract administration office has delegated specific contract
administration functions to another contract administration office (CAO).
FAR 42.402 This type of delegation often occurs when your office has a production
contract in a plant where another agency has an on-site contract adminis-
tration activity. When making on-site visits to such facilities, prior noti-
fication is required, as detailed in Exhibit 3-7. If the CAO has already
gathered data that will fill your data requirements, personnel within the
CAO will generally discourage your visit and provide you with the exist-
ing data.
Access to Classified When your contractor facility visit requires access to classified informa-
Information During tion, you must give advance written notice to the contractor.
Visits to Contractors
DFARS
Post-Visit Reporting In addition to the notification requirements shown in Exhibit 3-7, you are
expected to inform the CAO of any agreements you reach with contractor
personnel or other results of your visit that may affect CAO operations.
Data from Inspection The type of data you can expect to receive from Government officials re-
Officials sponsible for inspection will depend on what inspection and acceptance
methods are specified contractually. Under its contract, the contractor
assumes responsibility for timely delivery and satisfactory performance.
Performance includes furnishing the quantity and quality of items the con-
3-25
tractor agreed to deliver and the Government agreed to pay for. Although
the contractor is fundamentally responsible, the Government, through
contract administration, protects its interest to ensure a quality product.
Inspection and acceptance requirements included in a contract are the ba-
sis for this protection.
CAO Notification Requirements for Contractor Facility Visits
Names, official positions, and security clearance information for all visitors.
Date and duration of visit.
Name and address of the contractor’s facility and personnel to be contacted.
Contract number, any program involvement, and purpose of the visit.
Request for CAO representation, if desired. (The CAO may accompany visitors,
whether or not desired.)
Identify data to be obtained in conjunction with the visit.
Exhibit 3-7
Purpose of Inspection The purpose of inspection is to determine whether a product or service

conforms exactly to what the Government has ordered. The extent of in-
spection varies with the dollar value of the contract and the type of supply
or service.
Inspection Defined Inspection means examining and testing supplies or services (including,
when appropriate, raw materials, components, and intermediate assem-
FAR 46.101 blies) to determine whether they conform to contract requirements.
Quality Assurance De- Quality assurance is a planned pattern of all actions needed to give ade-
finitions quate confidence that:
DFARS 246.101 Adequate acceptable technical requirements have been established,
Products and services meet technical requirements, and
The contractor achieves satisfactory performance.
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CHAPTER 3
Quality audit is a systematic examination related to quality procedures

designed to independently verify or evaluate the quality program, specifi-
cations, or contract requirements.
Quality program is a beginning through completion effort to develop,

plan, and execute material and service quality through design, production,
deployment, operations, and support.
Contractual Coverage Whenever possible, contractor self-inspection systems are used. There
for Inspection are basically three types of inspection systems:
Government reliance on inspection by the contractor. FAR

52.246-1, Contractor Inspection Requirements, is the standard
clause used to identify this quality level. The clause is required
for use for supplies or services when the contract amount does not
exceed the simplified acquisition threshold, unless the contracting
officer decides that some form of Government inspection and test-
ing is necessary. The clause does allow some specialized Gov-
ernment inspection and testing, but it relies on the contractor for
overall inspection. An example of a specialized test for a contract
not exceeding the simplified acquisition threshold could be an en-
viron-mental test for an outdoor herbicide product.
Standard inspection requirement. The standard inspection

clause, FAR 52.246-2, Inspection of Supplies—Fixed-Price, re-
quires that the contractor establish and maintain an inspection sys-
tem not otherwise defined except that it must be acceptable to the
Government. The standard inspection clause can be the only in-
spection clause in a contract, or it can be the foundation for other
Government inspection specifications. The FAR specifies other
clauses for use with different contract types and in specific situa-
tions. With minor adjustments in wording for contract type and
applications, these are basically the same as the standard inspec-
tion clause.
Higher-level quality control requirement. FAR 52.246-11,

Higher-Level Contract Quality Requirement (Government Speci-
fication), is the clause used when the technical requirements of a
contract mandate closer control of work processes or attention to
such factors as planning. This type of clause will require the con-
tractor to comply with Government inspection or quality assurance
procedures, if such are described in the contract.
3-27
Inspection Methods and The data desired from Government inspections result from several differ-
Data ent inspection methods. The most commonly used methods and their re-
sultant data are:
Sensory and dimensional checks. Sensory checks are examina-

tions by an inspector using eyes, ears, and other senses. The in-
spector exercises a good amount of personal judgment in this
method. This kind of examination reveals surface defects, miss-
ing pieces, noisy operations, and parts out of alignment. The in-
spector makes dimensional checks using gauges and micrometers
to determine whether the dimensions of the items conform to con-
tract specifications. Data obtained from an agency’s inspection
and acceptance personnel for routine commercial supply items, or
items that were previously inspected at a plant, will be based on
this type of inspection. Factors involved in this type of inspection
are listed in Exhibit 3-8.
Physical or performance tests. This kind of inspection provides

actual performance data. Requiring that a motor run or an oper-
ating system perform at a certain level for a specified period of
time are examples of this kind of inspection. Chemical tests to
determine chemical composition and physical tests to determine
hardness are also in this category of examination.
Destructive tests. This kind of inspection often provides data on

a “worst case” performance environment. Some contracts require
that end products meet certain reliability standards or withstand a
specific level of stress. Inspectors test these requirements simu-
lating abuse until the item is destroyed. For instance, to test fire-
proofing, the inspector heats the product until it burns.
3-28
CHAPTER 3
Elements of a Commercial Item Inspection
♦ Proper type or kind.
♦ Correct quantity.
♦ Damage check.
♦ Operability check.
♦ Preservation check for spoilage and other signs of age deterioration.
♦ Packaging and labeling requirements check.
♦ Appropriate packaging, if applicable.
♦ Proper item identification.
Exhibit 3-8
LESSONS LEARNED PAY DIVIDENDS
Returning from his near-useless visit to Platform, Harry consulted Eric, and the contract
administrator was immediately candid with him. “You blew it, Harry! You assumed that
because you were ready the contractor would be, too. Doesn’t always happen that way.
Before you visit any contractor, you’ve got to make sure there is an understanding about
why you’re coming, what you want, and who you want to see. That’s being businesslike.
Once you’ve established that kind of relationship, a contractor knows what to expect.”
Harry had taken Eric’s upbraiding in stride and found that lessons learned do pay
dividends. Subsequent visits to Platform were preceded by either a facsimile
trans-mission or E-mail that provided a brief agenda for the visit. Platform always
confirmed its receipt of these, and Harry placed a copy in his contract administration
file. Indeed, things had improved considerably since his first visit to Platform.
His most recent visit was to observe Platform’s demonstration test for pallet pliability.
Harry had come to respect Caroline’s expertise, and she, in turn, had come to
understand the COTR’s frustration over the pallet pliability problem. As Clyde had told
her, “Treat Carmichael as though he were the customer. Be responsive and keep him
fully in-formed.” She had no problem in measuring up to that.
It was a comprehensive demonstration test for pallet pliability and lasted the better part
of a week. Within short time periods, the processed wood was exposed to extremes in
temperature associated with good and bad weather. Fabricated pallets of the wood
3-29
were tested to hold various weights, and they were lifted and lowered numerous times as
would be the case in filling bins throughout the warehousing system.
“I guess all’s well that ends well, at least up to this point,” opined Harry at week’s end.
He was satisfied that the new pallets met the functional requirements of the agency’s
performance specification. Everyone seemed pleased. Before Harry left to drive back to
the agency, Clyde approached him. “Can we consider the results of this week a
go-ahead signal to start producing pallets, Harry? We’d like to get a leg up on things
while we’ve got a decent inventory of lumber we can process.”
The COTR was equal to the occasion. “Clyde,” he said, “what you may choose to do is
up to you. As far as the results of the demonstration test are concerned, you’ll be
hearing from our agency, in writing, over the next week. If everything is on target, it
may be that you’ll start receiving delivery orders for pallets within the next two weeks.
But I remind you that the decision to order is not mine to make and that any order must
come from the contracting officer. Okay?”
Clyde shook his head in agreement. After Harry drove off he said to Caroline, “You
know, I’ll never understand these Government people. Nice enough and most friendly,
but they‘re a cautious bunch. If we ever dealt with our suppliers and customers that
way, we’d be out of it.”
“Maybe so,” responded Caroline. “But I’ve learned a lesson or two this past week
about a Government customer’s monitoring, especially when the stakes are pretty high.”
Then she added, “I think we’re the better for it.”
Interim Inspections Even if a contract calls for reliance on the contractor’s inspection system,
the Government retains the right to inspect and probably will inspect for
adequacy and perform sensory checks. The Government has the right to
inspect all materials and workmanship at any time and any place in a
manner that will not unduly delay the work. Interim Government inspec-
tions may focus on different aspects of performance. For instance, de-
termining whether:
On-schedule performance can be expected,
Cost will be within the initial estimate for cost-reimbursement

types of contracts or for fixed-price types of contracts with
progress payments,
Resources are being applied at originally predicted levels,
Quality of end products will be consistent with the specification,
Progress payments are warranted,
3-30
CHAPTER 3
New components need to be incorporated in major systems, or
A contractor’s own inspection system is adequate.
Improper Inspections Inspection clauses provide the Government with certain rights in contract
monitoring, but the improper application of inspection procedures can
jeopardize these rights. Be alert for any indication of improper inspec-
tions, most of which fall into the following categories:
Unspecified tests that are improper. The Government does not

have to specify the method it will use to test a product or service
for contract conformance. It can perform tests that are unspeci-
fied. When unspecified tests impose a stricter standard of per-
formance than is otherwise prescribed, they are improper.
Erroneous tests. Inspection testing is improper if it is not a rea-

sonable measure of contract compliance. If, however, your in-
spector failed to accurately perform a interim test so that a
de-fective item passed through an interim inspection undetected, it
will usually not prevent rejection later.
Repeated tests. The Government generally has the right to in-

spect items or services it had inspected previously. If such reins-
pections are inconsistent with prior inspections, they are improper.
Reinspections are also improper if they are unreasonable as to time
and place so that undue or unnecessary delays result. Reinspec-
tions for acceptance purposes at destination when the supplies
have previously been accepted at a place other than destination is
inappropriate as well, except for an inspection associated with
quantity, dam-age in transit, or possible substitution for fraud.
Unusual Inspections When a Government inspector conducts an inspection exactly according to

and Incompetency a contract’s specifications, a rejection of supplies cannot be overturned by
another test method, even though the other test shows that the supplies
met the specifications of the contract. However, if a contractor produced
an item that exactly conforms to a Government-furnished sample, a rejec-
tion based on improper operation is not valid because the contractor has
complied with performance requirements under the contract.
If the contractor can demonstrate that a Government inspector is incom-

petent, a rejection based on inspections made by that inspector may be in-
validated through a formal appeals process. If the negligence of a
Govern-ment agent causes damages to a contractor, then in all likelihood
the Government will be held liable for those damages.
3-31
Data Supporting Ac- The acceptance procedure is important, because at the time and place of
ceptance or Rejection formal acceptance, title passes from the contractor to the Government.
Acceptance is final except for:
Latent defects,
Fraud, or
Gross mistakes that amount to fraud.
Acceptance Standards Acceptance is based on essentially three types of inspection standards:
Strict compliance standards. The Government generally has the

right to enforce strict compliance with contract specifications by
either rejecting the work or requiring a price reduction for non-
comforming work, but discretionary standards in the form of sub-
jective standards or first article approvals are sometimes necessary.
Subjective standards. “Comfortable fit” or “easy operation” are

examples of such standards used in specifications. Brand name
“or equal” specifications also fall into this category. Industry
standards and customary commercial practices govern in these sit-
uations.
FAR 52.209-3(b) First article approvals. Because the primary purpose for first ar-
ticle approval is to prove a contractor’s capability of producing end
FAR 52.209-4(b) items that will meet a contract’s specifications, easily correctable
defects are not cause for rejection of first articles. Instead, the
first article approval clauses provide for “conditional” approval.
Place of Acceptance The contract controls where items will be accepted. The point of ac-
cept-ance is:
FAR 46.503
The contractor’s plant,
A prescribed destination point, or
Anywhere else, if mutually agreeable.
Normally, when a contract requires Government quality assurance actions

at a plant, acceptance will be done at the plant. When quality assurance
actions are performed at destination, acceptance will ordinarily be done at
destination.
3-32
CHAPTER 3
Time of Acceptance After delivery is made, a reasonable period of time is allowed for Gov-
ernment acceptance or rejection. Although the Government may not have
formally accepted items, acceptance may be implied by either the Gov-
ernment’s conduct or by the Government’s delay.
Notification of Accep- Acceptance or rejection of supplies must be made as promptly as possible

tance or Rejection after delivery. A notice of rejection must be provided to the contractor
when the product or service has been found unacceptable. Specific ac-
tions by the Government may imply acceptance when none was intended.
For example, if the Government consumes part or all of delivered but de-
fective items, then acceptance of the consumed portion has generally oc-
curred. In other words, Government alteration of items prior to rejection,
or use of the items, constitutes acceptance.
The contractor is responsible for removing rejected supplies and paying

the Government for any storage and similar charges. When a contractor
refuses to remove rejected supplies, the Government has the authority to
ship them back to the contractor at the contractor’s expense. The Gov-
ernment may be able to sell those supplies and use the proceeds against
storage charges.
Transfer of Ownership Ownership (title) transfers to the Government upon formal acceptance.
The time of this ownership transfer is significant when damage or loss
FAR 46.505 occurs. The Government becomes responsible for the damage or loss
based on the following delivery requirements:
F.O.B. (Free on board) Contractor has delivered conforming supplies

Origin to the carrier.
F.O.B. (Free on board) Contractor has delivered conforming supplies

Destination to destination and the supplies have been ac-
cepted by the Government.
Evidence of Final In- As evidence of final inspection or acceptance, you usually see one or more
spection or Acceptance of the following documents:
A receiving report. This report is signed by an official autho-

rized to accept supplies or services for the Government. It is
usually written evidence of final acceptance. DD Form 250, Ma-
terial Inspection and Receiving Report, is the document generally
used for formal acceptance by the Department of Defense (DoD).
Other agencies usually have their own unique forms as found in
agency FAR supplements.
3-33
A copy of an invoice (or voucher). Signed by an authorized

official, this can serve as an acceptance document if permitted by a
contract.
A contractor’s bill of lading (CBL). Under a CBL, the trans-

portation carrier is responsible to the contractor for any damage or
loss, and the contractor, in turn, is responsible to the Government.
When a contract so states, a CBL usually means that the Govern-
ment is responsible for freight payments.
FAR 52.246-15 Certificate of Conformance. This certificate may be used in

certain instances instead of source inspection (whether the contract
calls for acceptance at source or destination) at the contracting of-
ficer’s discretion. The following conditions apply: (1) accep-
tance on the basis of a contractor’s certificate of conformance is in
the Government’s interest; (2) small losses would be incurred in
the event of a defect; or (3) the contractor’s past-performance rep-
utation makes it likely that deliverables will be acceptable and any
defective work will be replaced or corrected without contest. The
Government still retains the right to inspect the deliverables.
Application of FAR There is a series of 67 solicitation provisions and contract clauses found
Clauses for Transporta- within the framework of FAR 52.247 that deals with transportation. Al-
tion most one-third of these deal with the postaward aspects of the F.O.B. point
or the payment of freight. A contract administrator must carefully assess
FAR Subpart 42.14
which one or more of these is required for any given solicitation or con-
tract document.
The legal significance of the F.O.B. point is that it signifies the point of
acceptance which, in turn, almost always indicates the point at which title
(ownership) passes from the contractor to the Government.
3.4 Inform Others of When a contract progresses to its successful completion according to plan,
Contract Status the contract administrator should provide the status of that contract to all
interested parties. Transmitting a contract’s status can take one or more
of several forms:
Individual or conference telephone calls. This is a simple and

timesaving device as long as caution is exercised in sharing infor-
mation about contractor performance that is appropriate for tele-
phone conversations.
Individual or group meetings. If what is to be shared requires

the distribution of information (e.g., contractor or Government
progress or other reports), then a one-on-one meeting with an in-
terested party or a group meeting of several may enhance the mes-
3-34
CHAPTER 3
sage and permit a dialog to occur that otherwise would not if in-
formation were transmitted by courier, mail, or electronically.
Oral briefings. On occasion, especially where there may be high

levels of interest in contractor performance because of a program’s
sensitivity, dollar amount, importance to the agency, or whatever,
it may be advisable to present a contract’s status through the use of
an oral briefing along with supporting visual aides and/or other
summary information presented by key Government contract ad-
ministration personnel. This may be especially helpful when
those to be briefed represent a variety of organizational functions.
Routing information for comments. A commonly used method

for informing interested parties, again exercising appropriate cau-
tion in the process, is to place information in a folder, tag it with an
organizational routing sheet, and include a handwritten note re-
questing a review of the material and its return, if necessary, by
whatever date. If appropriate, encourage the receiver’s questions
or comments concerning what the information relates about a con-
tractor’s performance.
3-35
CHAPTER 4
PROBLEM RESOLUTION IN CONTRACT

ADMINISTRATION
YET ANOTHER REALM FOR ERIC
Eric was in Joanne’s office providing her with an update on the pallet procurement with Plat-
form Industries. She seemed pleased with the results thus far and reinforced the need for Eric,
along with Harry’s input, to get after the preparation of a series of delivery orders for pallets.
She reminded the contract administrator that there was a warehousing system and its customers
to be serviced. Eric assured her that pallet delivery orders was a front-burner item on his agen-
da.
Shifting gears in their conversation, Eric noted that he had run across what appeared to be some
problems associated with missed or questionable delivery schedules in several ongoing con-
tracts. He had been contacted by both Government and contractor personnel, all of whom were
after him to provide some resolution of known or anticipated delivery schedule slippages.
“There’s no doubt I can handle these,” he was quick to say, “but what’s your perspective on
these sorts of things?”
As always, Joanne responded forthrightly and to the point. “Perspective? Yeah, I’ve got one,
and it’s quite simple. Failure to deliver in a timely manner, unless for some excusable reason,
equals a condition that amounts to default. I start there and then look at the facts of any delay
situation with the objective of resolving it as best I can, making a decision based on what I find
out along with inputs from both Government personnel and the contractor.” Then she added
jokingly, “And if things really get tough, I read the contract to figure out what resolution alter-
natives may, or may not, be available to me as the Government’s business manager.”
“Well,” Eric added quickly, “that paints a fairly straight line down what can become a zigzag
highway. Like I’ve got three deals involving slipped deliveries and each one’s different.”
“How so?” queried the contracting officer. With that opening, Eric vented his spleen. It
seems that one deal has the technical people screaming about a contractor’s inability to deliver
on time, and that is causing system problems because a required inventory of components is
dangerously low. Another arrangement involves a contractor that calls weekly about the bad-
gering he is taking from some Government field personnel who are pressuring his manufacturing
people to increase deliveries against some ill-defined need for more than has been promised un-
der the contract. And the third situation is clearly the most confusing—a prime’s subcontractor
has refused to force the issue of timely delivery with one of its vendors, claiming that the ven-
dor’s most reliable distribution center, with which it always does business, has been unjustly put
under lock and key by federal agents for alleged fraud in its taxreporting practices.
4-1
PROBLEM RESOLUTION IN CONTRACT ADMINISTRATION
Before Eric could continue, Joanne jumped in. “Well!” she said raising her voice, “welcome to
the imperfect world of contract performance, Eric. Do you know where to turn to search out
what alternatives are available to you in these situations? Are you ready to exercise some busi
ness judgment, or do you expect that buried in those contracts’ terms and conditions you’ll find
some magical answers to your problems?”
She had done it to him again. “No,” he responded, “I don't expect to find any patent leather
answers, but I do expect to uncover some alternatives that can serve as a basis for, as you put it,
the exercise of some business judgment. How would you approach it?”
Joanne was beginning to sense Eric’s increasing confidence in sharing his concerns during their
brief conversations. She liked that. And she didn’t let the opportunity pass by to do some
on-the-spot training. “How would I approach it? Well, certainly not like a bull in a china shop.
Let’s see ...”
And then she unloaded. “Common to all three situations, Eric, I’d look for solutions, if at all
possible, that might satisfy both sides. Guess that means I’d have to involve both sides. And
then there’s the matter of what each contract may contain that provides a basis for examining
alternatives. Yeah, I’d look for solutions through resolution. And I’ll be delighted to have you
report to me on how you expect to handle each situation you mentioned. By when can you do
that? After all, we don’t want delays in prudent business management to contribute to the mud-
dled resolution of performance delays in Government contracts.”
“Give me a couple of days, will you Joanne? And I’ll come in with an approach to each of
them.” She nodded favorably, and he left understanding, yet again, why she was the boss. He
was determined to measure up.
4-2
CHAPTER 4

Overall: Take all necessary steps for the resolution of performance problems identified
through monitoring your Government contracts and inform a contractor and other
interested parties of decisions reached and actions taken.
Individual:
4.1 Verify and document evidence of known or predictable performance problems,

including those dealing with breach of contract.
4.2 Determine the impact of any problem on the requirement.
4.3 Issue a suspension-of-work order or stop-work order, if needed.
4.4 Prepare the Government’s position on any performance delays.
4.5 Resolve performance problems short of invoking a formal contractual remedy.
4.6 Prepare a final decision.
4.7 Invoke a formal remedy.
4.8 Inform the requiring activity and other interested parties of the decision reached
and action taken.
4-3
INTRODUCTION TO PROBLEM RESOLUTION

IN CONTRACT ADMINISTRATION
Perspective on Prob- The key to effective, innovative problem-solving techniques is not merely
lem-Solving Methods to search for textbook or regulatory solutions. Proactive problem solving
involves careful thought, a sense of practicality, and, wherever possible, a
positive approach. Consult regulatory guidance to ascertain what may be
required as a function of contractual terms and conditions.
Performance Problem A performance problem is any known or predictable situation that may
endanger or disrupt the efficient execution of a contract’s terms and con-
ditions, regardless of whether the situation was or may be caused by the
contractor, the Government, or both.
Determine Creative This chapter provides some ideas for creative approaches to the resolution
Approaches of known or predictable contract performance problems associated with
the suspension or stoppage of work and delays in performance. Creative
approaches means:
Looking for solutions that will satisfy both parties,
Seeking solutions from the contractor, and
Seeking solutions from Government personnel.
Steps in Performance Steps for seeking resolution to performance problems in contract adminis-
tration are charted on the next page. Following the flowchart, each step is
discussed in detail.
4-4
CHAPTER 4
STEPS IN PROBLEM RESOLUTION DURING

CONTRACT ADMINISTRATION
Input: Contract with a stop-work

order clause.
1-2. Verify and document known or

predictable performance problems or other
breach and determine the impact.
3. Issue a suspension-of-work order or a

stop-work order, if needed.
4. Prepare the Government’s position on

the delay of work.
5-6. If possible, resolve the problem short of

a formal contractual remedy and prepare a
final decision.
7. Inform the requiring activity and other

interested parties of the contract’s status.
4-5
PROBLEM RESOLUTION IN CONTRACT

ADMINISTRATION
4.1 Verify and Doc- The careful monitoring of a contract pays dividends in the early identifica-
ument Known or Pre- tion of performance problems. Performance problems that can occur are
dictable Performance
Problems
Examples of Performance Problems
SCHEDULE: Failure to deliver or make progress toward timely delivery.
COST: Exceeding cost estimates or budgets on cost-reimbursement or

fixed-price types of contracts so as to endanger both schedule
and performance (or even its very survival).
QUALITY: Supplies or services in process or being delivered do not meet

contract requirements or are not expected to do so.
OTHER COMPLIANCE: Contractor noncompliance with other terms and conditions of a

contract (e.g., with clauses on labor rates, clean air and water,
subcontracting goals, or maintaining specified working condi-
tions).
shown in Exhibit 4-1.
Exhibit 4-1
Common Cause of Per- Each of the problems in Exhibit 4-1 has a common denominator. It in-
formance Problems volves a potentially broken promise, technically known as a “breach.” A
breach of contract is a failure, without legal excuse, to perform any prom-
ise that forms the whole or part of a contract. For instance, when a party
to a contract:
Fails to perform, either in whole or in part,
Gives notice beforehand that it will not perform the contract when
the time for performance arrives (constructive breach), or
4-6
CHAPTER 4
Makes performance impossible for itself or the other party.
Every breach of contract gives the injured party the right to pursue and
collect damages. Moreover, the party harmed by a breach may some-
times, in addition to pursuing and collecting damages, be excused from its
performance responsibilities.
Breach Under a Gov- The Government can be guilty of a breach when it:
ernment Contract
Issues a unilateral change to a contract that is outside the scope of
the contract, or
Fails to disclose pertinent site information for on-site work.
The contractor can be guilty of a breach when it:
Abandons contract performance, or
Commits a fraudulent act in connection with a contract.
Determine Symptoms You may need to conduct factfinding with the officials involved in a
and Cause problem to identify its symptoms and cause. Methods used in factfinding
include:
Discussions with the contractor,
Personal observations at the work site,
Discussions with a COR/COTR,
Discussions with audit personnel,
Discussions with quality assurance personnel, and
Discussions with requiring activity and user personnel.
4.2 Determine Im- When a problem surfaces, immediately ask: “What does the contract say
pact of Problem on regarding this situation?”
Requirement
Always consider a problem as it mirrors or relates to a contract’s terms or
conditions. Many “problems” disappear when you isolate terms and con-
ditions that apply to them. For example, a technical specialist may report
that the contractor is using inferior material. Required contract clauses
generally make contractors responsible for overall product or service qual-
ity, offering for acceptance only those items that conform to contract re-
quirements. While the technical specialist may be disappointed in the
4-7
quality of the product, a review of the actual contract requirement may

indicate that the product was in conformance and, therefore, acceptable.
Relate Problems to Many so-called problems can be avoided simply by reading the contract.
Contract Language You may discover after factfinding that the problem is in the contract it-
self. The Government may have made one interpretation of what is re-
quired and the contractor another. In problems arising out of differing
interpretations, the contract administrator will first need to determine
whether a contract’s language is ambiguous or whether unreasonable in-
Rules of Contract Interpretation
♦ Everyday words are given their dictionary definition.
♦ Technical words are defined as is usual or common in the trade or technical area, unless
the context or usage indicates a different meaning.
♦ Words defined by the contract are interpreted as the contract defines them.
♦ The same word, used in different parts of the contract, is presumed to mean the same
thing.
♦ Contract language should not be interpreted or defined so as to render the language mea-
ningless or the rights and obligations of either party unrealistic.
♦ The contract should be read as a whole and, wherever possible, consistently.
♦ When there is a conflict between two of a contract’s sections and there is no specific di-
rection to the contrary:
É Handwritten language takes precedence over typed language.
É Typed language takes precedence over printed language.
É Specific clauses take precedence over general clauses. (The presumption is that a
specific clause qualifies a general clause and, therefore, carries more weight.)
♦ Where the public interest is affected, an interpretation is preferred which favors that in-
terest.
4-8
CHAPTER 4
terpretations have made. Use the guidelines in Exhibit 4-2.
Exhibit 4-2
Be a Calming Force If there is a problem involving someone who is making an unreasonable

interpretation, your job is to convince that person, calmly and with cool
logic, that the position being advocated is unrealistic.
Deal With Ambiguous Ambiguous language is usually interpreted against the drafter, unless the
Language other party’s interpretation is unreasonable. Moreover, if the ambiguity
is obvious, the other party (the “nondrafter”) has the duty to request clari-
fication before contract award. If the nondrafter does not and the ambi-
guous language is obvious, the courts would probably say that the
nondrafter had the last opportunity to correct the deficiency and did not.
Intentions Related to If a contract’s words do not point to a solution, see if there is any evidence
Interpretations as to what the Government and the contractor intended initially. Look for
inconsistencies with past interpretations of the same language by either the
Government or contractor. Courts and boards will generally hold a con-
tracting party to interpretations that it held, or at least did not challenge,
prior to the dispute. A Government interpretation of language in the spe-
cifications at the postaward orientation will prevail over a later contradic-
tory Government opinion. Similarly, when the Government can show
that the contractor originally calculated certain work as required by the
contract and is now trying to claim the work is extra, that work will be
considered part of the basic contract and not additional work.
Get Everything On the Your documentation and factfinding efforts may be hampered by someone
Table trying to cover up actions that are now regretted. A problem-solving at-
titude always yields better results than a finger-pointing approach.
4-9
CAUSE AND EFFECT: A TWO-SIDED COIN
In delving into the netherworld of performance delays, Eric began to realize that
oper-ational contract administration was far more than the simple application of
regulatory prescriptions or the enforcement of numerous contract clauses. Indeed, as he
often said, “There’s no end to the intricacies of it all. And in many instances, the
‘answer’ to a problem is not found in strict contractual language, but rather in
ascertaining its cause and determining the impact of its effect.”
In the three cases he had briefly conveyed to Joanne, he found contractual language in
each that set forth the parties’ rights and responsibilities concerning performance
delays. If a delay was excusable, that was one thing. If a delay rested on the
Government’s shoulders, that was another. If a delay was occasioned by Government
action or inaction under a change order, that could produce another. And on and on.
In reviewing each case, Eric determined that its resolution had to deal with issues
associated with cause and effect. And a big factor had to be the significance of a delay
in terms of its ripple effect. This was the stuff, he concluded, from which a final decision
could be shaped and justified. Certainly there were cut-and-dried contractor
delin-quencies that represented airtight default situations, as well as examples of
overzealous Government administration that had contributed to contractor performance
problems and subsequent delays. But in many instances, it was clear that separating the
wheat from the chaff was not an easy job.
The contract administrator determined that for any performance delay, including those
that appeared to be open-and-shut cases, he would exercise a four-step methodology in
working to establish a justifiable course of action. He tapped out the following on his
computer, ran a copy for Joanne, and banked it for future reference.
First, determine the cause or causes of the delay by questioning and listening
to both sides.
Second, examine the contractual responsibilities and rights of both parties in

the event of a performance delay.
Third, assess the extent of the delay’s impact, both operationally and
fi-nancially, on the Government’s interests.
Fourth, document the results of the previous steps, share them with interested
parties, and make a written final decision for action.
Determine the Extent of When a known or predictable performance problem has been identified
Problem Damage and it is not just a simple matter of clarifying a contract’s requirements,
you must determine the problem’s significance. The overriding issue is
4-10
CHAPTER 4
the extent of damage the Government will incur if the problem is not re-
solved. Factors that must be considered include:
Delivery,
Price or cost,
Quantity, and
Quality.
The amount of time and effort you will need to resolve the problem has a
direct relationship to the problem’s significance to the user’s requirement.
4.3 Suspension or One of the first issues you must deal with when a serious problem surfaces
Stoppage of Work is whether the contractor should continue performance. Some of the
questions you need to ask are:
How serious is the problem?
How long will it take to correct the problem?
Which is more costly to the Government—paying additional

mon-ey for suspending or stopping the work until the problem is
fixed or paying money for the work to be corrected later?
A contract administrator is responsible for making decisions that are in the

Government’s best interest, not only as that interest relates to one contract,
but as it relates to the Government’s overall well-being.
Identify Need to Sus- Under a construction or architect-engineer contract, if provided by the

pend Work contract, the contracting officer may order a suspension of work for a rea-
sonable period of time. If the suspension is unreasonable, the contractor
FAR 42.1302 may submit a written claim for increases in the cost of performance, ex-
cluding profit.
Conditions for Claims If the performance of all or any part of the work under a construction or
Under Suspended Work architect-engineer contract is suspended, delayed, or interrupted by an act
of the contracting officer, or a failure to act within the time specified in
FAR 52.242-14 the contract (or within a reasonable time if not specified), an adjustment is
to be made for any increase in cost, excluding profit, that is necessarily
caused by an unreasonable suspension, delay, or interruption of the work.
No adjustment is to be made for any other cause, including the fault or
negligence of the contractor, unless provided under any other term or con-
dition of the contract.
4-11
More specifically:
Any adjustment to the contract must be in writing.
A claim is not allowed for any costs incurred more than 20 days
before the contractor notified the contracting officer in writing of
the act or failure to act (except this condition does not apply to a
claim resulting from a suspension order).
A claim, in an amount stated, must be asserted in writing as soon

as practicable after the termination of the suspension, delay, or in-
terruption, but not later than the date of final payment under the
contract.
Identify Need to Stop Under any negotiated fixed-price or cost-reimbursement type of supply,
Work research and development, or service contract, if provided by the contract,
the contracting officer may issue a stop-work order if stoppage is required
FAR 42.1303 for reasons such as advancement in the state of the art, production or en-
gineering breakthroughs, or realignment of programs.
Conditions for Issuing Generally, a stop-work order is issued only if it is advisable to suspend
Stop-Work Orders work pending a decision by the Government and a supplemental agree-
ment providing for the suspension is not feasible.
FAR 42.1303(a) and (b)
Issuance of a stop-work order must be approved at a level higher than the
contracting officer, and a stop-work order must not be used in place of a
termination notice after a decision to terminate has been made.
Sequence of Events on The following general sequence of events must occur in a non-facilities
Issuance acquisition stop-work order action. (Stop-work orders for facilities con-
tracts are treated under the clause at FAR 52.242-16, Stop-Work Or-
FAR 52.242-15 der—Facilities.)
The contracting officer may issue a stop-work order, in writing, at

any time requiring the contractor to stop all or any part of the work
called for by the contract for a period of 90 days (this may reduced
to a lesser time in the contract) and for any further period agreed to
by the parties. (A lesser time period, if one can be specified, will
enable to contractor to hold down costs associated with any work
stoppage.)
On receipt of an order, the contractor must comply with its terms

and take all reasonable steps to minimize the incurrence of costs
allocable to work covered by the order during the period of work
stoppage.
4-12
CHAPTER 4
Within the 90-day (or other) period, the contracting officer must
either cancel a stop-work order or terminate the work covered by
the order as provided in the contract’s termination clause(s).
If a stop-work order is canceled or the period of the order expires,

the contractor must resume work and is entitled to an equitable
adjustment in cost, price, and/or delivery, if the order resulted in an
increase of the time required to perform or in the cost properly al-
locable to performance of the contract.
The contractor must assert its right to an adjustment within 30 days

after the end of a work stoppage, but the contracting officer may
deal with a claim submitted any time before final payment under
the contract.
If a stop-work order is not canceled and the work covered by the

order is terminated for convenience, the contracting officer must
allow reasonable costs resulting from the order in arriving at a
termination settlement.
If a stop-work order is not canceled and the work covered by the

order is terminated for default, the contracting officer must allow,
by equitable adjustment or otherwise, reasonable costs resulting
from the order.
Contents of Stop-Work A stop-work order should include the following:

Order
A description of the work to be suspended,
FAR 42.1303(c) Instructions concerning the contractor’s issuance of further orders

for materials or services,
Guidance to the contractor on action to be taken on any subcon-

tracts, and
Other suggestions to the contractor for minimizing costs.
After Issuing Promptly after issuing a stop-work order, the contracting officer should
Stop-Work Order discuss the order with the contractor and, if appropriate, modify the order
in light of the discussion.
FAR 42.1303(d) and (e)
As soon as feasible after issuing a stop-work order, but before its expira-
tion, the contracting officer must take appropriate action to do one of the
following, as detailed above:
Terminate the contract,
4-13
Cancel the stop-work order (such a cancellation requires the same

approvals as its issuance), or
Extend the period of the stop-work order if necessary and if the

contractor agrees (such an extension requires a supplemental
agree-ment).
4-14
CHAPTER 4
TO STOP OR NOT TO STOP? ... THAT IS THE QUESTION
Eric was in the middle of a secure phone call from Chuck Aimsley, the agency’s director
of material management. Chuck was explaining to him that the agency’s
firm-fixed-price contract with Manufacturing Unlimited for 25,000 security devices, to be
distributed worldwide, was bordering on a problem. The contractor had been performing
well, and its deliverables, with few exceptions, were on time and in compliance with the
Gov-ernment’s specification. After three months of performance, everyone was pleased.
“So what’s the problem, Cbuck?” asked Eric. Aimsley than went into an extended
explanation of national security requirements for the devices which, as the contract
administrator recalled, had set the stage for the requirement several months ago. As
Aimsley carried on about this, he reached the bottom line of his phone call. “In a
nutshell, Eric, the problem we have is that top-side is about to issue new regulations
concerning security procedures that reflect what we’ve learned from terrorist activities
over the past year.”
“Okay,” Eric said, “that sounds responsible to me. But what’s that got to do with
Manufacturing Unlimited’s deal?” Aimsley responded very simply. “A whole lot, Eric.”
And then he added, “The impending regulations require the use of upgraded security
devices. And that means the ones being produced now are quite useless, because they
fall short of lock-and-detection requirements under the new rules. I’m anxious to know
what we can do about this in terms of our current contract. To date, only about 8,000 of
the 25,000 devices have been delivered, and as we speak the contractor’s production line
continues to roll. At almost $1,500 a device, we’re talking the better part of four million
bucks.”
“Can’t we modify the spec for those yet to be delivered and have the contractor provide
some sort of retrofit kit for the ones already in hand?” Eric’s suggestion was a good
one, but Aimsley said, “No, Eric, we can’t do that. We’ve already considered that
alternative and concluded that the cost would be prohibitive, if indeed it could be done at
all. And even if it could, we’d be distributing security devices, along with retrofit kits,
hoping that people could modify a complex piece of equipment to make it work. No,
that’s out of the question. Far too many risks in that approach.”
Eric’s mind was swirling with thoughts as Aimsley continued to talk. Finally, he
interrupted. “Tell you what I’ll do, Chuck. Let me get with the contracting officer,
discuss some alternatives, and I’ll be back to you before the end of the day.”
Reinforcing the need to define and set some course of action, Aimsley agreed with the
contract administrator and said he would be at his desk all day. With that, the phones
clicked at both ends.
Eric had learned that Joanne was not one for aimless talk about anything. If he was to
get her involved, he had to present alternatives that could be discussed with her.
“Okay,” he mumbled to himself, “what can we do?” He then proceeded to tap into his
computer, cleared the screen, and started to list what he felt were the salient points he
thought the contracting officer would want to deal with. His list looked like this:
4-15
♦ Is there a legitimate need for action? If so, who says so, by when does it have
to be taken, and who must approve it?
♦ Would it be appropriate to issue a stop-work order to Manufacturing

Un-limited’s contract pending a decision about what should be done? Why
would we want to issue such an order?
♦ If a stop-work order is appropriate, how long should it last and can we

approximate its cost to the Government?
♦ Should we discuss the situation with the contractor before we decide on a

contractual course of action or after we decide?
♦ Should we consider a termination for convenience, go through all that, and

then recompete the requirement based on a modified specification?
♦ We can’t fool around with this one. What course of action will assure a
reasonably quick resolution of the problem for all parties?
After completing his list, Eric called the contracting officer. “I’ve got a hot one,
Joanne, and I need your help. Can I see you?” She told him yes, but cautioned him to
bring along his own thoughts about whatever the matter might involve. She was too
busy to get into some purely philosophical discussion. As Eric put down the phone, he
assured her that the situation was very real and required her time.
Practicalities in Consi- The necessity for a stop-work order can result from actions initiated by
dering Work Stoppage either Government or contractor personnel.
Government actions necessitating a stop-work order. These

actions may be taken by the contracting office to reduce the Gov-
ernment’s liability when, for instance:
Ê The correction of defective specifications is necessary,
Ê Government-furnished supplies or services will be delivered

late,
Ê Termination for default is being considered (provided that the

stop-work order is not used in lieu of termination),
Ê Quality assurance or inspection personnel notify the contract-

ing office that the production line must be stopped for tool ca-
libration, or
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CHAPTER 4
Ê The requiring activity notifies the contracting office that it

needs time to initiate changes that would substantially change
the end product or service.
Contractor actions necessitating a stop-work order. Contrac-

tor actions may necessitate a stop-work order and represent the
Government’s best interest. For instance:
Ê Contractor submission of a value engineering proposal that will

take the Government time to evaluate, but one that appears to
offer a production or engineering breakthrough that would be
in the Government’s interest to pursue; or
Ê Contractor notification to the contracting office of conditions at

a Government work site that make the performance of work
unsafe and are not immediately correctable.
Determine Impact of Work stoppages should only occur after the Government has made a de-
Work Stoppage termination of their impact. Factors that determine such an impact are
Factors That Determine Stop-Work Order Impact
♦ Estimated cost for delaying the work.
♦ Potential effect on labor (loss of skilled labor, loss of efficiency, etc.).
♦ Potential damage to perishable goods.
♦ Estimated effect on overhead (inventory, indirect labor, etc.).
♦ Any adverse effects the delay may have on contract completion.
shown in Exhibit 4-3.
Exhibit 4-3
4-17
Decide Whether to Stop A decision must be made based on an estimation of the risks and benefits
Work involved in letting work continue versus those involved in its disconti-
nuance. This risk/benefit analysis should involve several considerations.
For instance:
The origin of or purpose for stopping the work. This may over-
ride any other consideration. An example would be when the
Occupational Safety and Health Administration (OSHA) orders the
closing of a Government job site.
A cost assessment. Analyze the estimated cost for work stoppage

versus the cost liability of the Government if the work continues.
Other alternatives. There may not be other alternatives, but often

there are. In some cases, a termination for convenience may be a
practical alternative.
Document Decision to In documenting the risk/benefit analysis for stopping work, include docu-
Stop Work mentation as to why a supplemental agreement is not possible between the
parties. Remember: You may not issue a stop work order unless certain
prerequisites exist, as shown in Exhibit 4-4.
Prerequisites for Issuance of a Stop-Work Order
Do not issue a stop-work order unilaterally unless all of the following prerequisites are met:
♦ There is a clause in the contract that allows the Government to issue a unilateral order to
stop work.
♦ It is advisable to suspend work pending a decision by the Government.
♦ A supplemental agreement between the parties covering the suspension is not feasible.
♦ The issuance of the stop-work order is approved at a level higher than the contracting of-
ficer.
Exhibit 4-4
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CHAPTER 4
Issuing Order Contracting officers can issue stop-work orders orally or in writing.
ACOs can only recommend to the contracting officer the issuance of a
stop-work order when a CAO is monitoring the work.
Oral Orders Highly urgent reasons, such as life-threatening safety violations, may
make oral orders necessary. Contracting officers should only issue oral
orders when the situation precludes waiting for the issuance of a written
one, and a time frame for work stoppage needs to be conveyed. The de-
cision to issue an oral order should be based on minimizing the Govern-
ment’s cost liability. Immediately follow up oral orders and confirm
them with written ones.
Written Orders Include all of the content requirements listed in Exhibit 4-5 in a written
order. Oral orders should cover as many of these minimum content re-
quirements as is practicable.
4-19
Minimum Content Requirements for a Stop-Work Order
♦ The effective date and time.
♦ Nature of or reason for work stoppage.
♦ A description of the work to be suspended.
♦ Instructions concerning the contractor’s issuance of further orders for materials or ser-
vices.
♦ Guidance to the contractor concerning subcontractors.
♦ Other suggestions to the contractor for minimizing costs.
♦ When a written order confirms an oral one, the written order should reference the oral
order by identifying:
É The date and time of the oral order,
É Who conveyed the order for the Government,
É The contractor employee who received the oral order,
É The method of transmission (for example—telephone, facsimile, E-mail, personal

conference, or whatever), and
É The location where the oral order was presented in person, if applicable.
Exhibit 4-5
Work Stoppage Uncer- If a contract is stopped because of realignment of program priorities with-
tainties in an agency due to budget cuts, there may not be a resumption of work at
all. In situations like this, keep the contractor informed of other alterna-
tives the Government may be considering. This will allow the contractor
to make better business decisions concerning its other commercial and
Government work.
Contractor Written Ac- However a stop-work order is conveyed, make sure you obtain the signa-
knowledgment ture of a contractor’s employee acknowledging its receipt. Without this
acknowledgment, you documentation is incomplete as to when the
stop-work order actually became effective. You need to establish when
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CHAPTER 4
the Government is released from the responsibility for payment of any

costs incurred for contract work as a result of the stoppage.
Government-Contractor Inform the contractor of all the circumstances and considerations that led
Discussion of Order up to the issuance of a stop-work order. In the interest of minimizing
disruption and promoting better planning for both parties, your goal
should be to keep the lines of communication open. At a minimum, in-
clude in your discussion the topics shown in Exhibit 4-6.
Topics for Stop-Work Order Discussions With Contractors
♦ Fully discuss the reasons for issuing the stop-work order.
♦ Explain the factors considered when reaching any specified time frame and the degree to
which it is certain or subject to revision.
♦ Explore the appropriateness and impact of possible time frames for work stoppage.
♦ Obtain an estimate of labor and other costs associated with the expected work stoppage.
♦ Discuss any alternative actions to continuing the stop-work order. Ask the contractor for
suggestions.
♦ Investigate the contractor’s willingness to extend the stop-work order bilaterally beyond
a 90-day interval in the event that becomes necessary.
♦ Discuss the type of costs that the Government can agree to cover and those for which it is
unable to provide compensation.
Exhibit 4-6
Determine Need to Once a contractor has stopped work, a decision may eventually be made
Terminate never to resume it. In this case, a termination action is proper. Any de-
cision to terminate should be made within the period of the stop-work or-
der. Since reasonable costs resulting from the stop-work order must be
allowed in arriving at any settlement, an efficient termination should be
made and the contractor informed promptly.
4-21
Maintain Daily Con- Daily communication may seem excessive, but it serves as a reminder that
tacts stop-work situations are highly undesirable and should be discontinued as
quickly as possible. At a minimum, contact the parties responsible for the
stoppage. Consider including the offices most affected by the decision,
because requiring organizations can greatly influence the cancellation of
the order.
Cancel the Order The contractor will resume work on the expiration (or any extension) date
of the stop-work order unless you cancel the order or the contract is ter-
minated. If you have determined to cancel the order, contact the contrac-
tor orally first, advising the contractor when to resume work. You must
follow up with written confirmation. Contractors are not required to
resume work until a written notice has been received.
If you take no official action when the stop-work order expires, the con-
tractor will again be free to resume work and the Government will be lia-
ble for all costs it incurs in contract performance.
YOU HANDLE THE PAPERWORK . . . I’LL HANDLE THE JOB
Karla Thurston was frustrated. As the COTR for an agency’s large environmental
re-mediation project, she was on-site, virtually everyday, at the location being remdiated
by Geo-Ecology, Inc., under an indefinite-quantity contract that permitted the issuance of
firm-fixed-price and time-and-materials task orders. Having undertaken much
site-characterization activity, the contractor had been consistently late in delivering
in-vestigatory reports and the results of soil sample tests. Delays attributable to site
characterization were beginning to have an effect on remedial action schedules for
cleaning up the location.
Karla’s frustration had surfaced numerous times in progress meetings with the
contractor. She had been persuaded, time and time again, that any delivery slippages
were manifestations of unanticipated difficulties in the work. She finally decided to
confront the contractor’s project director, Brent Harrison, and sent him an E-mail that
expressed her point of view. In part, it read as follows:
“We are losing time and public support for the overall remediation effort,
and that’s unacceptable. I realize that engaging in site-characterization
activities is not like producing baskets, but we must get from remedial
design to remedial action as originally scheduled or our agency’s
customer will be reluctant to provide funding for future remediation work.
None of us wants that to occur, Brent. We must move more rapidly and
give greater attention to timely delivery.”
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CHAPTER 4
Brent got the message, talked to his company’s Director of Environmental Services,
reiterated the continuing difficulties associated with the work, and was told to do
whatever was necessary—within reason—to satisfy the customer. He was also advised
to identify any additional costs that had been generated by the Government’s insistence
on improved delivery, as well as those attributable to any efforts associated with what the
Government had labeled as performance delays in reporting.
With marching orders in hand, Geo-Ecology’s project director informed his own team
that a new day was at hand, and within 48 hours thereafter, he responded to Karla’s
E-mail with one of his own. In part, it conveyed the following:
“You’ve made us aware of the necessity for increased action on our part
to meet your customer’s requirement. As you know, Karla, we have
rectified unintended schedule slippages over the past few months and fully
intend to apply whatever resources are necessary to meet future
schedules. I would like to speak with you at our next meeting about how
to accommodate the impact of these changes within our contract and its
task orders.”
On its receipt, Karla made two copies of Brent’s E-mail, placing one in her own contract
file and sending one to the agency’s cognizant contract administrator. To the latter’s
copy, she attached her earlier E-mail message to Harrison and scribbled a note across
the top of it: “Action delayed is action denied. This contractor now understands what
the name of the game is. I’ll keep you posted.”
Obtain and Verify Evi- Problems that involve delays are serious. One of the goals of Govern-
dence of Delay ment contracting is to acquire what is needed when it is needed. Every
contract, therefore, includes a completion time frame or delivery date. In
obtaining and verifying evidence of a delay, remember that there are basi-
cally two types of performance criteria—those for end products (including
finished services) and those for levels of effort.
4.4 Performance De- Risks associated with performance delays (events that slow the per-
lays for-mance of work) covered by appropriate clauses in Government con-
tracts have been traditionally allocated as follows:
FAR 52.249-8 and -9 The contractor bears both schedule and cost responsibility for a
delay that it causes or that is within its control.
4-23
FAR 52.249-14 For a delay not caused by the contractor or for one beyond its con-
trol, the contractor is entitled to an extension of the delivery sche-
dule proportionate to the excusable delay, but the contractor bears
the risk of increased cost resulting from the delay.
FAR 52.242-14 The Government is responsible for both the schedule and cost ef-
fects of a delay that it causes, for one under its control, or for one
FAR 52.242-17 that it has agreed to compensate the contractor.
FAR 52.249-14(b) A delay attributable to failure to perform by a subcontractor that is

beyond the control and without the fault or negligence of both its
prime contractor and itself is not deemed to be the basis for de-
fault, unless:
Ê The subcontracted supplies or services were obtainable from

other sources,
Ê The contracting officer ordered the prime contractor in writing
to acquire the supplies or services from another source, and
Ê The contractor failed to comply reasonably with this order.
End Products Versus End Products. Some contracts call for a measurable amount of
Levels of Effort work, such as preparation of training course materials to be deli-
vered in camera-ready form or for the manufacture of a product as
required by specifications. This type of performance requirement
states a specific time for delivery or completion.
Levels of effort. In other contracts, the contractor’s obligation is

to apply a stated level of effort toward a specified objective or kind
of work during a specified period. In these contracts, their expira-
tion date marks the end of the contractor’s obligation. When that
date has passed, the contractor is not obligated to provide addi-
tional effort, even if the objective was not met during the life of the
contract.
Importance of Type of Determining which type of performance criteria is contained in a contract

Performance is a key to verifying evidence of a delay. The program planning back-
ground surrounding the delivery date helps to determine how important
the date is. Supported by this information, you can more intelligently and
usefully apply the necessary efforts to assure timely completion of work or
resolve any delay problems.
Causes of Delay A delay occurs when:
The delivery period has passed and what should have been done
was not done, or
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CHAPTER 4
There is an anticipated delay in delivery or performance and the

contractor has advised that it will not perform the contract when
the time for performance arrives.
Importance of Taking Failure to meet the scheduled delivery or completion date usually origi-
Action nates with a problem that occurred much earlier in the course of perform-
ing contract work. Take action as soon as you identify a potential delay.
Delay in meeting the delivery schedule could endanger an entire Govern-
ment program or mission and may result in:
Increased cost,
Reshuffling of a program’s effort,
Disruption of personnel,
Decreased efficiency,
Inability to proceed with the mission or program, or
Public embarrassment for the agency.
Determine Basis and Careful planning will not avoid all delays. Verify any evidence of a per-
Impact of Delays formance delay that results from your monitoring methods or from a con-
tractor’s notification. Check with all parties to:
Identify the existence of an actual or anticipated delay,
Determine if the delay will impact delivery or completion,
Determine the cause and who is responsible,
Determine the duration of the delay, and
Select an appropriate action to resolve the problem.
A contractor is usually quick to provide notice when a delay is not its

fault, because it may be entitled to an extension of time, additional money
in the case of a compensable delay, or both.
When a delay is the contractor’s fault, you may not discover this until the
date for completion has arrived. Careful monitoring of a contract helps
identify any actual or anticipated delays, including those caused by the
contractor.
4-25
Identify Type of Delay The type of delay mirrors who is responsible. For instance:
The Government,
The contractor,
Both the Government and the contractor, or
Neither party.
Delays invariably cause damage, either in the form of lost revenue or in

the form of extra cost to the Government or the contractor.
Three Classifications of There are three basic classifications of performance delays: excusable;
Performance Delays other than excusable; and commingled and concurrent.
FAR 49.505(d) Excusable delays. These delays are beyond the control and
without the fault or negligence of a contractor or its subcontractors
FAR 52.249-8 and -9
at any tier. The basic Termination for Default clause and the Ex-
FAR 52.249-14 cusable Delays clause indicate that a contractor will not be held
liable if its failure to perform a contract arises from such delays.
Examples of these delays include:
Ê Acts of God or of the public enemy,
Ê Act of the Government in either its sovereign or contractual

capacity,
Ê Fires, floods, epidemics, and quarantine restrictions,
Ê Strikes and freight embargoes,
Ê Delays of common carriers (for commercial items), and
Ê Unusually severe weather.
Other than excusable delays. These are delays that the Gov-
ernment has not authorized and for which a contractor is responsi-
ble. The contractor is responsible for meeting a contract’s
requirements when it cannot justify a delay as being beyond its
control. It is, therefore, responsible for all costs incurred in mak-
ing up for the “lost time” associated with other than an excusable
delay.
Commingled or concurrent delays. There are delays that fall in

a middle ground, ones that are neither excusable nor other than
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CHAPTER 4
excusable. A commingled delay occurs when both parties are at

fault for one or more events contributing to that delay. A concur-
rent delay occurs when two or more delays happen at the same
time.
These kinds of delays can be difficult to resolve, but the effort

must be taken to determine their causes and results. When such
causes and results can be segregated and measured separately, it
may be that the contractor can be assessed for the amount of a de-
lay attributable to its actions as well, say, as the Government or a
subcontractor for its actions. Appropriate deductions of time for
the delay, including their cost or schedule consequences, can then
be placed against the definable party (or parties) and the contract
modified to reflect this.
Reasonableness of De- A total delay adjustment can be divided into its reasonable and unreasona-
lay ble portions, with an adjustment being granted for that portion considered
to be reasonable. For example, if performance was suspended for 30 days
while the Government made a decision and a period of five days is recog-
nized as a reasonable time within which to make that decision, then the
additional 25-day delay may be considered unreasonable. In this case,
the contractor would probably be entitled to any costs resulting from the
25-day delay.
Liabilities for Other- A contractor may be held liable for a delay that is otherwise excusable if
wise Excusable Delays the delay was within the contractor’s (or subcontractor’s) control. For
example, a strike-caused delay is normally excusable. It cannot be ex-
cused, however, if the contractor (or subcontractor) could have acted to
end the strike by:
Filing an injunctive relief with the appropriate Government labor

relations board,
Using other available Government procedures, or
Using a private board, organization, or other arbitration medium to

settle the dispute.
Government Perfor- Government procurements contemplating fixed-price types of arrange-

mance Delays ments for supplies other than commercial or modified commercial items
must contain the clause at FAR 52.242-17, Government Delay of Work.
(This clause is optional for contemplated fixed-price types of arrange-
ments for supplies or services that are commercial or mod-
ified-commercial. It is not applicable if a contract otherwise provides for
an equitable adjustment because of delay or interruption, as when a
Changes clause may apply).
4-27
When the Government delays work, it provides for the administrative set-
FAR 42.1304 tlement of contractor claims that arise from delays and interruptions in
performance caused by acts, or failures to act, of the contracting officer.
FAR 52.242-17 The Government Delay of Work clause does not authorize a contracting
officer to order (or justify) a suspension, delay, or interruption of perfor-
mance.
If a contracting officer has notice of an unordered delay or interruption

covered by the Government Delay of Work clause, then the contracting
officer must act to end the delay or take appropriate action as soon as
practicable.
Bases for Government Examples of actions that cause Government delays or interruptions in-
Delays clude instances when authorized Government officials act or fail to act,
such as:
Directing a contractor to stop work,
Making a change to the contract,
Performing other acts within the Government’s sovereign capacity,
Not obtaining process approvals or funding,
Not issuing timely changes or responding to contractor requests,
Not furnishing timely Government property, and
Not inspecting or accepting when required.
Checklist for Identify- Use Exhibit 4-7 as a quick reference to help you identify the type of delay
ing Delays that occurred or may occur.
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CHAPTER 4
Is This Delay Excusable?
Note: If you can answer “yes” to any of these questions, the delay was probably excusable.
But before you make a final decision, you must make sure that the contractor had no
control over the circumstances that caused the delay.
Yes N/A No
♦ If the delay was caused by a labor strike, did the contractor:
É File a charge with the appropriate labor relations board to seek

injunctive relief in court, or
É Use other available Government procedures or private boards

or organizations in an attempt to settle or arbitrate disputes that
caused the strike?
♦ Was the delay caused by Government interference or disruption?

Examples of Government interference or disruption include:
É Delay in making payments that are rightfully due.

É Late delivery of Government-furnished property.
É Failure to reply to a contractor’s request for clarification.
É Failure to disclose all facts applicable to performance.
É Site conditions that are different than portrayed.
É Scarcity of supplies due to Defense Production Act priorities
over commercial or nonrated orders.
É Delay in issuing a required notice to proceed.
É Delay in issuing changes.
É Delay in performance by other Government contractors.
É Delay caused by protesting the award of the contract by an
interested party.
É Delay in making the site available.
É Delay in providing funding.
É Delay in inspection or acceptance.
É Delay due to defective or ambiguous specifications.
É Delay in granting approvals.
4-29
Is This Delay Excusable?
Yes N/A No
♦ If the delay was caused by a subcontractor, is the delay excusable

to the subcontractor(s) at each tier?
You would answer “No” to this question if:
É The delay was caused by a dispute between the subcontractor

and the prime, or
É The subcontracted products or services were available from

other sources in time for the prime to complete performance.
♦ Was the delay caused by any other occurrences specifically mentioned

in the Default or Excusable Delays clauses (or other clauses) as being
generally excusable?
For example, these include:
É Acts of God or of the public enemy.

É Acts of the Government in either its sovereign or contractual
capacity.
É Fires.
É Floods.
É Epidemics.
É Quarantine restrictions.
É Strikes.
É Freight embargoes.
É Delays of common carriers.
É Unusually severe weather.
♦ Was the delay caused by other circumstances not previously mentioned

that were:
É Not caused by the contractor, and

É Over which the contractor had no control?
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CHAPTER 4
UNWINDING A TANGLED SKEIN
Karla Thurston’s E-mail package arrived at Courtney Burnside’s desk two days after it
had been sent. Courtney was the agency’s contract administrator for Geo-Ecology’s
contract. She read the E-mail messages and cover note and took a deep breath while
shaking her head in disbelief. She was immediately on the phone to Thurston, who
an-swered on the first ring.
“Karla, this is Courtney Burnside in contracts. I got your E-mail package, and I think
what you’ve done puts us at great risk. Why didn’t you give me a call about all this
before you committed your thoughts to writing and shared them with the contractor?”
“C’mon, Courtney,” interrupted Karla, “the remediation job is moving along at a snail’s
pace, and I’m being pressured by my management and the customer’s agency to have the
contractor get off its backside and on with the job. Brent Harrison knows what’s at
stake, and I think we’ve made our case without a lot of ifs, and, or buts.”
“Pretty heady stuff, Karla,” Courtney shot back, “but you and I must meet over the next
day to take stock of what you may not realize is in the mill. And then, given everything
that’s happened, I’ve got to face my contracting officer. Believe me, I’m not looking
forward to that. I think both you and the contractor’s project director may have put a
noose around your necks, and it will be the customer and the contractor who will feel the
pain.”
Karla responded abruptly. “You’re metaphor eludes me, Courtney. Whatever you’re
saying, put in plain English. Okay.”
“You bet,” said the contract administrator. “I’m telling you that what’s happened is a
ticking time bomb. And when it goes off, my guess is that we’ll be faced with contractor
claims—documented with dates, places, and names—that will add up to a mighty
amount. And what for? Well, for starters, think on these: performance delays
attributable to Government actions, technical direction way beyond what it should have
been, and all of it will be sent to us in a package labeled ‘Excusable Delay Claims Under
Contract Umpty-ump.’ Oh yes, the metaphor might elude you, Courtney, but the
message shouldn’t. I advise you to get over here early tomorrow morning.”
There was a silence at the other end of the phone followed by a simple question. “I’ve
just cleared my calendar for tomorrow, Courtney. Tell me when to be there and what to
bring.”
Prepare Finding of After addressing excusability issues, your next step is to document the
Facts Government’s position in a finding of facts. In doing so, present clear
and concise evidence for your conclusions. Include:
A list of the persons with factual knowledge of the delay,
4-31
Relevant statements or evidence,
A history of contract performance, indicating when work began

under the contract,
Progress made to date,
Reasons for both excusable and/or other than excusable parts of

the delay,
The contractor’s remaining obligations under the contract, and
The contractor’s expectations regarding contract completion.
Include this finding of facts in the official contract file for any future re-
construction of events.
Develop Government’s Developing the Government’s position on a delay basically deals with:
Position
Deciding if the delay was excusable, and
If so, then calculating the amount of any time and cost adjust-
ments.
Unless it is obvious, you can require the contractor to:
Substantiate the evidence of the delay,
Substantiate the costs associated with the delay,
Demonstrate that the delay was reasonable, and
Demonstrate that the delay was void of any commingled or con-

current delays.
Contractor Burden of A delay is excusable when the contractor can prove:

Proof
An event that caused a delay has occurred and the event was not
the contractor’s fault,
The event was the type for which an excusable delay can be
grant-ed,
The overall progress of the work was delayed by the event which
caused the delay,
The event was unforeseeable, and
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CHAPTER 4
The requested additional time is appropriate to compensate for lost

time.
Consult Requiring Ac- If you have determined that a delay is excusable, consider what impact the
tivity delay will have on the requiring activity. Always consult this activity
before preparing the Government’s position. This can assist you in:
Estimating a reasonable additional time for performance,
Identifying and analyzing any potential alternatives to a revised

delivery schedule, and
Establishing any recoverable damages due the contractor.
Before meeting with the requiring activity, review the contract clauses that
pertain to delay and any background information used to select those
clauses. The acquisition plan, purchase request, and any determinations
and findings are good sources of background information. This informa-
tion will enable you to temper any unrealistic reactions of a requisitioner.
By consulting with the requisitioner, you will become aware of current
needs as well. What was not critical in the past may be critical now.
Additional Performance As stated in the contract, the delivery requirement is probably based on a
Time delivery that reflects one of the following:
A Market Standard. The delivery or performance reflects stan-

dard market or industry practices. While the requisitioner needs
the requirement, timeliness is not critical to its mission.
Critical Need. The delivery or performance reflects an exact date

or time that the requisitioner depends on for the satisfaction of a
mission or program. A delay would seriously jeopardize this.
Semi-Critical Need. The completion date cited in the contract is

based on a bona fide need of the requisitioner, but would only
cause inconvenience if the delivery date were missed. However,
at some point, the delivery requirement would become critical.
The contractor’s expectations for the impact of a delay on final delivery or

performance may be minimal or nonexistent. However, you also need to
investigate if any portion of the contractor’s continuing performance has a
potential negative impact on the requiring activity.
After you establish the impact and current criticality of the requirement,
you can make a better choice among possible alternatives to resolve any
problems caused by a delay.
4-33
Extending Time Allowing a time extension commensurate with the delay is the appropriate
action when the delay is excusable. For example, when flood conditions
force a plant to close for five days, the completion date can be extended
for the same number of days, plus any additional time it actually took to
clean up the plant for continued operation.
You may allow a time extension only when the requisitioner has deter-
mined the requirement is not critical. When the requirement is critically
needed, you must explore other alternatives. These alternatives would
probably result in a change to the contract. Examples include:
Use a different method of shipment,
Delete a low priority task,
Change the place for inspection,
Allow a material substitution,
Allow other specification changes, or
Accelerate performance.
Accelerated Delivery Accelerated delivery can occur when an authorized Government official
does any one of the following:
Makes a request to accelerate delivery,
Fails to grant a time extension when one should have been granted,
Threatens to terminate for default, or
Pressures the contractor to complete a schedule.
Remember: There is no acceleration unless an action or inaction causes

the contractor to perform work at a faster rate. It is very important,
therefore, to determine if the contractor was on or ahead of schedule when
acceleration began.
Adjust Schedule for A contractor has the burden of proving the need or validity of a proper
Acceleration time extension. It should be able to explain how it could have met the
schedule had it not been accelerated. This can serve as the benchmark for
measuring an adjustment for a delay.
If an analysis of a contractor’s progress at the time of acceleration shows

that, at the time, the contractor was behind schedule, then the time it
4-34
CHAPTER 4
lagged behind schedule can be deducted from the adjustment the contrac-
tor might otherwise be due for the acceleration.
Impact of Accelerating Acceleration of contract performance includes adhering to the original de-
Performance livery date when the contractor is entitled to an extension of time for a de-
lay. Acceleration can occur from both action and inaction in dealing with
delay issues. If the Government accelerates contract performance, the
contractor may have to do one or more of the following to meet the pre-
scribed delivery date:
Hire more employees,
Add additional shifts,
Pay overtime, or
Purchase more expensive products from other sources.
In these circumstances, the contractor’s right to an equitable adjustment is

derived from a contract’s Changes clause. Typically, this clause sets
forth that:
If any change causes an increase or decrease in the cost of, or the

time required for, performance of any part of the work under the
contract, whether changed or not by a change order, the contract-
ing officer must make an equitable adjustment in the contract’s
price (or estimated cost and any fee), delivery schedule, or both,
and must modify the contract accordingly.
By not granting a timely extension, the effect may “change” the contract
by shortening the time allowed for delivery under its terms and conditions.
As with other changes it initiates, the Government is liable to a contractor
for the effect of accelerating performance on both time and costs.
Importance of Prompt It is important to resolve delay issues promptly after determining that a
Resolution delay is excusable. Not recognizing these delays by granting an exten-
sion of time may result in such action or inaction being treated as a
“con-structive change” by the contractor.
When a contract modification is not issued in recognition of a delay’s ex-

cusability and the contractor makes a claim for cost and/or time based on
acceleration, then the contractor has the burden of proof to show that:
An excusable delay occurred,
The contracting officer (or authorized representative) had know-

ledge of the delay,
4-35
Action by the Government indicates that delivery was accelerated,
The contractor actually accelerated performance,
The contractor incurred additional costs as a direct result of the

acceleration, and
The contractor notified the Government of the existence of an ex-

cusable delay and a time extension was not granted.
Incurred Costs The Government may be required to pay for any additional costs to the
contractor when it was a party to a delay or other change.
As a general rule, use standard principles of cost and price analysis to ar-
rive at the Government’s position concerning delay costs. However,
recognize that your job in developing the Government’s position for delay
costs is often more difficult if actual cost data are not available and costs
are difficult to prove. The contractor can use subjective measures to es-
timate its costs when presenting requests for additional money.
Total Cost Cautions Be wary of an approach that presents actual cost compared with originally
expected cost. There are two dangers in this:
Total actual costs can include both costs properly attributable to

the delay, and those that may have been incurred through the con-
tractor’s mismanagement.
Total originally expected cost can be based on what at the time

was an unrealistically low offer (i.e., a buy-in situation).
Proof of Entitlement to The contractor’s burden of proof is twofold:

Claim
It must present evidence that it had no control over the situation
that caused the delay and increased its costs or that the Govern-
ment was directly responsible for the delay. If it is unable to
prove its entitlement to the costs it claims, you may not process
payment for them.
It must be able to show that the costs it is claiming resulting from a

delay are reasonable. The contractor is not expected to know ex-
act costs for delays that it was not anticipating and over which it
had no control. But it must present a logical basis for the costs it
is claiming so that you can conclude they show a reasonable esti-
mate of actual damages.
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CHAPTER 4
Major Recoverable To the extent the contractor can document them, verifiable expenses that
Costs From Excusable are generally recoverable include:
Delays
Idle time of facilities or equipment. Idleness of rental equip-
ment is not normally an allowable expense since the equipment
can be returned to the rental agency. However, if the contractor
can show that it is less expensive to continue renting, these costs
may be allowed.
Increase in material prices. The contractor should support these

increases with supplier invoices or letters substantiating them.
Increase in wages. You can normally verify these costs by con-

sulting local labor union officials, by interviewing contractor per-
sonnel, or by examining payroll records in an audit.
Loss of efficiency. This is the most difficult expense to docu-

ment, but it is also one of the most common costs of delay and
disruption. When the contractor has been forced to work out of
sequence, that is in a poorly organized, inefficient manner instead
of one given to an originally scheduled sequence of work, learning
curve efficiencies will be lost.
Unusually severe weather conditions. To be allowable, costs

reflecting these conditions could not have had an effect on per-
for-mance were it not for the change in performance due to the de-
lay. You can verify conditions of unusually adverse weather by
U.S. Weather Service reports for the affected period. Compare
these with those of the original performance period to verify the
degree or extent of unusual weather conditions that could have
contributed to delays. The contractor bears the burden of docu-
menting that the weather was unusually severe, and that it also had
an actual effect on the contractor’s performance.
Other Recoverable Insurance and bond coverage. If the contractor extended these
Costs coverages for the period of the delay and would not have otherwise
done so, it should provide you with a notice from the bonding or
insurance companies for the amount of any increased premium re-
sulting from the extension.
Protection or storage of materials. These must be actual addi-

tional costs. Examples are rehandling and transportation charges
that would not have been necessary if the work had proceeded
without delay or interruption.
4-37
Additional make-ready costs. If a production run was inter-

rupted, there will be additional costs for restarting the production
line.
Demobilizing and mobilizing the work force. When the con-

tractor laid off personnel during the delay, there will be adminis-
trative rehiring costs. If the delay was long and the contractor is
unable to rehire part of the original work force, recruitment adver-
tising and employment fees to recruitment agencies may be in-
cluded within these costs.
Interest. Interest on funds necessary to finance the extended

performance time caused by the delay is recoverable.
Unabsorbed overhead. Unabsorbed overhead, when it applies,

can include both direct labor personnel underutilized because of
the delay and general office overhead expenses directly attributa-
ble to or chargeable against the contract. However, before you
determine that these expenses are appropriate, make sure that the
Prerequisites for Payment of Unabsorbed Overhead
♦ The contractor must prove that it attempted to mitigate the damages for the delay, that is,
sought other work to offset this overhead cost and spread it out across other jobs.
♦ The contractor’s overhead must be unabsorbed or increased over what it would have been
during a normal period that did not include a delay.
♦ The contractor must be agreeable to an audit of its books and records in order to verify
the unabsorbed overhead amount. Note that you do not necessarily have to conduct an
actual audit. You need only obtain the contractor’s agreement to one.
prerequisites shown in Exhibit 4-8 are met.
Exhibit 4-8
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CHAPTER 4
Discuss Government Discuss your findings with the contractor. These discussions should in-
Position With Contrac- clude:
tor
The Government’s analysis of the evidence concerning the back-
ground and reasons for the delay,
The Government’s position reached as a result of this analysis, and
The contractor’s position regarding the delay, including all the

supporting facts and documentation for it.
Prepare Final Decision When discussions are concluded, prepare a written decision of your in-
tended action. The notification to the contractor should include:
The Government’s determination on the nature of the delay,
Acceptable reasons for believing the delay is excusable and a de-

termination concerning any other than excusable part of the delay,
Recoverable damages (if any),
A revised delivery schedule, and
The contractor’s appeal rights.
4.5 Resolve Con- You should assist the contractor in identifying and solving performance
tractor Performance problems that would not be considered excusable. The earlier problems
Problems are identified the simpler the solution. You should attempt to reach in-
formal resolution with all parties prior to invoking a formal contractual
remedy.
4.6 Document Final Document any informal agreement on corrective steps to be taken to bring
Decision performance back into compliance through:
Either a memorandum of concern requesting a written plan from

the contractor for correcting performance, including:
Ê A statement of the problem,
Ê Suggested corrective steps,
Ê A response time, and
Ê A place for the contractor to provide acknowledgment by sig-
nature of its receipt.
Or a formal contract modification.
4-39
4.7 Invoke Formal If the contractor is unwilling or unable to resolve its performance problem,
Remedy you will need to invoke a formal contractual remedy. (Remedies are dis-
cussed in Chapter 6.)
4.8 Inform Requiring Advise the requiring activity of the final decision. This activity will need
Activity and Other to be prepared to make adjustments on other program actions that may be
Interested Parties affected by any schedule change. You may need this activity’s support if
the contractor decides to appeal the final decision. As appropriate, other
interested parties should be informed of the final decision.
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CHAPTER 5
CONTRACT MODIFICATIONS AND OPTIONS
ANOTHER CHALLENGING FRONTIER
In requiring her staff to measure up to the agency’s expectations of them, Joanne was known for
her strong support of training programs for contracts personnel. She had always set the
stand-ard for her contract specialists, administrators, and others by seizing the opportunity to
complete both mandatory and, when she could, optional courses that were offered in the field of
procurement and related management. Whenever possible, she participated as an instructor.
In discussing his career development with Eric, Joanne had encouraged him to develop and stay
with a training plan that would reinforce his performance capabilities and skills, as well as keep
him current with new developments in the field of acquisition management. She frequently said,
“You can hide behind a million rules that nobody else knows, but that’s not the name of the
game. In today’s environment, you’ve got to concentrate on developing a wide range of skills
that permit you to be a business manager, someone who can contribute to an acquisition team.”
Eric was scheduled for a course in postaward contact management that emphasized the planning
and execution of modifications and options, two areas of more than passing interest for him.
He had already been involved in a modification for the pallet procurement, and assuming that
Platform Industries performed successfully, an extension of its performance could be realized
via the Government’s exercise of a one-year option period.
As he reflected on the modification to Platform’s indefinite-delivery indefinite-quantity contract

(ID/IQ), Eric remembered that the contractor had agreed to a no-cost modification covering the
submission of a weekly progress report on the wood preservation effort. In light of this, the
contract administrator had executed a change using a Standard Form (SF) 30, and with the con-
tractor’s agreement to it, a bilateral modification was effected. That had been a fairly
straightforward procedure.
Eric had been sent a syllabus for the course he was to attend, and after reviewing it somewhat
carefully he was taken aback by three things: the differing types of contract modifications, the
possible ripple effect their issuance could have on multiple areas of contractor performance, and
the fairly substantial work that had to go into exercising options.
In thinking about all this, he was struck with ambivalence over the dramatically different ap-
proaches of the public and private sectors to dealing with contract modifications. On the one
hand, the world of commercial contracting frowned on, or so it seemed, the idea of including a
changes article in buyer-seller agreements. On the other, the world of government procurement
rarely bypassed the inclusion of a changes article in its contracts. “Wonder why this difference
in application?” he thought to himself.
5-1
The deal with Platform Industries included a Changes clause under FAR 52.212-4(c), but that
was short and sweet. All it said was “Changes in the terms and conditions of this contract may
be made only by written agreement of the parties.” That was far different than the unilateral
right expressed in a Government contract whereby a contracting officer could issue changes
within the general scope of a contract, and the contractor had to undertake the change as issued.
And then there was the business of pricing out changes for fixed-price types of contracts versus
costing them out for cost-reimbursement types. He thought he understood the business of
working toward some net amount which either added or deleted dollars in the pricing out of
fixed-price types of changes. But doing this for changes under a cost-reimbursement arrange-
ment, where an estimated cost, not a price, had been agreed to, had him confused.
And then there was the nomenclature associated with modifications: unilateral issuances lead-
ing to bilateral or supplemental agreements; equitable adjustments in either price, cost, or deli-
very; the in-scope versus out-of-scope dilemma and situations in which technical direction
altering contractor performance was not considered to have the same effect as the issuance of a
change order; and the use of modifications to reflect novation and change-of-name agreements.
He had much to learn.
Eric had a practical interest in understanding options. At some point in time, Platform’s con-
tract would require the Government to consider exercising one. He wondered how much time
and effort would be required to justify an extension of work for Platform. There certainly
wasn’t an immediate need for concern, but he knew that unless he made time his friend it would
surely become his enemy in the options arena.
Putting aside the course syllabus, he reached toward his computer to check for any recent
E-mail correspondence. Finding none, he scarfed up three items from his “in basket” requiring
attention. As he tried to clear his focus for what had to be done, he was left with a lingering
thought about what Joanne had said concerning the development of a wide range of skills that
would permit one to become a business manager.
“It’s like an endless trail,” he mumbled to himself. “She’s right, and I’ve got to expand my ho-
rizon to know more than rules. Indeed, the business of modifications and options is another
challenging frontier for me!”
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CHAPTER 5

Overall: Develop skill in modifying contracts through administrative modifications,

change orders, supplemental agreements, and in exercising options.
Individual:
5.1.1 Determine whether to consider modifications proposed by contractors.

5.1.2 Determine that a Government request for a modification is sufficient.
5.1.3 Determine whether to meet a requirement through a new procurement or a mod-
ification.
5.1.4 Estimate the impact of a proposed change on price, cost, delivery, and perfor-
mance.
5.1.5 Determine whether any consideration is appropriate for a modification.
5.1.6 Document a decision to reject a modification.
5.1.7 Determine the appropriate type of modification.
5.1.8 Implement modifications for supplemental agreements.
5.1.9 Implement modifications for unilateral changes.
5.1.10 Implement modifications for other administrative changes.
5.1.11 Implement modifications for novation agreements.
5.1.12 Implement modifications for name changes.
5.2.1 Identify available options.
5.2.2 Consult requiring activities to determine the need for additional supplies or ser-
vices covered by an option.
5.2.3 Determine whether a synopsis is required for an option.
5.2.4 Determine whether to exercise an option.
5.2.5 Provide written notice to the contractor and exercise an option.
5.2.6 Prepare a written determination for a contract file.
5-3
INTRODUCTION TO CONTRACT
MODIFICATIONS AND OPTIONS
Rationale for Contract During the administration of a Government contract, specified terms and
Modifications conditions may require modification. This may be necessary to incorpo-
rate revised performance requirements or to handle contingencies that de-
velop during performance. Some of these modifications are made in
accordance with a contract’s terms and conditions; others, however, are
neither anticipated nor were they expected to occur under the original
business arrangement.
Rationale for Options Options may be included in Government contracts when it is in the Gov-
ernment’s best interest. In supply-type contracts, options may be appro-
priate when basic quantities are learning or testing quantities and
com-petition for the options is impracticable once initial contracts have
been awarded. In service-type contracts, options may be appropriate to
ensure continuity of operations and the diminution of disrupted support if
there are anticipated needs for similar services beyond initial performance
periods.
Definition of Contract “Contract modification” means any written change in the terms of a con-
Modification tract. A contract modification is either bilateral (agreed to by both the
Government and the contractor) or unilateral (signed only by the con-
FAR 43.103 tracting officer).
Definition of Option “Option” means a unilateral right in a contract by which, for a specified
time, the Government may elect to purchase additional supplies or servic-
FAR 17.201 es called for by the contract, or may elect to extend the term of the con-
tract.
Policy on Contract Only contracting officers acting within the scope of their authority are
Modifications empowered to execute contract modifications on behalf of the Govern-
ment. Other Government personnel are prohibited from executing con-
FAR 43.102(a) tract modifications, acting in such a way as to encourage contractors to
believe they have authority to bind the Government, or directing or en-
couraging contractors to perform work that should be the subject of a con-
tract modification.
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CHAPTER 5
FAR 43.102(b) All contract modifications are to be priced before their execution, if this
can be done without adversely affecting the Government’s interest. In
any event, at least a maximum price or estimated cost must be negotiated
unless impractical (and such impracticality should be rare).
FAR 52.212-4(c) For the acquisition of commercial items or services acquired under the
policies and procedures of FAR Part 12, the applicable Changes article
requires that changes may be made only by the written agreement of the
parties. The terms and conditions of traditional Government contracting
Changes clauses that reserve the Government’s right to issue changes, to
whatever prescribed extent within the scope of a contract, are absent.
Unless both parties have agreed to some conditions for the issuance of
changes under other contract clauses, the net result of this is that changes
for acquisitions made under FAR Part 12 cannot be made unilaterally by
the Government.
Basic Tenet of Con- Whatever the basis for a modification, the authority to invoke one is al-
tract Modifications ways restricted to situations in which the Government receives adequate
value in exchange for an agreement to modify a contract. For example:
In some instances, adequate value will reflect the release of a con-

tractor from some of its obligations, and the result will probably be
a reduction in price or estimated cost.
In other instances, adequate value will reflect new or additional
contractor obligations, and the result will probably be an increase
in price or estimated cost.
In some instances, adequate value will reflect a trade-off of factors
resulting in no increase or decrease in price or estimated cost, as in
a no-cost contract modification.
Policy on Options Only contracting officers acting within the scope of their authority are
empowered to exercise options on behalf of the Government. In doing
FAR 17.207(a) so, a contracting officer must provide a written notice to the contractor
within the time period specified in the contract.
FAR 17.207(c) An option may be exercised only after a determination that: (1) funds are
available; (2) the requirement covered by the option fulfills an existing
Government need; (3) the exercise of the option is the most advantageous
method of fulfilling the need, price or cost and other factors considered;
and (4) the option was synopsized in accordance with appropriate pre-
scriptions, unless exempted therefrom.
5-5
When an option is exercised, the contract modification or other written

document that notifies a contractor must cite the contract’s option clause
as authority.
Common Misconcep- One frequently hears the terms “amendment” and “modification” used in-
tion terchangeably. Such usage is incorrect. The term “amendment” means
the revision of or addition to a Government solicitation document. In
brief, it is correct to say, “The Government amends its solicitation docu-
ments and modifies its contracts.” What is common to both is the form
by which each is executed, the Standard Form (SF) 30, Amendment of So-
licitation/Modification of Contract.
Steps in Performance The general steps in modifying contracts are charted on the next page.
Following the flowchart, each step is discussed in detail. Similarly in the
subsequent section, the steps in exercising an option and documenting it in
a contract modification are charted and then discussed in detail.
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CHAPTER 5
STEPS IN MODIFYING CONTRACTS
1-2. Review a proposed modification for

sufficiency.
3. Determine whether to meet the require-

ment through a new procurement or a
modification.
Should a new Yes

procurement The contract remains “as is.”
be initiated?
No
4-6. Determine whether to modify the
contract.
Modify No
the The contract remains “as is.”
contract
Yes
Types of Modifications
7. Determine the type of modification.
1. Supplemental agreements.
2. Unilateral changes.
3. Other administrative changes.
4. Novation agreements.
5. Name changes.
8-12. Implement the selected type of
modification.
5-7
5.1 Modifications A contractor may request a contract modification when the reason for the
change was something:
5.1.1 Consider Con-
tractor Requests for Beyond the Contractor’s Due to Action by the Required by the Contract
Modifications Control Contractor
• An excusable delay. • Its name is changed. • An economic price
adjustment.
• A stop-work order. • Submission of a • A price redetermina-
value engineering tion.
proposal.
• A constructive • Consideration of- • A Department of
change. fered for other than Labor (DOL) wage
an excusable delay. rate increase when
services are contin-
ued by exercising an
option.
• A settlement for a • A novation agree-
termination for con- ment.
venience.
Contractor Motivations A contractor is required to provide all necessary documentation when

for Change sub-mitting requests. The documentation varies with the reason for the
modification. The contractor must provide sufficient documentation to
support any request for a change in delivery and/or performance. Con-
tractors may attempt to make up for losses they would have incurred had
there been no change. They may also perceive an opportunity to increase
profit margins. Carefully evaluate every request for a modification. You
must be satisfied the contractor has made its case for the change.
Document Changes There are no specific guidelines for documentation requirements except
when a change affects the legal status of a company. A contractor sub-
FAR 42.1204 mitting a request for either a novation agreement or name change must
submit, at a minimum:
Three signed copies of the proposed novation agreement.
A list of all affected contracts and purchase orders remaining un-

settled between the transferor and Government showing for each
the:
Ê Contract number and type,

Ê Name and address of the contracting office,
Ê Total dollar value as amended, and
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CHAPTER 5
Ê Remaining unpaid balance.
The opinion of legal counsel for the transferor and transferee stat-
ing that the change was properly effected under applicable law and
the effective date of transfer.
Novation agreements require additional documentation to support the re-

quest for a modification. Your agency’s counsel must determine the
adequacy of this additional documentation.
Restructuring Costs A recent aspect of the consolidation of DoD contractors has included re-
Under DoD-related structuring agreements where several DoD contractors have merged. The
Novation Agreements process may involve allowable restructuring costs, where the proposed
consolidated contractor can prove that there will be a reduction of overall
DFARS 242.1204(e) costs. Restructuring costs have to be audited, and the administrative con-
tracting officer may be in excellent position to assist the cognizant con-
tracting officer in developing an evaluation plan.
Obtain Guidance From Many requests from a contractor for a contract modification involve the
Requiring Activities technical requirements of the contract. Cautiously examine changes that
indicate performance has changed but not the function of the end item. In
a firm-fixed-price contract, the contractor is generally free to use any me-
thod or manner of performance to provide the end item or service, as long
as the end item or service meets the needs of the Government.
Determining if the Government will be harmed may require you to involve

the requiring activity and any technical advisors involved in a project.
Requiring activities are the best source for determining the:
Impact of any delivery delays on the requirement,
Value of proposed considerations other than price,
Acceptability of a value engineering proposal, or
Acceptability of substitute materials.
Understand that requiring activities may not be amenable to any change to

the original terms of the contract and may have justification for this kind
of reaction. Consider their point of view carefully. The contract admin-
istrator is the middle person between the contractor and the user. You
may want to ask the contractor to provide a briefing or further documenta-
tion to support its request for a change.
5-9
Make the Determina- After you have all the documentation from a contractor, decide if a mod-
tion ification to the contract is necessary. Do not approve the modification
when:
What would be modified is already covered by the contract,
Technical changes cannot be supported to the requiring activity’s

satisfaction,
Changes to nontechnical business terms and conditions are unac-

ceptable, or
Additional funds are not available to fund the modification.
Importance of Funding Funding is always a consideration for approving a modification. Even

when a contractor is entitled to an equitable adjustment, the modification
cannot be simply summarily approved and issued. If funds are not avail-
able, a contract may have to be otherwise adjusted so that overall price or
cost does not change. Decreasing the total quantity under a contract, for
instance, is one means of otherwise adjusting it.
5.1.2 Consider Gov- At any time after award, the Government may have to make changes to
ernment Requests for requirements covered by a contract. You will need to examine whether
Modifications any Government proposed change is sufficient for processing. At a
minimum, the request should:
Be clear and understandable as to what the change encompasses,
Not be covered currently by the contract,
Be agreeable to all appropriate Government officials,
Contain appropriate and adequate documentation to support the

need for the change, and
Detail the Government’s position as to the proposed change’s im-
pact on:
Ê Quality,
Ê Quantity,
Ê Completion date, and
Ê Price or cost.
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CHAPTER 5
5.1.3 Determine Im- In dealing with any change, initiated by either the Government or the con-
pact of Change on tractor, it is essential to determine whether the change is within the scope
Scope of the contract. This determination is not always an easy one to make.
The basis for ascertaining the impact or extent of a change on a contract’s
scope of work is to be found in the contract’s Changes clause.
In all cases, the extent of any change and its implementing change order
must be within the general scope of one or more specified areas set forth
in a contract’s Changes clause.
Understand Different There are numerous Changes clauses, along with specified alternates, and
Changes Clauses each has a function given the type of contract for which it is prescribed
and the specified areas within which it permits changes to occur within the
general scope of a contract.
For instance, the Changes clause in a firm-fixed-price supply contract for

other than commercial items acquired under FAR Part 12 permits changes
to be issued within the general scope of the contract in one or more of the
following:
Drawings, designs, or specifications when the supplies to be fur-

nished are to be specially manufactured for the Government in ac-
cordance with the drawings, designs, or specifications;
Method of shipment or packing; or
Place of delivery.
In contrast, the Changes clause in a cost-reimbursement type of contract

for services (no supplies to be furnished) permits changes to be issued
within the general scope of the contract in one or more of the following:
Description of services to be performed,
Time of performance (i.e., hours of the day, days of the week,

etc.), or
Place of performance of the services.
Common Characteris- Despite different Changes clauses for different types of Government con-
tics of Changes Clauses tracts, all of them possess the following common characteristics for the
issuance and implementation of a change order:
Government:
Ê The authority to issue it is found in the contract itself.
5-11
Ê A contracting officer must issue it in writing and without no-

tice to sureties, if any.
Ê Its issuance may occur at any time up until final payment.
Ê The extent of its issuance must be within the general scope of

the contract for any one or more specified areas subject to
change.
Contractor:
Ê It must proceed promptly, assuming the change is in com-

pliance with the Changes clause.
Ê It must assert its right to receive an equitable adjustment within

a specified number of days from its receipt of the change (and
the contracting officer may, if the facts justify it, extend this
time and receive and act on a proposal for an equitable adjust-
ment up and until final payment under a contract).
Ê An equitable adjustment may be reflected in price or cost,

schedule, and/or other affected terms and conditions of the
con-tract.
Both Government and contractor:
Ê An equitable adjustment, when agreed to, must be expressed in

writing.
Ê Failure to agree to an equitable adjustment is a dispute under

the contract’s Disputes clause.
Determine In-Scope As noted earlier, determining whether a change is within a contract’s

Changes scope is, in many instances, not easy. Exhibit 5-1 lists several factors that
should be considered in this determination.
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CHAPTER 5
Factors Indicating In-Scope Changes
♦ The function of the item or service has not changed.

♦ The basic purpose of the contract has not changed.
♦ The dollar magnitude of the change is proportionate to the price or cost of the original
contract.
♦ Competitive factors of the original solicitation are the same.
♦ Specification or statement of work changes are not extensive.
Exhibit 5-1
Questions Dealing With Questions that deal with in-scope/out-of-scope changes need to be ans-
In-Scope Changes wered.
Does the changed work represent what both parties reasonably

contemplated at the time of award?
Is the changed work essentially the same as was initially bargained

for?
Is the nature of the requirement altered by the change?
Would this type of change normally be expected for this kind of

requirement?
Were the drawings or specifications defective, requiring extensive

redesign?
Minor or Major Varia- It may appear that any change resulting in either an increase of items or a
tions of Scope longer period of performance would be considered outside the scope of a
contract. Judicial authorities have suggested thinking in terms of major
and minor variations, not merely in terms of an increase per se. Such
thinking helps determine whether quantity changes are within the scope of
the contract. For example:
5-13
Minor Variation Major Variation

The Government’s design for a sophis- An existing contract covered the pur-
ticated machine required the use of chase of 100 widgets as a line-item.
100 widgets. The contractor had to The Government increased the total to
use 150 widgets to make the machine 150.
function properly
The increase of 50 units was within The increase of 50 units was not within
scope, because the function of the end the scope of the contract, because the
item did not change. widgets were the end item.
Contractor Perspectives Generally, contractors are less concerned with changes that are beyond the
scope of their own contracts than with changes on their competitors’ con-
tracts. When out-of-scope changes are made to a competitor’s contract, a
contractor is likely to view it as a missed business opportunity. However,
when a contractor is faced with an out-of-scope change to its own con-
tract, it may not object to that change not being within the contract’s scope
because additional compensation is clearly due.
A contractor’s competitors may protest any change that would be consi-

dered outside the scope of a contract to the General Accounting Officer
(GAO). The GAO describes changes that are “within scope” as those that
the competing offerors would have “reasonably anticipated” under the
terms of the contract. The GAO’s focus is the competitive process. At
times, the GAO has concluded that a change is new work and therefore
represents a new procurement. In these circumstances, the GAO may
rule that an agency’s appropriate action is to terminate the modified por-
tion of the contract.
In the case of the 50 extra widgets previously reviewed as an example of a

minor change, competition has been achieved. However, in the example
of a major change, a competitive price was not obtained. Even if the
price negotiated for the change was the same unit price as for the basic
contract, there is no way of knowing whether the increased quantity would
have resulted in a lower unit price among competitors in the open market-
place. Consequently, the GAO would likely determine that the statutory
requirement for competition was circumvented.
5.1.4 Estimate Im- Before issuing a contract modification, you must determine what impact a
pact of Change change will have on:
Price or cost,
Delivery, and/or
Performance.
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CHAPTER 5
Bases for Change The Government may anticipate and therefore address the need for some
changes prior to award. Various contract clauses provide the basis for
modifying contracts when specified situations arise or if information not
known at the time of award becomes subsequently available. For in-
stance, and if provided for within a contract, modifications may be ef-
fected to accomplish the following:
Options for additional work and economic price adjustments,
Change orders,
Equitable adjustments under inspection terms and conditions for

nonconforming supplies or services,
Equitable adjustments for the delivery of defective (or late) Gov-

ernment-furnished property,
Adjustments in agreed-to dollars if certain taxes are increased or

decreased,
Variation-in-quantity limitations for deliverable items, and
Increases in the total estimated cost limitation for

cost-reimburse-ment types of contracts.
Technical Evaluation of Obtain a technical evaluation of a proposed change when a contractor’s

Impact request would result in a change to basic contract requirements not antic-
ipated before award. Request technical evaluators to address how the
change will impact delivery and performance.
Price/Cost Evaluation According to the effect a change has on a resulting equitable adjustment,
of Impact changes to basic fixed-price types of contract requirements can be placed
in one or more of three categories. Usually a single change will embody
elements of more than one category. These categories are:
Additive Changes. Work added to the contract, resulting in more

money for the contractor.
Deductive Changes. Work a contractor has not yet performed

deleted from the contract, resulting in a reduction of the contract
price.
Substitution Changes. Added work being substituted for deleted

work, resulting in either no change in contract price or a change
that is tempered by the monetary effect of the substitution in-
volved. (Even when work of equal value is substituted, it is im-
5-15
portant to get the change in writing so that the requirement is ac-

curately documented.)
For cost-reimbursement types of contracts involving substitution changes,

there is no net dollar amount negotiated for the difference between added
or deleted work as there would be for such changes under fixed-price
types of contracts.
Cost or Pricing Data Examine cost or pricing considerations in the same way you would ex-
amine them for a basic contract. If your independent Government esti-
mate appears to be somewhat defective, use other means of comparison,
for example:
A history for similar requirements,
Current market prices, or
A cost-realism analysis.
Required Cost or Pric- Unless an exception applies or a waiver is applicable, a contractor must
ing Data submit cost or pricing data as part of its change proposal if the value of the
change is $500,000 or more. This may be required, if justified, for ac-
FAR 15.804-2(a) tions below $500,000 but exceeding the simplified acquisition threshold
($100,000).
Exceptions to Cost or A contracting officer is prohibited from requiring the submission of cost
Pricing Data or pricing data (but may require information other than cost or pricing da-
ta, but only to the extent necessary) to support a determination of price
reasonableness or cost realism for the following:
FAR 15.804-1(a)(1)(i) Agreed-to prices based on: (1) adequate price competition, or (2)
prices set by law or regulation.
The acquisition of a commercial item meeting the definition in

FAR 15.804-1(a)(2)
FAR 2.101. (If the contracting officer does not have sufficient
information to determine a fair and reasonable price, then informa-
FAR 15.804-5(c)(1)
tion other than cost or pricing data for a commercial item must be
through (3)
limited to information that it is regularly maintained by an offeror
in its commercial operations.)
Exceptional cases where a waiver has been granted.

FAR 15.804-1(a)(3)
For modifications to contracts or subcontracts for commercial
FAR 15.804-1(a)(4) items, if the basic contract or subcontract was awarded without the
submission of cost or pricing data under an approved exception
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CHAPTER 5
and the modification does not change the contract or subcontract to

one for the acquisition of other than a commercial item.
If the modification changes the nature of the work to the commer-

cial item or adds other noncommercial work, then obtaining cost or
pricing data for the changed work is not prohibited.
Obtaining Cost or Pric- When cost or pricing data are required, the contractor must be required to
ing Data Certification execute a Certificate of Current Cost or Pricing Data, which must be in-
cluded in the contract file.
FAR 15.804-4
Processing Delays Evaluating a change can be extremely time-consuming. You may need to
comply with legal or administrative requirements that apply to contracts
for the increased dollar value of the contract as changed. Two examples
make the point.
FAR 22.805(a)(1)(ii) EEO Clearance. When a change raises a contract’s total value over
$1,000,000, you need to obtain an approval for compliance with equal
opportunity. If the Department of Labor has no compliance approval on
record for the contractor, there would be a delay while an approval was
processed.
Wage Determinations. When a modification includes a significant

FAR 22.1007(b) amount of new work covered by the Service Contract Act and/or per-
formed by new categories of service workers not included on wage deter-
minations obtained for the basic contract, you are required to obtain a
wage determination covering these new categories.
The regulations are not clear as to when new service work is significant,
but certainly when the dollar value of work to be performed by persons
within these new service categories exceeds $2,500, the threshold for ap-
plicability of the Act on a new procurement, an additional wage determi-
nation would be appropriate for a modification as well.
5.1.5 Determine Ap- The job of a contract administrator is to ensure fairness to both contracting
propriate Considera- parties, and to evaluate the relevance of consideration to both the contrac-
tion tor and the Government. Base your evaluation on what is equitable and
reasonable for the particular circumstances surrounding a change. Some-
FAR 48.104 times consideration has been predetermined or limited based on a formula
or a restriction contained within a contract itself, as with a sharing ar-
rangement relative to acquisition savings calculated for a value engineer-
ing change proposal.
5-17
5.1.6 Provide Notice You must notify all parties involved when a decision is made to reject a
of Rejection change. You must advise the contractor in writing when rejecting a re-
quest. When the contractor initiates a request, you will not only owe the
contractor a response, but should notify the requiring or program office of
a decision as well.
If the requiring or program office initiated a modification, you would ob-

viously owe the initiating office notification of any decision to reject the
change. You may choose not to notify a requiring or program office on a
contractor-initiated modification when its input was not required in the
decision-making process.
FAR 48.103 The terms of the contract or regulatory guidelines may state when a spe-
cific type of response is due. For example, you must ensure the contract-
ing officer responds with a decision to value engineering change proposals
within 45 days from the Government’s receipt of them by either provid-
ing:
A notice of the decision, or

The anticipated decision date with an explanation for the delay.
Otherwise, the contractor must be notified promptly to avoid costly delays

or other performance problems.
5.1.7 Determine There are two types of contract modifications:

Type of Contract
Modification Bilateral (supplemental agreement) as signed by the contractor and
the contracting officer, and
FAR 43.103
Unilateral as signed only by the contracting officer.
Bilateral Modifications Bilateral or supplemental agreements are used to:

(Supplemental Agree-
ments) Make negotiated equitable adjustments resulting from the issuance
of unilateral changes,
Definitize letter contracts,
Approve changes required by a contract, such as economic price

adjustments, or
Reflect other agreements of the parties modifying the terms and

conditions of a contract.
5-18
CHAPTER 5
Most supplemental agreements involve the negotiation of price, cost, and

other terms, usually entailing tasks that are similar to those involved in the
award of a basic contract.
Use of Bilateral Mod- Select a bilateral modification when, for instance:

ifications
A change has an effect on the substantive rights of either party,
There is sufficient time to negotiate a supplemental agreement, or
There is no basis in the contract’s terms and conditions for issuing

a unilateral modification.
Unilateral Modifica- Unilateral modifications are used to:

tions
Make administrative changes. These are changes that are minor
in nature and do not materially affect contract performance. They
deal mainly with a contract’s administrative recitals. Examples of
administrative changes include:
Ê Correction of a funding citation,

Ê Change in a paying office,
Ê Addition of a zip code on a delivery address,
Ê Novation agreements, and
Ê Name-change agreements.
Issue change orders. This term refers to the actual issuance of a

change authorized by the Changes clause in the basic contract.
The Changes clause is cited as the authority for the modification.
As defined in FAR 43.101, “Change order” means a written order,
signed by the contracting officer, directing the contractor to make
a change that the changes clause authorizes the contracting officer
to make without the contractor’s consent.
Make changes authorized by other contract clauses. Although

these are not termed change orders, they can be issued unilaterally.
Examples are the issuance of a stop-work order, a termination no-
tice, and the exercise of an option.
Use of Unilateral Mod- Select a unilateral modification when, for instance:

ifications
A change has no effect on the substantive rights of the contractor
or the Government,
5-19
A change can be made unilaterally under a specific contract term,

such as the Changes, Stop-Work Order, or Termination clauses,
The contractor’s agreement to a change is not otherwise required,

and
The time required to negotiate a bilateral agreement would cause a

delay that would adversely affect the Government’s interests.
As unilateral changes, change orders should be followed up with bilateral

modifications (supplemental agreements) when negotiations are concluded
on the change. If exhaustive negotiations do not result in a mutual
agreement, the contracting officer may issue a final decision as the basis
for definitizing a unilateral change.
5.1.8 Implement In implementing a unilateral change that requires a supplemental agree-

Contract Modifica- ment between the parties (e.g., a change order), there are nine steps to fol-
tions for Supplemental low in dealing with fixed-price types of contracts.
Agreements
Step 1 Obtain a proposal from the contractor. Most Government agencies
prescribe formal change-order procedures. The contractor’s proposal for
a change should include price, schedule, and performance data as well as
an indication of the maximum equitable adjustment that could result from
the change.
Step 2 Evaluate the contractor’s proposal. Make sure that the proposal covers
all elements of the change, that is, increases, decreases, and substitutions.
FAR 3.501 When you evaluate a contractor’s proposal for a change, actual cost or
value is just one factor to consider. Generally, a contractor should make
the same overall percentage of profit or loss after a change that it would
have made without the change. Allowing a contractor to “get well” on
changes encourages the practice of “buying in” (i.e., submitting an offer
below anticipated costs expecting to increase the contract amount after
award through unnecessary or excessively priced change orders).
Field Pricing Support DoD uses the contract administration office for field pricing support on:
for Proposal Evaluation
Fixed-price proposals over $500,000,
DFARS 215.805-5
Cost proposals over $500,000 from offerors with estimating sys-
tem deficiencies, or
Cost proposals over $10 million.
The contract administration officer’s price/cost analyst supports the ad-

ministrative contracting officer in preparing the field pricing report by:
5-20
CHAPTER 5
Working with the auditor to establish a deadline for the auditor’s

report,
Identifying areas for special consideration,
Arranging for exchange of technical and audit information, and
Acting in full responsiveness to requests for technical information

from the auditor.
Step 3 Do factfinding, if necessary. Never enter any negotiation without being

adequately prepared. Extensive factfinding is necessary when a change
covers issues not required by the original contract or when you suspect
that the contractor is in a loss position. Invite other Government officials
involved in the change to provide pertinent facts to use during any negoti-
ations. Contractors are usually more accommodating when a change is in
their favor. Be prepared to counter any contractor arguments.
Step 4 Develop a prenegotiation position on price. Select and use whatever

price analysis techniques will ensure a fair and reasonable price. The
FAR 15.805-2 procedures followed on an original fixed-price type of award may provide
a sound foundation for developing the prenegotiation position for a
FAR 15.807 change.
When there is no adequate basis for price analysis, use cost analysis tech-
niques as the basis for the Government’s pricing position, addressing:
The pertinent issues to be negotiated,
The cost objectives, and
A profit objective.
Take Account of Con- In negotiating a contract change, you must also consider the current posi-
tractor Position tion of the contractor. One case that is often cited to illustrate the concept
of maintaining the contractor in the same profit or loss position is Keco
Industries, Inc. (176 Ct.Cl. 983, 1966). Keco had been awarded a con-
tract for 200 refrigeration units. One hundred of the units were to be
electricity-driven and 100 gasoline-driven. Before any of the gasoline
units were produced, the Government issued a change order directing that
all 200 units be electricity-driven.
A Government audit revealed that the contractor was in a loss position on

both types of units. However, the loss position on the electric units was
$332.58 per unit, whereas the loss on the gasoline units was only $148.80
per unit.
5-21
Calculate Adjustment The contractor’s total loss position before the change was $48,138. For
From Change the contractor to be left in the same position it had been in before the
change was issued, the adjustment had to be figured as follows:
Price per gasoline unit $1,720.00

Less cost difference between the gasoline unit
and the electric unit ($1,868.80–$1,603.58) 265.22
Price per unit for the 100 units covered by the

change order $1,454.78
Contractor’s loss position after the adjustment:
100 electric units unchanged by the order:

$1,603.58 (cost per unit)
minus 1,271.00 (contract price per unit)
$ 332.58 (loss per unit) x 100 units = $33,258.00
100 units covered by the change order:

$1,603.58 (cost per unit)
1,454.78 (equitable adjustment price per unit)
$ 148.80 (loss per unit) x 100 units = $14,880.00
Total loss on contract after the adjustment: $48,138.00
A price adjustment reflecting only the price difference between the elec-
tric unit and the gas unit would put the contractor into an even greater loss
position than had been the case. An adjustment giving the contractor its
actual cost for manufacturing the units altered by the change order would
enable the contractor to recoup some of the loss it would have suffered
originally.
Step 5 Develop negotiation strategies and tactics. Review any methods and
techniques previously used to negotiate with the contractor. Inquire
about the contractor’s strategies and tactics with other contract adminis-
trators or contracts personnel who have negotiated with the contractor.
Be prepared to counter any of the contractor’s strategies and tactics that
you can anticipate.
Step 6 Conduct negotiations. Practically speaking, the principle of equitable

adjustment for contract changes means that the Government will do
whatever is fair, right, or reasonable if the contractor can prove that it is
entitled to the cost it claims. Have the flexibility to change your objec-
tives as new information is provided by the contractor during the negotia-
5-22
CHAPTER 5
tion process. If required, meet with appropriate officials and consider any
new information before making a final decision.
Step 7 Prepare the agreement and obtain approvals Most agencies use the
Standard Form (SF) 30, Amendment of Solicitation/Modification of Con-
FAR 43.301 tract, to modify their contracts, but your agency may require its own form.
A sample SF 30 used as a supplemental agreement is shown in Exhibit
5-2.
When a SF 30 does not provide enough room to document the change, use
the Optional Form (OF) 336, Continuation Sheet, or a blank sheet of paper
as the second page of the modification.
Internal approval policies vary from agency to agency. Make sure you
are familiar with your agency’s requirements.
Step 8 Obtain a release of claims. To indicate the finality of the settlement and
to avoid subsequent controversy on supplemental agreements that result
FAR 43.204(c) from unilateral modifications, a release of claims should be pursued.
Refer to Exhibit 5-3 to review the FAR-prescribed terminology for a con-

tractor’s release.
5-23
Sample Supplemental Agreement
5-24
CHAPTER 5
Exhibit 5-2
Contractor’s Statement of Release
(For supplemental agreements definitizing unilateral changes)
In consideration of the modification(s) agreed to herein as a complete equitable adjustment

for the Contractor’s ______describe_______ “proposal(s) for adjustment,” the Contractor
hereby releases the Government from any and all liability under this contract for further
equitable adjustments attributable to such facts or circumstances giving rise to the “propos-
al(s) for adjustment” (except for …..).
Exhibit 5-3
Implications of Release A release of claims generally terminates a contractor’s right to further

of Claims claims unless it excepts a particular issue, reserving both parties’ rights to
a future settlement. There are some recognized exceptions that may make
a signed general release of claims invalid, such as when:
A modification increases the price for a change to the contract and

the change is later recognized as being part of the original contract;
The Government breaches the contract or fails to perform in accord-

ance with a supplemental agreement;
A mutual mistake exists, but not a mistake about which only one of
the parties knew or reasonably could have known;
The Government uses economic duress, such as threats to termi-

nate for default, in getting the contractor to sign the release;
The circumstances involve fraud, unless both parties had know-

ledge of the fraud when the settlement agreement and/or claims
release was signed; or
The official who signed the release lacks the authority to sign it.
(This has been held to apply to, among others, the signature of a
duly authorized contracting officer when that person did not follow
appropriate procedures in settling a claim.)
5-25
Step 9 Document the file and distribute the agreement. The supplemental
agreement should be signed by both parties on three copies. Signed cop-
ies are to be distributed to each of the following:
The official Government file,
The contractor, and
The paying office.
Other offices may be on your normal distribution list for duplicates of the
signed copies in accordance with agency regulations.
5.1.9 Implement Implementing a unilateral modification for an administrative change is

Contract Modifica- different than implementing a bilateral modification. There are usually
tions for Unilateral eight steps to follow.
Changes
Step 1 Incorporate the change in the contracting office suspense system.
Generally, issuing a supplemental agreement is the most common method
for definitizing a unilateral modification. It is important to establish
goals for definitizing any unilateral change. Establish due dates for interim
steps in the process including a date for the overall goal.
Step 2 Identify the clause authorizing the change. A Changes clause is not
the only clause authorizing a modification. When the Government issues
a stop-work order, for instance, the contractor is required to stop work un-
til given the go-ahead. The clause allows the contractor to obtain an
equitable adjustment for the delay. Make sure you cite the appropriate
clause for the change.
Step 3 Determine whether to issue a telegraphic order. When unusual or ur-

gent circumstances demand quick action, you may implement unilateral
FAR 43.201 changes by telegraphic messages, but only if you comply with all re-
quirements as listed in Exhibit 5-4.
Step 4 Prepare and issue the change order or other unilateral change. Pre-
pare your unilateral change on your agency’s prescribed form for contract
modifications, usually the SF 30. Exhibit 5-5 shows a sample of a SF 30
used as a change order.
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CHAPTER 5
Prerequisites for Unilateral Issuance by Telegraphic Message
♦ The circumstances are urgent or compelling.
♦ Furnish copies of the message promptly to the same addressees who received the basic
contract.
♦ Take immediate action to confirm the change by issuance of a SF 30, Amendment of So-
licitation/Modification of Contract.
♦ The message must contain substantially the same information required by the SF 30, ex-
cept it would:
É Not indicate the estimated change in price, and
É Include in the body of the message the statement: “Signed by (Name), Contracting
Officer.”
♦ The contracting officer must manually sign the original copy of the message.
Exhibit 5-4
5-27
Sample Change Order
Exhibit 5-5
5-28
CHAPTER 5
Step 5 Inform the contractor of its obligation to continue work under the
contract as changed. When a Government contracting officer issues a
FAR 33.213 unilateral change, the contractor must proceed with the work as changed.
This holds true even if an agreement as to adjustment in price and perfor-
mance time has not been reached or there is open and intense disagree-
ment on these adjustments. There are a few exceptions. A contractor
need not proceed if:
It needs and requests, but does not obtain, clear direction from the
contracting officer on how to proceed with the change;
The Government’s action leaves the contractor in an untenable po-

sition. (An example of this is when faulty Government testing
procedures result in the rejection of delivered items.);
A contract clause permits the contractor to stop work when funds

FAR 52.216-24
are exhausted or when a certain percentage of the costs has been
FAR 52.232-7 expended;
The Government grossly and materially breaches its duties and ob-
FAR 52.232-20 ligations under the contract;
FAR 52.232-22 Performance is impossible. (However, when performance is
temporarily impossible, as in the case of temporary unavailability
of Government-furnished materials, the contractor’s duty to pro-
ceed will remain effective and the contractor must continue per-
formance after the obstacle to performance has been removed.); or
An issued change is beyond the scope of the contract.
Step 6 Inform the contractor of any need to segregate the costs of perform-
ing changed work. A contractor’s standard accounting method may not
FAR 43.203 be designed to segregate the costs of performing changed work. You can
demand this cost segregation only when a contract requires a contractor to
FAR 43.205(f) do so. When there is such a requirement, alert the contractor to the poss-
ible need for a revision to its normal accounting procedures to track the
FAR 52.243-6 following direct costs categories:
Nonrecurring costs (e.g., engineering costs and costs of obsolete or

reperformed work),
Costs of specific work caused by the change (e.g., new subcontract
work, new prototypes, or new retrofit kits), and
Costs of recurring work (e.g., labor and material costs).
5-29
Step 7 Document the file and distribute the modification. It is important to

document the file adequately for unilateral changes. You need to identify
what follow-up action is required for definitizing a change.
Step 8 Definitizing a unilateral change. After a unilateral change has been is-
sued, you need to issue a bilateral agreement or otherwise definitize the
change. The following steps for definitizing unilateral changes are the
same as for bilateral changes:
Establish a prenegotiation position,
Negotiate a supplemental agreement on the amount of the equita-

ble adjustment and other terms,
Obtain a release of claims or resolve the claim, and
Document the file and distribute the supplemental agreement or

other document used to definitize the change.
5.1.10 Implement Most administrative changes correct nonsubstantive errors in the original
Contract Modifica- contract document. Follow three steps to implement them.
tions for Other Ad-
ministrative Changes
Step 1 Verify that the change does not affect the substantive rights of the
parties. Normally this is merely a matter of reading the change request
and making a judgment.
Step 2 Prepare and issue the change. Use a SF 30. Exhibit 5-6 provides a
sample unilateral modification to effect an administrative change.
Step 3 Document the file and distribute the modification. Send signed copies
of the modification to the contractor, the paying office, and retain one
signed copy for the contract file.
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CHAPTER 5
Sample Modification for an Administrative Change
Exhibit 5-6
5-31
WHAT A DIFFERENCE A CLAUSE MAKES
After having studied both the nature of and regulatory requirements for contract
modifications, Eric began to realize that changing or altering a Government contract
requires more than meets the eye. He became particularly alert to the specific terms of
the traditional Changes clauses used in Government contracts. And while he found a
similarity of conditions expressed in each, it was a wake-up call for him to realize that
what can be changed under any Changes clause is not merely a question of its “being
within the general scope.” The business of general scope, he concluded, while
sometimes difficult to determine relative to a proposed change, is further clarified in
each clause by expressed areas within which, and only which, changes can be issued.
It all added up to a lot more than pushing paper and simply getting it out the door. In
some cases, there were decisions to be made that reflected a multitude of interests, from
the requiring activity and funding sources to the contractor and its subcontractors. In
other cases, modification procedures were simple. “I guess,” he said to himself, “the
whole nine yards of it reinforces the fact that if you’re gonna alter a Government
contract, for whatever reason, you gotta do it in some form of writing.”
Throughout his study of contract modifications, he reflected on the ease with which
Platform Industries had agreed to a no-cost, bilateral change to its contract for the
submission of a weekly progress report. All of that resulted in a supplementary
agreement. It wasn’t considered a big deal, but it was critical to Harry Carmichael and
the requiring activity. And yet again, Eric wondered what might have been the case had
Platform not agreed to the change. For under FAR 52.212-4, the Changes article
merely said that both parties had to agree, in writing, to any change in the contract’s
terms and conditions. It almost seemed too simple.
Eric zipped into his computer and banked the following questions concerning the
Changes article under FAR 52.212-4. He would raise them with Joanne when she had
time for one of their general conversations.
♦ How should I approach changes, assuming some might be necessary, for items or
services procured under FAR Part 12 (Acquisition of Commercial Items) using
FAR Part 13 (Simplified Acquisition Procedures), 14 (Sealed Bidding), or 15
(Contracting by Negotiation) as the method of contracting?
♦ Without a unilateral right to issue a change, how do I persuade the contractor to

agree to one? And if we get hung up at the outset, how do we bridge the gap?
♦ Does the Changes article under FAR 52.212-4 infer an equitable adjustment in
the event of a change, and what exists to resolve their differences if both parties
can’t agree to one?
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CHAPTER 5
5.1.11 Implement A novation agreement is a legal instrument executed by:

Contract Modifica-
tions for Novation The contractor (transferor),
Agreements
The successor in interest (transferee), and
FAR 42.1201
The Government.
A novation agreement provides for:
The transferor to guarantee performance of the contract by the

transferee,
The transferee to assume all obligations under the contract, and
The Government to recognize the transfer of the contract and re-

lated assets.
Dealing With Novation Sometimes you will receive a copy of an administrative modification from
Agreements another contracting office affecting one of your contracts. If you do, then
distribute it as you would any other such modification. The contractor
FAR 42.1203(f)(4) must submit proper documentation to support a novation agreement.
Such documentation is shown in Exhibit 5-7.
FAR 42.1202(c) For a novation, first look at the list of all affected contracts and other or-
ders. The contracting officer or ACO administering the largest unsettled
balance has the responsibility to execute the novation agreement for the
Government. Obtain any missing or deficient documentation if your con-
tract has the largest unsettled balance of the listed contracts.
FAR 42.1203(b) Provide all contracting offices affected by a proposed novation agreement
with:
A list of all affected contracts, and
A request for comments or feedback within 30 days.
5-33
Documentation Requirements for Novation Agreements
♦ Three signed copies of the proposed novation agreement.
♦ An authenticated copy of the instrument effecting the transfer of assets (e.g., a bill of
sale, certificate of merger, contract, deed, agreement, or court decree).
♦ A list of all affected contracts and purchase orders remaining unsettled between the
transferor and Government, showing for each the:
É Contract number and type,

É Name and address of the contracting office,
É Total dollar value, as amended, and
É Remaining unpaid balance.
♦ A certified copy of each resolution of the corporate parties’ boards of directors authoriz-
ing the transfer of assets.
♦ A certified copy of the minutes of each corporate party’s stockholder meeting necessary
to approve the transfer of assets.
♦ An authenticated copy of the transferee’s certificate and articles of incorporation, if a

corporation was formed for the purpose of receiving the assets involved in performing the
Government contracts.
♦ The opinion of legal counsel for the transferor and transferee stating that the transfer was
properly effected under applicable law and the effective date of transfer.
♦ Evidence of the transferee’s capability to perform the contracts.
♦ Balance sheets of the transferor and transferee, as of the dates immediately before and
after the transfer of assets, certified for accuracy by independent accountants.
♦ Evidence that any security clearance requirements have been met.
♦ The consent of sureties on all contracts if bonds are required or a statement from the
transferor that none is required.
Exhibit 5-7
5-34
CHAPTER 5
Processing and Execut- The processing and execution of a novation agreement involves the fol-
ing Novation Agree- lowing five steps.
ments
Step 1 Obtain legal review of sufficiency. As with any legal documentation
about which you are generally unfamiliar, obtain Government counsel’s
FAR 42.1203(d) clearance on the basis for the modification and the supplemental agree-
ment itself.
Step 2 Execute the agreement. Sign the document when it is consistent with
the Government’s interest to execute the agreement. However, it may not
FAR 42.1203(c) always be appropriate to process a novation agreement. Base a decision
not to execute one on:
Feedback from other contracting offices, or
A determination that the proposed transferee is not responsible.
A lack of responsibility can be based on information that would include,

but not be limited to, the transferee’s inclusion on the List of Parties Ex-
cluded from Federal Procurement and Nonprocurement Programs.
FAR 42.1204(e) Follow the format provided in the FAR for executing an agreement when
the contractor has not provided the agreement. Make any changes that
might be necessary to the standard novation agreement.
Step 3 Forward the novation agreement. After documents have been re-
viewed and approved by the Government, forward a copy to both the
transferor and the transferee. Request them to sign the approved agree-
ment and return it for the Government’s signature. Ask the contracting
officer to sign the novation agreement only after the transferor and trans-
feree have signed.
Step 4 Prepare a contract modification incorporating the agreement. A

contract modification (using a SF 30 unless otherwise directed by agency
FAR 42.1203(f) requirements) must:
Reference the novation agreement,
Incorporate a summary of the agreement in the modification, and
Have attached a complete list of affected contracts.
5-35
Step 5 Distribute the modification. Send a copy of the modification to the fol-
lowing:
FAR 42.1203(f)
The transferor,
The transferee,
Each contracting office listed by the contractor as having current

contracts that would be affected by the agreement,
Each administration office, if different from the contracting office,

listed by the contractor as having current contracts that would be
affected by the agreement, and
All who received a copy of the contract currently being adminis-

tered.
5.1.12 Implement A change-of-name agreement is a legal instrument executed by the con-

Contract Modifica- tractor and the Government that recognizes the legal change of a contrac-
tions for Name tor’s name without disturbing the original contractual rights and
Changes ob-ligations of the parties.
FAR 42.1201
Dealing With Sometimes you will receive an administrative modification based on a

Change-of-Name change-of-name agreement signed for the Government by a contracting
Agreements officer in another contracting office that affects your contract. If you do,
then distribute it as you would any other such modification. The con-
FAR 42.1203(f)(4) tractor must submit proper documentation to support a change-of-name
agree-ment. Such documentation is shown in Exhibit 5-8.
As with novation agreements, first look at the list of all affected contracts
and purchase orders. The contracting officer or ACO administering the
largest unsettled balance has the responsibility to execute the
change-of-name agreement for the Government. Obtain any missing or
deficient documentation if your contract has the largest unsettled balance
of the listed contracts.
5-36
CHAPTER 5
Documentation Requirements for Change-of-Name Agreements
♦ Three signed copies of the change-of-name agreement.
♦ The document effecting the name change, authenticated by a proper official of the State
having jurisdiction.
♦ The opinion of the contractor’s legal counsel stating that the change of name was proper-
ly effected under applicable law and showing the effective date.
♦ A list of all affected contracts and purchase orders remaining unsettled between the con-
tractor and the Government, showing for each the:
É Contract number and type,

É Name and address of the contracting office,
É Total dollar value, as amended, and
É Remaining unpaid balance.
Exhibit 5-8
Processing and Execut- The processing and execution of a change-of-name agreement involves the
ing Change-of-Name following five steps.
Agreements
Step 1 Verify that the contractor’s rights and obligations are unaffected. If
the contractor’s basic rights are affected, a change-of-name agreement is
inappropriate. A novation agreement or an assignment of payment may
suit the circumstances. As with any legal documentation about which
you are generally unfamiliar, obtain Government counsel’s clearance on
this issue.
Step 2 Execute the change-of-name agreement. When it is consistent with the

Government’s interest to sign the agreement and the contractor has pro-
vided a signed agreement, you would include it with the review of legal
sufficiency obtained in Step 1.
5-37
FAR 42.1205 Follow the format provided in the FAR for executing name changes when
the contractor has not provided the agreement. Make any changes that
might be necessary to the standard change-of-name agreement.
Step 3 Obtain the contractor’s signature on the agreement. Obtain the con-
tractor’s signature before the contracting officer’s. Provide one copy to
the contractor and retain one copy of the signed agreement in the contract
file as backup for a subsequent contract modification.
Step 4 Prepare a contract modification incorporating the agreement. A

contract modification (using a SF 30 unless otherwise directed by agency
requirements) must:
Reference the change-of-name agreement,
Incorporate a summary of the agreement in the modification, and
Have attached a complete list of affected contracts.
Step 5 Distribute the modification. Send a copy of the modification to the fol-
lowing:
The contractor,
Each contracting office listed by the contractor as having current

contracts that would be affected by the agreement,
Each administration office, if different from the contracting office,

listed by the contractor as having current contracts that would be
affected by the agreement, and
All who received a copy of the contract currently being adminis-

tered.
5-38
CHAPTER 5
STEPS IN EXERCISING OPTIONS
1-2. Identify available options and

the need for additional supplies or
3. Determine whether a synopsis is

for an
4. Determine whether to exercise an

after:
• A formal solicitation,
• Market
Exercise No
the
Obtain required supplies
option? services through other
Yes
5. Provide written notice and

an
6. Prepare a written determination for

contract
5-39
5.2 Options Options provide the Government with firm prices for additional quantities
or periods of performance, but only for a specific period of time. That
FAR 17.204(e) time period may extend beyond the basic contract period and must be
identified in the contract.
Unless agency procedures specify otherwise, the total of a contract’s basic

and option periods cannot exceed:
Five years in the case of services, or
Five years’ requirements in the case of supplies.
These limitations do not apply to information technology contracts, and

statutes applicable to various classes of contracts (e.g., the Service Con-
tract Act) may place additional restrictions on the use of contract options.
5.2.1 Identify Avail- There are four standard FAR option clauses. These are summarized in
able Options Exhibit 5-9. Read the clause provided in the contract carefully, because
the contracting officer has the discretion to alter the language to fit a par-
FAR 52.102-1(b)(2) ticular situation. If the clause is incorporated by reference, then it uses
the clause’s standard language.
DoD Options for For- DoD has two options in addition to the four standard FAR options.
eign Military Sales and
Surge Requirements The first enables DoD to fulfill foreign military sales commitments.
DFARS 217.208-70(a) The second enables DoD to support an industrial mobilization program
by:
DFARS 252.217-7000
Increasing the quantity of supplies or services at a stated percen-
DFARS 217.208-70(b) tage rate, and/or
DFARS 252.217-7001 To accelerate the rate of delivery originally called for in the con-
tract.
Time for Exercising Every option will state a time period during which it may be exercised. It
Options may not be exercised at any other time. Your contract administration
plan should include a suspense date for review of options that allows suf-
FAR 17.204(b) ficient time prior to their expiration for verifying the need and researching
current market prices. Options are usually contained within the contract
as a separate line-item in the schedule.
5-40
CHAPTER 5
5.2.2 Determine Consult requiring activities to verify that:

Need for Additional
Supplies or Services The requirement covered by an option fulfills an existing Govern-
ment need, and
Funds are available for exercising the option.
5.2.3 Determine A notice in the Commerce Business Daily (CBD) is required prior to ex-
Whether Option Re- ercising an option unless:
quires Synopsizing
The original contract’s synopsis provided sufficient detail on the
FAR 5.202(a)(11) option, or
Another exception to synopsizing applies.
FAR 5.205(a) Additionally, you may use a “Research and Development Sources Sought”
announcement as a market research tool.
5.2.4 Determine Options must be exercised exactly as stated in the contract. You may not
Whether to Exercise change quantities, unless the option itself, not the basic contract, authoriz-
Options es partial deliveries, in which case, you may order less than the stated
quantity. You may never order more than the stated quantity.
You may not mutually agree to vary the price or any other term or condi-
tion for a stated additional quantity or continued performance period ex-
cept for:
FAR 22.1007(b) Any increase in wages contained in a new wage determination

from the Department of Labor when services a contractor will pro-
vide under an option are subject to the Service Contract Act; or
FAR 17.207(b) Economic price adjustment, but only if:
FAR 16.203 Ê The contract contains specific terms that allow economic price
adjustment in contract prices, and
Ê The contractor specifically requests a price revision in strict

compliance with those terms.
5-41
Standard Contract Clauses for Options
Clause Use Substance
FAR 52.217-6 Used if the option quantity is The contracting officer may
Option for Increased expressed as a percentage of increase the quantity at the unit
Quantity the basic contract quantity or price specified for the appropriate
as an additional quantity of a line-item.
specific line-item.
Provides for a written notice within

a time frame specified in the
contract’s Schedule.
Option deliveries will be at the same

rate as for the basic requirement,
unless the parties otherwise agree.
FAR 52.217-7 Used if the contract— Calls for a written notice within
Option for Increased a specified period of time.
Quantity—Separately Is not a service contract, and
Priced Line Item Specifies that option deliveries will
The option quantity identified as a be at the same rate as for the basic
separately priced line-item is the requirement, unless the parties
same as a corresponding basic line- otherwise agree.
Item with the same nomenclature.
5-42
CHAPTER 5
Standard Contract Clauses for Options
Clause Use Substance
FAR 52.217-8 Used if the contract is recurring and Limits the total extension of line-item
Option to Extend continuing services are required to services to six months.
Services assure continued performance in the
event of delays in the follow-on pro- Provides for a written notice within a
curement process. time frame specified in the con-
tract’s
Schedule.
Allows adjustment in line-item prices

only for Service Contract Act wage
rates.
FAR 52.217-9 Used if— Provides for a preliminary written

Option to Extend the notice of the Government’s intent to
Term of the Contract Work covered under the option exercise the option at least 60 days
requires start-up or phase-in; or before contract expiration.
Contract extensions should be Specifies a time frame for exercise

addressed; and of the option.
The contract applies to either supplies Limits the total contract duration to a
or services. specific time frame.
States that a contract extension

extends the option as well.
Consider Alternatives When exercising an option, you save considerable time and administrative
to an Option expense. However, if market conditions changed favorably for buyers of
the supplies or services contained in the option, the savings realized by
issuing a new procurement may be worth the time and expense of a resoli-
citation. In considering alternatives to an option, apply the following four
steps.
Step 1 Consider whether the contract awarded is an indicator of current

market conditions. This consideration is only valid when:
Options were considered in evaluating the basic contract, and
5-43
The time between contract award and exercising the option is neg-
ligible.
Step 2 Decide whether market research provides sufficient evidence. Some

factors to consider for an informal investigation of market prices are con-
FAR 17.207(c) tained in Exhibit 5-10.
FAR 15.405-1 When the contract award was noncompetitive, your research is primarily
to identify whether any competitors have entered the market. Your pri-
FAR 5.205(a) mary tool for seeking competition will probably be a “Research and De-
velopment Sources Sought” announcement in the CBD or a solicitation for
information or planning purposes. These mechanisms avoid the expense
of a formal solicitation if there are still no other sources available.
Factors for Obtaining Comparative Data to Assess Option Prices
♦ The relationship of the option price to the price for the initial contract period.
♦ The adequacy of competition at the time of initial award compared with competition at
the time of the potential exercise of an option.
♦ Changes in the general economy having a potential effect on the cost of performance.
♦ The findings of an informal poll of other contracting activities surveying significant

changes in offered prices for similar items or services.
♦ Potential savings in administrative costs in exercising the option compared with awarding
a new contract, including service disruption costs.
♦ Administrative or budgetary constraints that cause an inability to process a new solicita-

tion.
Exhibit 5-10
Step 3 Issue a formal solicitation if market research is insufficient. Use a

formal solicitation only if the first two steps do not provide sufficient data.
The purpose of using an option is twofold:
To avoid the expense of a formal solicitation, and
To take advantage of a lower option price.
5-44
CHAPTER 5
So use a formal solicitation as a last resort when there is no other way of

confirming that the option price is at least equal to current market prices.
Step 4 Make a decision based on the evidence at hand. You may discover
that the Government’s right to exercise an option has expired because:
A proper preliminary notice was not given, or
Funds were not available.
When you discover that the required date for a preliminary notice has
passed, discontinue the option process unless the contractor is willing to
waive its right to a preliminary notice. When the actual date for exercis-
ing an option is passed, the Government’s right to exercise it cannot be
restored. If still required, items or services under an expired option must
be procured using another contracting procedure.
5.2.5 Provide Writ- Remember that an option in a basic contract represents a considerable risk
ten Notice and Exer- for a contractor. If the cost of deliverables increases after contract award
cise Option beyond what a contractor anticipated when initially pricing an option, then
the contractor must absorb the loss represented by the difference between
the market price and the option price. Therefore, if costs have risen and
the contractor has not received a preliminary notice, it may not consent to
the exercise of an option. A contractor will usually agree to waive its
right to a preliminary notice when market pricing is the same as or lower
than its contractually specified option price.
In providing a written notice and exercising an option, apply the following

three steps.
Step 1 Provide a preliminary notice. The four standard FAR option clauses
require a preliminary written notice to a contractor within a period speci-
FAR 52.217-6 through fied in a contract’s Schedule. This notice must be provided within the
-9 specified time period or the Government loses its unilateral right to exer-
cise the option, unless the contractor waives its right to a preliminary no-
tice.
Step 2 Obtain a new wage determination for services subject to the Service
Contract Act, when required. If the basic contract contained a Service
FAR 22.1007(b) Contract Act wage determination, then the option will probably require
one. The only time it will not is when one of the following occurs:
The basic contract contained both supplies and services, but the
option applies only to supplies.
5-45
No personnel within the service categories subject to the Service

Contract Act will be used to perform services contained in the op-
tion (as when both professional services and services subject to the
Service Contract Act are in the basic contract, but only profession-
al employees will be used to provide services contained in the op-
tion).
When in doubt, question the contractor on the categories of labor to be

used in performing specific option services.
FAR 22.1008-6 When filling out the SF 98a, Notice of Intention to Make A Service Con-
tract and Response to Notice, indicate “Mod-Exercise of Option” in Block
2 of the form, which asks for the estimated solicitation date.
Step 3 Exercise the option. To exercise a contract option, use a SF 30 or the

form that you agency prescribes for modifications. This ensures that
everyone who was provided a copy of the basic contract is aware of the
additional requirement. It also provides the most uniform way of docu-
menting it. Generally follow the procedures in 5.1.9, above, for imple-
menting unilateral contract modification changes. In the rare instance
when you might be issuing a bilateral modification for the contractor to
acknowledge it has waived a required preliminary notice, generally follow
the procedures in 5.1.8, above, for implementing supplemental agree-
ments.
Before presenting the SF 30 to the contracting officer for signature,

double-check to ensure that there is enough time to provide it to the con-
tractor within the period specified in the basic contract. Provide a note to
the contracting officer highlighting the expiration date.
5.2.6 Prepare Writ- As contract administrator, you will prepare this determination for the con-
ten Determination for tracting officer’s signature. Exhibit 5-11 provides content requirements
Contract File for a determination to exercise an option.
FAR 17.207(f)
5-46
CHAPTER 5
Content Requirements for a Determination to Exercise An Option
♦ The option exercise complies with the terms of the option.
♦ Funds are available.
♦ The requirement covered by the option fulfills an existing Government need.
♦ The exercise of the option is the most advantageous method of fulfilling the Govern-
ment’s need, price and other factors considered.
♦ A statement that the option exercise was synopsized or a reference to the exception that
authorized not synopsizing.
♦ The option exercise complies with the requirements of FAR Part 6 regarding full and
open competition.
Exhibit 5-11
GETTING IN SHAPE TO EXERCISE AN OPTION
“It’s amazing,” Eric thought to himself, “how we use terminology without really
un-derstanding what it’s all about.” He had listened carefully during that part of his
training experience that covered the subject of options, and he realized how superficial
his knowledge had been of this important area. “An option clause is an option clause,”
he remembered himself saying. “When it comes time to exercise it, you just do it.” He
had learned that things were not quite that simple. As a matter of fact, things could get
downright complex in the business of options.
Looking toward dealing with the option available to the Government in Platform’s
contract, Eric thought he would try to get a bit of a head start by examining the
con-tract’s terms and conditions related to exercising the option. First, he found that
the solicitation document (a SF 1449) had referenced the inclusion of the provision under
FAR 52.217-5 (Evaluation of Options). Going to FAR 17.208(c)(1), he confirmed why
this particular solicitation provision had been used. He then examined the solicitation’s
addendum in which the applicable option clause was referenced. He consulted his
on-line FAR to read the clause under FAR 52.217-6 (Option for Increased Quantity).
“Okay,” he thought to himself, “we’re dealing with supplies here, not services, and thus
the cited clause.”
5-47
Yet again, Eric zipped into his computer and banked a series of questions concerning the
exercise of an option under Platform’s contract. “More grist,” he muttered smilingly,
“for Joanne’s mill!”
♦ When should I start to consider exercising the option?
♦ With whom should I consult about the option, and what questions should I ask?
♦ What responsibility do I have to test the marketplace before deciding to exercise

the option, and how do I execute that responsibility?
♦ The price of any option quantity has been fixed in the basic ID/IQ contract.
What if Platform comes at me claiming increased costs based on unknown and
un-controllable conditions at the time of initial award?
♦ Why might we reject exercising the option?
5-48
CHAPTER 6
CONTRACT REMEDIES
ACCOUNTABILITY WHEN THINGS GO WRONG
It was Monday morning, and after a restful weekend Eric had settled in at his desk for what he
knew would be a busy few days. He checked his voice mail and found a few messages. None
was of any real consequence. Then he turned to his computer, booted-up, and began to read
messages in his E-mail system. There were only three, but they were more than enough for a
Monday morning.
The first message was from Pat Fazio in the agency’s finance and payment office.
“Eric: Received a call from Terry Kelley in inspection and acceptance concern-
ing Argo’s current contract. Kelley wants me to stop payment on Argo’s recent
invoice for the delivery of its tenth lot of generator engines. Seems that
on-the-spot inspection at destination found several of the engines had cracked
casings. Kelley, who sounded quite upset, was uncertain of the cause or the ex-
tent of the damage. I was called to stop payment before Kelley called Argo’s
production chief to inform the contractor of the problem and to make immediate
arrangements for transporting the delivered generator engines back to its plant.
I need your advice in this matter. Please respond within 48 hours.”
The second message was from Harry Kaplan, a colleague of Eric’s in contract administration.
“Eric: I need your help. Just got a call from our field office in Dallas. Seems
that a call came in from a requisitioner in Houston about the delivery of 500
boxes of mapping paper that appear useless. The paper was to be used for the
transposition and recording of information related to aerial photography taken
from a spacecraft. Far as I can determine, the aerial photography had to do
with something about the shifting curvatures of the earth’s continental surfaces.
The bottom line is that what is to be transposed and recorded from the aerial
photography has got to be done within the next month so that it’s ready for dis-
tribution and use at an international conference in Houston, one that’s being
co-sponsored by the U.S. and several other countries. The problem with the
mapping paper, or so I’m told, is that it is not light-sensitive enough to record
some of the minute shifts in geologic formations surfaced by the aerial photogra-
phy. We bought the paper under FAR Part 12 as a commercial item, and, in
checking the contract, I find that we neither included an express warranty for the
paper nor did we accept the lowest offered price. Rather, we accepted Argo’s
price as representing a best-value deal, principally because of the demonstrated
quality of its paper. Kind of a mess. And the pressure for its resolution is very
strong, especially with the international conference only a stone’s throw away.
6-1
CONTRACT REMEDIES
What would you do about all this? And more important, where would you
start?”
The third message appeared as if in some form of code. It was sent by Dawson Gibbs, one of
Joanne’s CORs.
“Eric: In checking Rapid Response’s vouchers for the past month, I’ve run into
a real problem in trying to separate fact from fiction. The contractor’s most re-
cent voucher for the past two weeks includes costs incurred for direct labor activ-
ities that bear no relationship to what we expected. Documentation of costs has
referenced four reports which, while required, evidence no correspondence be-
tween their titles and contents. It’s like someone took something off the shelf,
housed it in a three-ring binder, and then plugged in a title page to make it seem
appropriate. Obfuscation is too lenient a term to characterize my reaction to it.
And these people have been warned on prior occasions about charging for things
that we feel are purposely misleading. You’ll recall that I never felt that Rapid
Response should have gotten this job. When are we going to learn? If you have
the time, perhaps you’ll respond to this.”
“Well,” thought Eric, “welcome to Monday!” Aside from other work in front of him, he de-
cided to call Pat Fazio before mid-morning. Harry Kaplan’s plea for help would have to wait
until Eric found some time. The message from Dawson Gibbs left him with an uncomfortable
feeling. His immediate thought was that there could be a real problem with Rapid Response.
For all three situations, he knew that Joanne would cut to the chase. Oh yes, she would zero in
on them unflinchingly. He could hear her now. “What’s common to all three, Eric?” she
might ask. And then would answer her own question. “First, you’ve got to verify what appear
to be the facts. Second, you’ve got to consult with the parties, including our in-house people,
and determine the cause. Third, given the cause you’ve got to ascertain accountability. And
fourth, once you’ve isolated accountability, then you can reach for an appropriate remedy.
Where would you look for remedies, Eric?”
Verify, consult, ascertain, and apply the appropriate remedy. It came through to him as a rea-
sonable, four-step methodology, and he wondered how helpful each contract file would be in
getting after each case.
6-2
CHAPTER 6

Overall: Select and pursue a formal contract remedy for performance problems associated
with a contractor’s nonperformance or noncompliance under a contract.
Individual:
6.1 Identify remedies that might be appropriate.

6.2 Determine whether to use a cure or a show cause notice.
6.3 Invoke liquidated damages.
6.4 Reject nonconforming supplies or services.
6.5 Invoke an express warranty.
6.6 Invoke an implied warranty.
6.7 Prove the existence of latent defects, fraud, or gross mistakes amounting to fraud.
6.8 Select one or more remedies as the best for a particular performance problem.
6.9 Determine whether to withhold, reduce, or demand payment from a contractor.
6-3
CONTRACT REMEDIES
INTRODUCTION TO CONTRACT REMEDIES
Government Contract Government contract remedies are forms of relief that can be pursued in
Remedies light of a contractor’s nonperformance or noncompliance with a contract’s
terms or conditions. These forms of relief can be provided by contract
clauses or from basic rights provided in Government contract law and,
occasionally, in commercial contract law.
Government Policy on In seeking contract remedies, Government policy requires its agents to:
Choosing Contract
Remedies Document and verify the sufficiency of evidence for the remedy
sought,
Notify the contractor of the Government’s intention to seek relief,

and
Seek and obtain contractor feedback on a proposed Government

action.
Reaching a bilateral agreement on solutions to contract problems is always

preferred to unilateral Government action. Sometimes, however, unila-
teral action is required.
Addressing Remedies This chapter addresses contract remedies that are not discussed separately
Not Covered Else- in other chapters.
where
These are:
Actions preliminary to a termination for default,
Liquidated damages,
Rejecting work and demanding reperformance,
Accepting work with minor nonconformities for a reduced contract

amount or other consideration,
Pursuing rights under a warranty, or
Seeking postacceptance rights due to:
Ê Latent defects,
Ê Fraud, or
Ê Gross mistakes of the contractor.
6-4
CHAPTER 6
Steps in Performance The general steps in seeking corrective actions to defective performance
are charted on the next page. Following the flowchart, each step is dis-
cussed in detail. In subsequent sections, steps involved in seeking some
specific remedies are charted at the beginning of each section and then
6-5
CONTRACT REMEDIES
PRELIMINARY STEPS
FOR CHOOSING CONTRACT REMEDIES
Remedies
Identify and select one or
more contractual remedies. 1. Cure or show cause notice.
2. Liquidated damages.
3. Rejection of noncomforming
supplies or services.
4. Invoke rights under an
express warranty.
5. Invoke rights under an
implied warranty.
6. Remedies for latent defects,
fraud, or gross mistakes.
7. Any other remedy specified
in a specific clause at issue.
6-6
CHAPTER 6
IDENTIFYING TYPES OF REMEDIES
6.1 Identify Types of Monitoring identifies or permits the surfacing of performance failures or
Remedies other breach of contract situations, such as:
Anticipated or actual late delivery,
Failure to control costs adequately, and
Unsatisfactory performance.
Remedies Without Re- The Government has several methods at its disposal to remedy a given
sorting to Termination situation without resorting to contract termination. These include:
Issuing cure or show cause notices,
Imposing liquidated damages,
Rejecting nonconforming supplies or services,
Invoking written warranties,
Invoking implied warranties, and
Proving the existence of latent defects, fraud, or gross mistakes

amounting to fraud.
Selecting the most appropriate remedy for a situation is covered in 6.8 of

this chapter.
6-7
CONTRACT REMEDIES
STEPS IN ISSUING
A DELINQUENCY NOTICE
1. Issue a notice and obtain

a response.
2. Evaluate the contractor’s

response.
Options Based on the

3-4. Select and implement
Contractor’s Response to a Cure
a course of action.
or Show Cause Notice
1. Defer termination action.

2. Seek alternatives to default.
3. Initiate proceedings as detailed
in Chapter 9 (Disputes,
Claims, and Terminations)
6-8
CHAPTER 6
DELINQUENCY NOTICES
6.2 Issue Cure or Contractors should, if practicable, be notified of the possibility of being
Show Cause Notice terminated for failing to perform their contractual obligations. Notifica-
tion will take one of two forms:
Cure notice, or
Show cause notice.
Issue Cure Notice A cure notice is used when:
The contractor fails to make progress and performance is endan-

gered,
At least 10 days or more remain for contract performance and cor-

rection of the problem can reasonably be expected to take place
within the remaining time, or
The intent is to terminate the contract prior to the delivery date.
Contents of Cure Notice At a minimum, a cure notice must:
FAR 49.607(a) Specifically state the failure believed to be endangering per-

for-mance,
Allow the contractor at least 10 days to “cure” the failure,
Be in writing and sufficient to support a default termination, and
Be sent with proof of delivery requested.
The FAR format for a cure notice is shown in Exhibit 6-1.
Cautions About Cure Issuing a cure notice when the time remaining for performance does not
Notices permit a “cure” period of 10 days or more endangers the Government’s
position (i.e., it would appear that the Government is permitting the con-
tractor to extend performance beyond the required delivery date). In this
case, a cure notice should not be issued.
Failure to issue a cure notice when required will probably result in an

invalid termination for default, resulting in that termination’s conversion
to one for convenience.
6-9
CONTRACT REMEDIES
After a cure notice has been issued, a contract cannot be terminated until
the time for cure specified in the notice has expired, unless there is evi-
dence of wrongful conduct or repudiation by the contractor.
FAR Format for a Cure Notice
You are notified that the Government considers your _______________________ [specify
the contractor’s failure or failures] a condition that is endangering performance of the con-
tract. Therefore, unless this condition is cured within 10 days after receipt of this notice [or
insert any longer time that the contracting officer may consider reasonably necessary], the
Government may terminate for default under the terms and conditions of the ________
___________ [insert clause title] clause of this contract.
Exhibit 6-1
Issue Show Cause No- A show cause notice is used when there is insufficient time remaining in a
tice delivery schedule for the contractor to cure or correct the delinquency.
Usually a show cause notice is issued when there are fewer than 10 days
remaining; however, it can be used at any time when you can determine
there is not sufficient time within the delivery schedule to permit a realis-
tic “cure.” The notice must afford the contractor an opportunity to pro-
vide evidence that a delinquency, for instance, was beyond its control.
Contents of Show At a minimum, a show cause notice must:

Cause Notice
Inform the contractor of its liabilities in the event of default,
FAR 49.607(b)
Permit the contractor to show cause why the contract should not be
terminated for default,
Inform the contractor that failure to explain the cause of the defi-
ciency may be taken as admission that no valid explanation exists,
When appropriate, invite the contractor to discuss the matter at a

conference, and
Be sent with proof of delivery requested.
The FAR format for a show cause notice is shown in Exhibit 6-2.
6-10
CHAPTER 6
FAR Format for a Show Cause Notice
Since you have failed to _______________________[insert “perform Contract No. ____

within the time required by its terms,” or “cure the conditions endangering performance un-
der Contract No. ____ as described to you in the Government’s letter of _______(date)”],
the Government is considering terminating the contract under the provisions for default of
this contract. Pending a final decision in this matter, it will be necessary to determine
whether your failure to perform arose from causes beyond your control and without fault or
negligence on your part. Accordingly, you are given the opportunity to present, in writing,
any facts bearing on the question to ____________ [insert the name and complete address of
the contracting officer], within 10 days after receipt of this notice. Your failure to present
any excuses within this time may be considered as an admission that none exist. Your atten-
tion is invited to the respective rights of the Contractor and the Government and the liabili-
ties that may be invoked if a decision is made to terminate for default.
Any assistance given to you on this contract or any acceptance by the Government of delin-
quent goods or services will be solely for the purpose of mitigating damages, and it is not the
intention of the Government to condone any delinquency or to waive any rights the Govern-
ment has under the contract.
Exhibit 6-2
Requirement for Send- Copies of either a cure or show cause notice must be sent to:
ing Copies of Notices
The contracting office’s small business specialist and the Small
FAR 49.402-3(e)(4) Business Administration Regional Office nearest the contractor
when the contractor is a small business, and
FAR 49.402-3(e)(3)
The contractor’s surety when a payment and a performance bond
were required for contract performance.
Evaluate Contractor A contractor’s response to delinquency notices can take several forms.
Response
Cure Notice Response A contractor is not required to respond to a cure notice since the contrac-
tor is told to correct the problem before the contract becomes delinquent.
However, unless the problem is actually cured, the Government, upon ex-
piration of the delivery period, has the option of issuing either a:
Show cause notice, or
Termination notice.
6-11
CONTRACT REMEDIES
Show Cause Notice If you choose to issue a show cause notice (either with or without a prior
Response cure notice), the contractor has 10 days to respond. Typical responses are
summarized in Exhibit 6-3.
Typical Contractor Responses to Show Cause Notices
♦ An offer to “cure” performance.
♦ An offer to provide substantial performance in exchange for relief from some terms or
conditions of the contract.
♦ Presentation of a case for an excusable delay.
♦ Agreement with the facts of the notice, but no offered solution.
♦ No response.
Exhibit 6-3
Actions After Evalua- Commensurate with a response, the Government may:

tion of Response
Defer termination action,
Modify the contract, or
Begin default proceedings.
Defer Termination Ac- Forbearance is the more formal term used to describe deferring termina-
tion tion action. This strategy is appropriate when a contractor has provided a
workable solution to the performance deficiency you formally brought to
its attention.
Waiver of Right to De- It is possible to unintentionally waive the Government’s right to default,
fault but only under certain conditions. For instance:
The Government fails to terminate within a reasonable time after

the condition for the default occurs,
6-12
CHAPTER 6
The contractor relies on the Government’s failure to terminate and

incurs additional expenses in its continuation of efforts to complete
performance, or
The Government has indicated a willingness for the contractor to

continue performance.
When the Government indicates its concurrence with continued per-

for-mance, such an indication must be clearly demonstrated to the con-
tractor in order for it to constitute a waiver of the Government’s right to
terminate. If the contracting officer does not make such a clear indica-
tion, the contractor may choose to discontinue performance.
Protection of Right to To protect the Government’s right to further action:

Default
Provide a notice to the contractor that includes all of the elements
contained in Exhibit 6-4, obtaining a receipt for the notice, and
Continue with default proceedings immediately after the contrac-

tor’s commitment for correcting performance has expired.
By outlining the conditions of forbearance, you eliminate the contractor’s

defense of relying on the Government’s inaction to own its detriment.
An example of a forbearance notice is shown in Exhibit 6-5.
Necessary Elements of a Forbearance Notice
To ensure preservation of the right to future remedial action for deficient performance, a let-
ter of forbearance must:
♦ Acknowledge the contractor’s stated method for and commitment to “cure” performance.
♦ Put the contractor on notice that the Government is deferring its right to future corrective
actions only if the contractor fulfills its commitment to remedy deficient performance.
♦ Declare the Government’s intention to pursue corrective contractual remedies, including

default, if the contractor fails to fulfill its commitment.
♦ Document a finding of facts that forms the basis for the Government’s actions.
Exhibit 6-4
6-13
CONTRACT REMEDIES
Sample Forbearance Notice
Dear Mr. Corporate Official:

SUBJECT: Contract No. LX74920-97-C-0891, Deficient Performance
This notice is a direct response to your reply of January 18, 1997, to the cure notice I issued
on January 11, 1997, to the ABC Company.
In your January 18 reply, you outlined your company’s plan for making delivery of the first
run of 160 widgets that was due, according to the delivery schedule of the subject contract,
by December 31, 1996, stating in part that:
1. The delinquency of the first run of widgets was due to:
(a) Employee absenteeism and overall lack of production during the end-of-year
holiday season, and
(b) The late delivery on January 4, 1997, by a material supplier of chemical com-
pound X3-NY that is necessary to complete the final stage of production.
2. Your company “projected” delivery of the first run of widgets by February 1, 1997,
by adding a third production labor shift for the five-day work week beginning January
21, 1997.
3. Your company “projected” that the second production run of widgets would be deli-
vered on time on April 1, 1997.
In response to these statements, I find the following facts are very pertinent:
1. Since the holiday season was a well-established fact on June 28, 1996, the day you
signed the proposal on which the Government contract award was based, any delay
that may have been caused by it is not excusable under paragraph (b) of the Default
clause in this contract.
2. Since you offer no explanation for the delinquent delivery of your material supplier, I
am unable to determine if its late delivery was excusable under paragraph (b) of the
Default clause. Since you provided no evidence to the contrary, I would presume it
was not excusable.
6-14
CHAPTER 6
Sample Forbearance Notice
Your use of the term “projected” does not convey to me a firm commitment on the part of the
ABC Company to meet the February 1 delivery date for the first run or the contractually
scheduled delivery dates for the second and third. It was only on my questioning your intent
during a telephone conversation on January 15, 1997, that you affirmed your company’s
commitment to these delivery dates.
Based on this evidence, and in spite of the apparent non-excusability of the delayed ship-
ment, the Government is prepared to temporarily defer default action; however, this forbear-
ance is conditioned on the following events:
1. Delivery of the first run of widgets on February 1, 1997.
2. Delivery of the second and third widget production runs as scheduled in the con-
tract.
If delivery is not made as indicated above, the Government reserves its right to take all re-
medies available to it under the contract, including the right to terminate for default, and un-
der the general rights provided by Government contract law based on all of the evidence it
has accumulated to date concerning the initial late delivery and any subsequent late delive-
ries.
If I may be of assistance in further explaining the Government’s position in this matter,

please contact me immediately.
Sincerely
Jane Justice
Contracting Officer
Inadvertent Waiver of If the Government does inadvertently waive its right to default, the con-
Right to Default tracting officer can regain this right by establishing a new delivery date
either unilaterally or bilaterally.
Any new delivery date must be reasonable considering the contractor’s

capabilities to meet it at the time it is established.
6-15
CONTRACT REMEDIES
Seek consideration from a contractor in establishing a new delivery date.

A delivery date can be extended, however, without consideration in order
to set forth the contractor’s obligation and protect the Government’s rights
to damages.
Seek Alternatives to There are alternatives to termination for default. For instance:
Default
A revised delivery schedule can be established.
The contractor may be permitted to use a third party to continue

performance.
The contract may be terminated at no cost when a requirement is

no longer needed.
Whatever the alternative, pursue and execute the following:
Establish the Government’s position for any consideration, a new

delivery schedule, and/or other terms and conditions of the con-
tract.
Negotiate sufficient consideration for appropriate relief from terms

and conditions.
Execute a supplemental agreement.
Document the contract file to explain the reasons for the action
taken.
6-16
CHAPTER 6
STEPS IN IMPLEMENTING
LIQUIDATED DAMAGES
1-2. Document all evidence

pertinent to the liquidated
damages clause and com-
pute the amount due.
3. Discuss the case for

invoking liquidated dam-
ages with the contractor.
Entitled to Yes Do not impose liquidated

relief? damages.
No
4. Prepare and issue
liquidated damages notice.
5. Obtain and analyze the

contractor’s reply.
6. Withhold payment.
6-17
CONTRACT REMEDIES
LIQUIDATED DAMAGES
6.3 Liquidated Liquidated damages represent a predetermined rate(s) or amount of dam-

Damages ages expressed in a contract that is payable to the Government by a con-
tractor for that contractor’s breach of contract or failure to perform.
If a liquidated damages provision is to be used in a contract, then the ap-

plicable clause and appropriate rate(s) or amount of such damages must be
included in the procurement’s solicitation document.
Policy on Liquidated Contracts should contain liquidated damages clauses only when both:
Damages
The time of delivery or performance is such an important factor
FAR 11.502(a) and (d) that the Government may reasonably expect to suffer damage if
de-livery or performance is delinquent, and
The extent or amount of such damage would be difficult to ascer-

tain or prove.
In deciding whether to include coverage for liquidated damages in a con-

tract, a contracting officer should consider the probable effect of such
coverage on pricing, competition, and the cost and difficulties of contract
ad-ministration.
In deciding whether to include coverage for liquidated damages for delay,

the Comptroller General (CG), on the recommendation of the head of a
concerned agency, is authorized and empowered to make a remission (the
act of refraining to enforce the damages either in whole or part) that in the
discretion of the CG is just and equitable.
6-18
CHAPTER 6
Importance of Reason- The rate(s) of liquidated damages used must be reasonable and considered
able Liquidated Dam- on a case-by-case basis. This is so because such damages fixed without
ages any reference to probable actual damages could be held to be a penalty,
and therefore unenforceable.
A contracting officer must take all reasonable steps to mitigate (to lessen
in force or intensity) liquidated damages.
FAR 11.502(b) A contract’s provision for liquidated damages may include both an overall
maximum dollar amount or period of time, during which damages may be
assessed, to ensure that the result is not an unreasonable assessment of
such damages.
Where Right to Termi- The efficient administration of contracts containing liquidated damages
nate for Default Exists clauses is essential to prevent undue loss to defaulting contractors and to
protect the Government’s interests.
If a liquidated damages clause is included in a contract and a basis for

termination exists, the contracting officer should take appropriate action
expeditiously to obtain a contractor’s performance or to terminate the
con-tract.
If delivery or performance is desired after a termination for default, then

efforts must be made to obtain delivery or performance elsewhere within a
reasonable time.
Differing Applications The following may be inserted in solicitations and contracts when liqui-
dated damages are appropriate.
FAR 11.504(a) FAR 52.211-11, Liquidated Damages—Supplies, Services, or Re-

search Development. For use when a fixed-price type of contract
is contemplated.
FAR 11.504(b) FAR 52.211-12, Liquidated Damages—Construction. For use for

construction, except for construction contracts awarded on a
cost-plus-fixed-fee basis. This clause is mandatory in DoD for all
DFARS 211.504(b)
construction contracts greater than $500,000 except CPFF con-
tracts or those in which the contractor cannot control the pace of
work. It is discretionary on contracts of less than $500,000.
FAR 11.504(c) When a construction contract specifies different completion dates

for separate parts of stages of the work, the contracting officer
must use FAR 52.211-12 with its Alternate I. This, in turn, re-
quires the use of FAR 52.211-13, Time Extensions.
6-19
CONTRACT REMEDIES
FAR 19.708(b)(2) FAR 52.219-16, Liquidated Damages—Subcontracting Plan. For

all solicitations and contracts containing the clause at 52.219-9,
Small, Small Disadvantaged and Women-Owned Small Business
DFARS 219.708(b) and
Subcontracting Plan, or its Alternate I. In contracts with contrac-
(c)
tors who have approved comprehensive subcontracting plans under
the DoD test program this clause should not be used.
FAR 22.305 FAR 52.222-4, Contract Work Hours and Safety Standards
Act—Overtime Compensation. For use when a contract may re-
quire or involve the employment of laborers or mechanics, unless a
contract not exceeding the simplified acquisition threshold or a
contract for commercial items under FAR Part 12. Other excep-
tions also apply.
Document Evidence for When enforcing liquidated damages, document any evidence of a con-
Liquidated Damages tractor’s failure to deliver supplies or perform services within the time
specified in the contract.
Focus this documentation on:
The stage of completion, if appropriate,
The probable amount of damages sustained by the Government,
The excusability and reason therefore of a delay, if appropriate,

and
The contractor’s capability to complete the contract.
Compute Amount Due When an assessment of liquidated damages is appropriate, the contracting
officer withholds payment based on an accurate computation of the
FAR 11.503(b) and (c) a-mount due.
The actual computation will depend not only on the specific amount or
formula set forth in the contract, but also on actual events that occurred
during the administration of the contract.
It is critical to identify all factors that control how to compute the amount
of liquidated damages in order to determine an accurate maximum amount
authorized under a specific contract clause.
If appropriate to reflect the probable damages, because the Government

can terminate for default or take other appropriate action, the rate of as-
sessment of liquidated damages may be in two or more increments that
provide a declining rate of assessment as the delinquency continues.
6-20
CHAPTER 6
Construction Contracts The rate(s) of liquidated damages to be assessed against a contractor

should be for each day of delay and the rate(s) should, as a minimum,
FAR 11.503(b) cover the estimated cost of inspection and superintendence for each day of
delay in completion.
Whenever the Government will suffer other specific losses due to a con-
tractor’s failure to complete work on time, the rate(s) should also include
an amount for these items. For instance, the following are examples of
specific losses:
The cost of substitute facilities,
The rental of buildings and/or equipment, or
The continued payment of quarters allowances.
Evaluate Calculated Examine a contract for any restrictions. Generally, a contract will restrict
Amount for Damages a total amount to be withheld to the greatest amount that can be withheld
under the authority of a single contract clause. Compute amounts that
FAR 32.111(c)(2) would be authorized under each clause.
To ensure that the total liquidated damages amount is reasonable and not a
penalty, you may have special contract terms limiting the overall amount
or period of time, or both, for assessing liquidated damages. Courts and
administrative boards have traditionally denied liquidated damages that
are excessive to the extent that they can be construed as punitive (i.e., a
penalty).
Discuss Assessment After determining the Government is entitled to assess liquidated damag-
With Contractor es, discuss the situation with the contractor. Explain the Government’s
position and permit the contractor to present evidence to refute that posi-
tion. Prior to the actual assessment of liquidated damages, advise the
contractor of:
The Government’s intention to assess liquidated damages unless

the contractor provides evidence to the contrary by a specified date
that such an assessment would be improper,
The basis or bases for the Government’s assessment of the damag-

es, and
The amount of the planned liquidated damages assessment, detail-

ing the reasons for any reduction in a specified amount stated in
the contract.
6-21
CONTRACT REMEDIES
Prepare and Issue Li- A liquidated damages notice should indicate:

quidated Damages No-
tice The reason for assessing the damages provided in the clause,
The dollar amount of the damages, and
Any steps the contractor may be able to take to avoid further as-
sessment of liquidated damages.
By issuing this notice, the contractor has one last opportunity to provide
evidence for not assessing the damages.
Obtain and Analyze A contractor’s response may:

Contractor Response
Document the case for an excusable delay,
Claim impossibility of performance, or
Claim that the work is substantially complete.
Liquidated damages are generally not appropriate after the work can be
considered “substantially complete.” Substantial completion occurs on
the day the product is ready for use in the manner intended by the Gov-
ernment at the place required by the contract (e.g., F.O.B. destination).
The practical basis for this theory is that minor defects that do not affect
use are not a reason to continue the liquidated damages period. However,
this theory has limited application to supply and service con-
tracts—applying mainly to equipment installation—and is based on deci-
sions of courts and boards of contract appeals.
Withhold Payment Based on gathered evidence, you will either:
Forego assessing liquidated damages,
Assess a reduced amount, or
Assess maximum allowable liquidated damages.
When you decide that it would be fair to forego a liquidated damages as-
sessment, provide the contractor with a written explanation of the reason.
Underscore that this case of nonassessment is not indicative of probable
action in other similar circumstances.
Assess Reduced Reduced amounts may be assessed when the total amount of liquidated
Amounts damages is excessive relative to:
6-22
CHAPTER 6
The total dollar amount of the contract, or
The probable amount of damages sustained by the Government.
Before you actually deduct this amount from any payment, you must ad-
vise the contractor that the contracting officer has made a decision to de-
duct a specific amount.
When the contractor has been authorized partial payments based on Gov-
ernment acceptance of some of the supplies or services under a contract,
apply the amount due from your computations and consideration to the
invoice the contractor submits for payment of late partial shipments.
Do not deduct the amount of liquidated damages due the Government on

requests for progress payments. Wait until the supplies or services have
been accepted by the Government before actually deducting the amount
due. This is true even when acceptance results from a repurchase against
the contractor’s account. If payment is not due until final acceptance,
deduct the amount on the final invoice.
6-23
CONTRACT REMEDIES
STEPS IN REJECTING NONCONFORMING

SUPPLIES OR SERVICES
1. Gather evidence for

rejection.
Sufficient? No Do not reject and/or obtain

sufficient evidence.
Yes
2. Determine whether to
accept a “minor” noncon-
formance.
Yes Notify the contractor that

Minor?
the nonconformance has
been deemed minor.
No
3. Reject and notify

contractor.
accept the nonconforming
deliverable(s).
6-24
CHAPTER 6
NONCONFORMING SUPPLIES OR SERVICES
6.4 Rejection of When they retain contract administration responsibility, contracting offic-
Nonconforming Sup- es are responsible for ensuring that nonconformances are identified and
plies or Services for establishing the unacceptability of supplies or services that do not meet
contract requirements.
FAR 46.103(d) and (e)
Policy on Noncon- The general rule is that contracting officers should reject supplies or ser-
forming Supplies or vices not conforming to contract requirements. There are, however, spe-
Services cified situations that permit contracting officers to deviate from the
general rule. For instance:
FAR 46.407(a) and (b) Where deviation from the general rule is in the Government’s best
interest, any accepted supplies or services must be accepted as au-
thorized by the prescriptions of FAR 46.407.
DFARS 246.407
Contractors ordinarily should be given an opportunity to correct or
replace nonconforming supplies or services when this can be done
within the required delivery schedule.
When correction or replacement is permitted, it must be without

additional cost to the Government, unless the contract specifies
otherwise, as might be the case in some cost-reimbursement types
of contracts.
The contracting officer is authorized to solicit and accept consid-

eration (including a refund) if supplier or services that are non-
conforming will nevertheless be accepted by the Government.
Discoveries After DoD If the nonconforming defect is discovered after acceptance, and:
Acceptance
The defect appears to be the contractor’s fault,
DFARS 246.407(f)
Any warranty has expired, and
There are no other contractual remedies, the government’s position

tends to be one of persuasion rather than legal entitlement.
In this situation, the possible steps the contracting officer or administrative

contracting officer may take include:
Notification to the contractor of the defects,
A request for repair or replacement at no cost to the government,

and
6-25
CONTRACT REMEDIES
Acceptance of consideration if offered.
Critical or Major Non- When a nonconformance is critical or major, a contracting officer must
conformances ordinarily reject the nonconforming supplies or services. But even in
these instances, there may be circumstances (e.g., reasons of economy or
urgency) when acceptance may be in the Government’s best interest.
FAR 46.407(c)(1) In such circumstances, a contracting officer must base a decision to accept
supplies or services on the following:
Advice by the requiring activity that the nonconforming delivera-

ble is safe to use and will meet its intended purpose,
Information concerning the nature and extent of nonconformance,
If feasible, a request from the contractor for acceptance of the de-

liverable,
A recommendation for acceptance or rejection with supporting ra-

tionale, and
A contract adjustment considered appropriate, including any ad-

justment offered by the contractor.
Sealing Acceptance A contracting officer’s determination to accept nonconforming supplies or

services considered to be critical or major must be documented in writing,
FAR 46.407(c)(2) and except that in urgent cases it may be furnished orally and later confirmed
(f) in writing. In any case, the contracting officer must obtain the concur-
rence of the requiring activity responsible for the requirement, as well as
the concurrence of appropriate agency health officials where health factors
are involved.
The acceptance of nonconforming supplies or services considered to be

critical or major requires that the contract under which they are accepted
be modified to provide for an equitable reduction in price or cost or for
some other consideration.
Minor Nonconfor- When a nonconformance is minor, the cognizant contract administration

mances office may make the determination to accept or reject, unless this authority
has been retained by the contracting office. To assist in making this de-
FAR 46.407(d) termination, the contract administration office may establish a joint con-
tractor-contract administration office review group, but such a group
can-not deal with critical or major nonconformances.
6-26
CHAPTER 6
FAR 46.407(f) The acceptance of minor nonconformances does not require that the con-
tract be modified unless:
It appears that the savings to the contractor in making the noncon-

forming supplies or providing the nonconforming services will
exceed the Government’s cost in processing the modification, or
The Government’s interests otherwise require a contract modifica-

tion.
Accepting a minor nonconformance on one contract or order does not

provide relief for correcting similar defects on pending or future work.
Each contract is its own arrangement, and what may be taken as an accep-
tance or rejection action under one does not, therefore, automatically ap-
ply to another.
Conditions for Accept- Generally, a minor nonconformance does not adversely affect one or more
ing Minor Nonconfor- of the following:
mances
Safety or health,
Reliability, durability, or performance,
Interchangeability of parts or assemblies,
Weight or appearance, if contract requirements, or
Any other basic objective of the contract.
Excusability There is a reason for nonconforming supplies or services, and that reason
must be determined to assess which party is responsible. You will need
to verify, for instance, that one or more Government officials involved in a
procurement did not direct a contractor to make any changes that may
have contributed to nonconformances. An example reinforces the point:
The acquisition of a fire truck may require the inclusion of 300 feet
of hose. If a Government official (e.g., a COR/COTR) tells the
contractor to provide only 250 feet of hose and in place of the oth-
er 50 feet provide five fire extinguishers, then a constructive
change has occurred, assuming the Government official had the
authority to make such a substitution. The missing 50 feet of hose
may cause a different inspector to recommend rejecting the work.
6-27
CONTRACT REMEDIES
Rejection Before Ac- Supplies or services that do not conform to contract requirements should
ceptance be rejected before acceptance. After a product or service has been ac-
cepted, you cannot later reject it. Acceptance is final except for:
Latent defects,
Fraud, or
Gross mistakes amounting to fraud.
Because acceptance is final, determine if the Government still has the

right to reject nonconforming supplies or services. Investigate whether:
The work has been explicitly accepted,
There is any evidence of implied acceptance (e.g., by silence, by

late rejection, or by retention and use of delivered items or per-
formed services), or
The Government accepted nonconforming work under a prior con-

tract for the same requirement.
Gather Evidence for Investigate the circumstances of a nonconformance to:

Rejection
Establish that acceptance has not already occurred,
Provide a basis for rejection,
Determine the seriousness of the problem, and
Determine if the contractor is at fault.
Notices of Rejection Notices of rejection must include the reasons for rejection and be fur-
nished promptly to the contractor, including a stated time period for the
FAR 46.407(g) contractor’s reply. If timely notification is not provided, acceptance in
certain cases may be implied as a matter of law. A notice of rejection must
be in writing if:
The supplies or services have been rejected at a place other than

the contractor’s plant,
The contractor persists in offering nonconforming supplies or

serv-ices for acceptance, or
Delivery or performance was late without an excusable delay.
A written notice of rejection requires a written receipt from the contractor.
6-28
CHAPTER 6
Timeliness of Notices The requirement for the Government to provide “prompt” notice is meas-
ured within the context of the rejected supplies or services. For instance:
The Government may not delay issuing a notice of rejection to the

point where the contractor is prevented from reworking or correct-
ing a defective item. In this case, the contractor may have
grounds for asserting that the notice was not prompt.
Likewise, a notice may not be considered prompt if a delay in its

issuance caused a contractor additional work or expense.
Remember: A notice of rejection does not extend the specified delivery

schedule, and the contractor remains obligated to provide supplies or
serv-ices that conform to the contract within that delivery schedule.
Make Final Decision on A contractor may reply to a notice of rejection by submitting:

Acceptance
A proposal to repair or correct the work,
A proposal to provide a downward adjustment in price or cost as a

basis for acceptance,
No reply, or
A refusal to repair or correct the work or to offer any considera-

tion.
Exhibit 6-6 illustrates several situations of nonconformance and a decision

that could result from an analysis of each.
6-29
CONTRACT REMEDIES
Nonconforming Deliverables
Minor Nonconformance
If Then Consideration
Consideration would be Accept as is (once). None.
less than the cost of mod-
ifying the contract.
Consideration would be Accept as is (once). Consideration comparable
greater than the cost of to the value of the loss
modifying the contract. sustained by the Govern-
ment.
Substantive Nonconformance
If Then Consideration
The contractor agrees to Withhold acceptance Cost to reinspect or retest.
correct the deliverable (or until receipt of the
reperform the service) corrected deliverable
within the delivery sche- (or reperformed ser-
dule. vice).
The contractor agrees to Withhold acceptance Cost to reinspsect or ret-
correct the deliverable (or until receipt of the est.
reperform the service) but corrected deliverable Appropriate consideration
needs an extension of the (or reperformed ser- for the delay.
delivery date. vice).
Repair can be accom- Accept as is. None.
plished through warranty
provisions.
Acceptance: Accept as is. Consideration comparable
• Would not affect safety to the value of the loss
or performance, and sustained by the Govern-
ment.
• Is justified on the basis
of economy or urgen-
cy.
The contractor refuses to Either: Contractor to pay all costs
make repair or provide • Correct the product for the correction or re-
appropriate consideration. or service through procurement.
other means (con-
tract or in-house),
or
• Terminate for de-
fault and repro-
cure.
Exhibit 6-6
6-30
CHAPTER 6
Acceptance of Con- Accept a contractor’s proposal for correction of the nonconforming supply
tractor Proposal or service based on:
Advice of the technical activity concerning safety and perfor-

mance,
Information regarding the nature of the nonconformance,
A request from the contractor for acceptance of the supplies or

services, if feasible,
A recommendation by the requiring activity and, when appropri-

ate, a program office for acceptance or rejection with supporting
ration-ale, and
An appropriate contract adjustment.
If you are ordering correction of defects at the contractor’s expense, be

sure to give the contractor a chance to correct the work. The contractor is
liable for the cost of Government or third party correction costs only if it
was given the opportunity to make the correction itself and failed to do so
within a reasonable time.
6-31
CONTRACT REMEDIES
EXPRESS WARRANTIES
1. Verify that a contract’s

warranty applies.
Does it apply? No
Pursue other remedies.
Yes
2. Select the appropriate
remedy.
3. Notify the contractor that

the Government is invoking
its rights under the warranty.
Will the
Yes
contractor honor Document the file.
the warranty?
No
4. Correct or replace non-

conforming deliverables
from another source and
charge the contractor.
6-32
CHAPTER 6
EXPRESS WARRANTIES
6.5 Express Warran- An express warranty is a written promise or affirmation given by a con-
ties tractor to the Government regarding the nature, usefulness, or condition of
the supplies or performance of services furnished under a contract.
FAR 46.701
In typical procurements for supplies and services, the Government speci-
fies its requirements and validates that they have been met through the in-
spection and acceptance process. Written warranties limit the
Gov-ernment’s risk when relying on the contractor’s own inspection me-
thods or systems to ensure the quality of performance requirements.
Criteria for Use of The use of warranties is not mandatory. The use of a warranty is manda-
Warranties tory in the acquisition of weapon systems. A useful reference for the de-
velopment, negotiation and administration of weapon systems warranties
FAR 46.703 is the Warranty Guidebook prepared by the Defense Systems Management
College, Ft. Belvoir, Virginia. In determining whether a warranty is ap-
DFARS 246.703 and propriate for an acquisition, the contracting officer must consider the fol-
246.770-2 lowing:
The nature and use of the supplies or services (i.e., complexity and
function, end use, difficulty in detecting defects before ac-
cept-ance);
The cost (i.e., contractor’s cost created by the warranty and Gov-
ernment administration and enforcement of the warranty);
The requirements for administration and enforcement (i.e., the

ade-quacy of an administrative system for reporting defects);
The existence of a trade-practice warranty (i.e., the acquired item

may be customarily warranted and cost to the Government may be
the same whether or not a warranty is included); and
The reduction of the Government’s quality requirements (i.e., to

the extent that the contractor’s liability may be partially or com-
pletely offset and its warranty provides adequate assurance of a sa-
tisfactory product).
6-33
CONTRACT REMEDIES
Limitations on Warran- Contracting officers must not include warranties in cost-reimbursement

ties types of contracts unless authorized by agency regulations. Three pre-
scribed exceptions to this rule call for the use of warranties under:
FAR 46.705
FAR 52.246-3 (Inspection of Supplies—Cost-Reimbursement),
DFARS 246.705
FAR 52.246-8 (Inspection of Research and Develop-
ment—Cost-Reimbursement, and
DFARS 252.246-7001 (Warranty of Data), is an exception to the

prohibition of the use of warranties in cost-reimbursement con-
tracts.
Warranty clauses do not limit the Government’s rights under an inspection

clause relative to latent defects, fraud, or gross mistakes that amount to
fraud.
Warranty clauses, except for those in construction contracts, must provide

that the warranty applies notwithstanding inspection, acceptance, or other
clauses or terms of a contract.
Warranties of Commer- Contracting officers are exorted to take advantage of commercial warran-
cial Items ties, including extended warranties, where appropriate and in the Gov-
ernment’s best interests, as offered by a contractor for the repair and
FAR 46.709 re-placement of commercial items.
Conducting market research may surface customary commercial warranty

practices that are appropriate for the acquisition of many supplies or ser-
vices. Such practices should be considered for incorporation into solici-
tations and contracts if a contracting officer determines them appropriate
for business arrangements satisfactory to both parties and not otherwise
precluded by law or executive order.
FAR 12.302(d) When used in a contract for commercial items, express warranties are in-
cluded by an addendum.
Express Warranties for To the maximum extent practicable, solicitations for commercial items
Commercial Items must require offerors to offer the Government as least the same warranty
terms, including offers of extended warranties, that are offered to the gen-
FAR 12.404(b) eral public in customary commercial practice. Solicitations may specify
minimum warranty terms, such as minimum duration, appropriate for the
Government’s intended use of an item.
Any express warranty must meet the Government’s needs, and a contract-
ing officer should analyze any commercial warranty to determine if:
6-34
CHAPTER 6
The warranty is adequate to protect the Government’s needs, both

in terms of the items covered and the length of the warranty;
The warranty’s terms allow the Government to exercise effective

postaward administration of the warranty to include:
Ê The identification of warranted items,

Ê Procedures for the return of warranted items to the contractor
for repair or replacement,
Ê The collection of performance information; and
The warranty is cost-effective.
Examine Express War- In some markets, it may be customary commercial practice for contractors
ranties to exclude or limit the implied warranties contained in the provisions of an
express warranty. In such cases, a contracting officer must ensure that
FAR 12.404(b)(2) the express warranty provides for the repair or replacement of defective
items discovered within a reasonable time after acceptance.
Post-Acceptance Acceptance by the Government imposes a major limitation on its rights.

Rights Through War- Standard inspection and acceptance clauses make acceptance by the Gov-
ranties ernment final and conclusive (unless otherwise stated in a contract). The
contractor is not liable for patent defects after acceptance by the Govern-
ment unless a warranty clause was made a part of the contract. A patent
defect is a defect that was either known by the Government or could have
been made known through reasonable inspections or tests prior to accep-
tance.
Warranties, expressed in a written specification provision or other written

form, are a necessity whenever there is concern that inspection and testing
may not be diligently carried out by the Government before acceptance.
Warranties preserve the Government’s rights after acceptance.
Express warranties are the contractor’s way of assuring the Government

that supplies or services:
Are free from defects in workmanship, and
Will conform to a contract’s requirements.
Specification Provi- Specification provisions that focus on the quality of the requirement can
sions be a warranty provision. An example of a provision routinely found in a
specification is:
“The contractor’s design shall ensure safe, efficient, and economi-

cal operation under normal operating conditions.” This provision
6-35
CONTRACT REMEDIES
is an attempt to protect the Government from defects discovered

after acceptance. Unlike specific warranty clauses or provisions,
this specification provision would not survive acceptance. The
Government would have to test this provision prior to acceptance
to determine if an item conformed to it.
Warranty Inclusions Express warranties (including specification provisions) must:
State the duration of the warranty, and
Specify a period during which notice of any defect must be given

to the contractor.
Assume that the specification provision example, provided above, were to

read:
“The product shall be capable of reproducing copies for 30 calen-

dar days without experiencing failure to any nonconsumable part.
(5,000 copies per day represent the estimated normal daily usage.)”
If this were the case, the provision would be considered an express war-
ranty. The Government’s rights would be protected after acceptance for
the 30-day period. In this case, the 30 days represent both the duration of
the express warranty and the period of time for notification.
Written Guarantees A contractor can make written guarantees to the Government through:
Accepting a warranty clause in a contract, or
Incorporating its commercial warranty in a contract.
Remember: Oral guarantees of a contractor are not considered warran-

ties.
Warranties included in a contract define the rights and obligations of the

contractor and the Government concerning defective items and services
after acceptance. Warranty clauses extend the Government’s right to
correction of defects or replacement of a deliverable until after accep-
tance.
Clauses requiring written warranties from a contractor are shown in Exhi-

bit 6-7.
6-36
CHAPTER 6
FAR Clause Title Purpose

52.246-17 Warranty of Supplies of a • Fixed-price supply
Noncomplex Nature - Alt I (Reserved)
- Alt II (Transportation costs to
correct)
- Alt III (Contractor only source)
- Alt IV (Fixed-price incentive
contract)
- Alt V (Disassembly required for
inspection or replacement)
52.246-18 Warranty of Supplies of a • Fixed-price supply or R&D
Complex Nature - Alt I (Reserved)
- Alt II (Transportation costs to
correct)
- Alt III (Fixed-price incentive
contract)
- Alt IV (Disassembly required
for
52.246-19 Warranty of Systems and • Fixed-price supply, service, or
Equipment under Perfor- R&D when performance specifica-
mance Specifications or De- tions or design are of major impor-
sign Criteria tance
- Alt I (Transportation costs to
correct)
- Alt II (Fixed-price incentive
contract)
- Alt III (Disassembly required for
52.246-20 Warranty of Services • Fixed-price service when
52.249-19 is not used
52.246-21 Warranty of Construction • Fixed-price construction
- Alt I (Brand name and model
equipment specified in con-
tract)
DFARS Warranty of Data When extended liability is desired:
252.246-7001 • Under contracts containing the
clause at DFARS 252.227-7013,
Rights in Technical Data and
Computer Software;
• In fixed price incentive contracts;
• In firm fixed price contracts.
DFARS Warranty of Construction When fixed price construction con-
252.246-7002 (Germany) tracts are to be performed in Germa-
ny.
Exhibit 6-7
6-37
CONTRACT REMEDIES
Types of Warranties Government warranty clauses provide for various types of warranties in
supply and service contracts, which generally fall into four basic catego-
ries:
Failure-free or hardware warranty. The contractor accepts the

responsibility to correct any failure or defect that occurs during a
specified or measured amount of use or operation. Refer to FAR
52.246-17, Warranty of Supplies of a Noncomplex Nature, for an
example of this type of warranty.
Correction of deficiencies warranty. The contractor agrees to

correct any deficiency in design, material, or workmanship that
becomes apparent during a test or early operation and that results
in the specific item’s performing below the required standard.
This type of warranty in a major systems contract usually also ap-
plies to spare parts and other supplies included in the contract.
Refer to FAR 52.246-19, Warranty of Systems and Equipment un-
der Performance Specifications or Design Criteria, for an example
of this type of warranty.
Supply warranty. The contractor is obligated to replace or re-

perform work on contract items if defects in material or workman-
ship existed at the time of acceptance. This is very similar to a
consumer warranty for commercial products. Refer to FAR
52.246-18, Warranty of Supplies of a Complex Nature, for an ex-
ample of this type of warranty.
Service warranty. The contractor agrees to reperform defective

services if defects in workmanship existed at the time of ac-
cept-ance. This is similar to a repair warranty in a retail estab-
lishment. Refer to FAR 52.246-20, Warranty of Services, for an
example of this type of warranty.
Data warranty. The contractor agrees either to correct or replace

data which does not at the time of delivery conform with the speci-
fication and all other requirements of the contract. If correction or
replacement is no longer required by the Government, the Gov-
ernment may elect a price or fee adjustment. This warranty lasts
for a period of three (3) years after delivery of the data.
If a contractor’s standard warranty applies, obtain a copy for a contract’s

file and provide one to the user.
6-38
CHAPTER 6
Enforcement of War- Since users are usually the first to identify defects under a warranty, it is
ranties essential that they be provided information, such as:
A summary of warranties that applies to a specific product or

serv-ice,
Specific components to which a warranty applies, if all compo-

nents are not included,
Who has Government responsibility to report warranty incidents

and the authority to implement a warranty’s clauses,
Duration of the warranty,
The contact person in the Government procurement office and the

contractor’s contract person, if the latter is allowed,
Documentation and other warranty requirements, and
Packaging and transportation requirements.
Application of Warran- Verify that a warranty clause applies to a specific failure. The basic con-
ties siderations for determining applicability are:
Confirm that the Government has officially accepted the items or

services.
Examine the written terms and conditions of the warranty. This

examination should reveal:
Ê Duration of the warranty, and
Ê Coverage for specific defects.
Determine if any Government obligations under the warranty were

met or ensure that they will be met.
Confirm that the facts support invoking the warranty.

Select Appropriate Re-
medy It is important to determine the contractor’s responsibilities and the Gov-
ernment’s rights under the terms and conditions of a warranty. The con-
FAR 46.706(b)(2) tractor must mark warranty items in accordance with Military Standards
129 and 130. This is necessary in order for the Government to administer
DFARS 246.706(b)(5) and seek enforcement of the warranties it has acquired under its contracts.
Warranties may provide alternate remedies such as:
Repair the defect,
6-39
CONTRACT REMEDIES
Replace the item,
Reperform the service,
Make an equitable adjustment, or
Pay for repairs, replacements, or reperformance the Government

has obtained from other sources.
Unless a specific clause states otherwise, the Government has the right to
choose the remedy that is in its best interest.
Obligation of Contrac- The contractor’s obligation to repair, replace, or agree to a price or cost
tor ad-justment includes the labor and material necessary to:
Reinspect items the Government reasonably expected to be defec-

tive,
Repair or replace the defective items, and
Inspect, package, pack and mark the repaired or replaced items.
Notify Contractor Contact the contractor about a warranty problem. Resolve the issue by:
Obtaining the contractor’s position and reasons for taking that po-
sition,
Reaching agreement on how and when the warranty will be ap-

plied, and
Documenting the results.
There will be less room for argument if you notify the contractor before
the warranty period expires. Warranties may be administered by other
organizations besides the contracting office. A supply organization or the
user with this responsibility may issue the notification to the contractor.
Make other Government organizations aware of the need for quick inter-
nal Government coordination to ensure that the Government’s rights are
not forfeited or lost.
Correct or Replace You may arrange for repair or replacement by the Government, or another
Nonconforming Items source, at the expense of the contractor, but take this action only as a last
or Services resort when other actions have failed.
6-40
CHAPTER 6
6-41
CONTRACT REMEDIES
IMPLIED WARRANTIES
1. Verify that an implied

warranty exists.
Does it apply? No
Pursue other remedies.
Yes
2-3. Notify the contractor
that the Government
intends to invoke its rights
under the warranty.
6-42
CHAPTER 6
IMPLIED WARRANTIES
6.6 Implied Warran- An implied warranty is an unwritten warranty that exists through the op-
ties eration of commercial law. The legal concept is one of fairness. That is,
an item of supply or a service should live up to the claim of the manufac-
turer or provider. If it does not, the buyer is generally entitled to a legal
remedy through the concept of an implied warranty.
As noted previously, the concept of a warranty is based on the seller’s as-

surance to the buyer that an item of supply or a service will meet certain
standards. Since a warranty imposes a duty on the seller, a breach of
warranty is a breach of the seller’s promise.
Uniform Commercial For commercial buyer-seller arrangements, the Uniform Commercial Code
Code (UCC) (UCC) designates five types of warranties that can arise:
Warranty of title (UCC 2-312),
Express warranty (UCC 2-313),
Implied warranty of merchantability (UCC 2-314),
Implied warranty of fitness for a particular purpose (UCC 2-315),

and
Implied warranty arising from the course of dealing or trade usage

(UCC 2-314[3]).
Implied Warranties for In terms of implied warranties, the Government’s postaward rights for the
Commercial Items acquisition of commercial items are:
FAR 12.404(a) The implied warranty of merchantability, and
The implied warranty of fitness for a particular purpose.
Additionally, the Government’s rights extend to the remedies contained in

the inspection/acceptance paragraph under FAR 52.212-4(a).
Warranty of Merchan- This implied warranty provides that an item is reasonably fit for the ordi-
tability nary purposes for which it is used. The item must be of at least average,
fair, or medium-grade quality, and it must be comparable in quality to
FAR 12.404(a)(1)
6-43
CONTRACT REMEDIES
those that will pass without objection in the trade or market for items of
the same description.
Warranty for a Particu- This implied warranty provides that an item is fit for a particular purpose
lar Purpose for which the Government will use the item.
FAR 12.404(a)(2) The Government can rely on this implied warranty when:
The seller knows the particular purpose for which the Government
intends to use an item, and
The Government relied on the contractor’s skill and judgment that

the item would be appropriate for the known particular purpose.
Before taking action in asserting any claim for a breach of an implied

warranty, a contracting officer should consult with appropriate legal
counsel.
Implied Warranty Cau- Remember: Warranties are invoked after acceptance. But there are limits
tions to doing so. For instance, the Government may not invoke an implied
warranty under the following:
FAR 52.246-2 The inspection and acceptance clause of a contract provides for fi-
nality of acceptance. For example, FAR 52.246-2, Inspection of
Supplies—Fixed Price, covers acceptance as follows:
“(k) Inspections and tests by the Government do not

relieve the contractor of responsibility for defects or
other failures to meet contractual requirements discov-
ered before acceptance. Acceptance shall be conclu-
sive, except for latent defects, fraud, gross mistakes
amounting to fraud, or as otherwise provided in the
contract.”
Under this condition, a contractor is relieved of any obligation of

an implied warranty once acceptance is made.
A warranty clause is included in a contract and it specifically ex-

cludes implied warranties. For example, FAR 52.246-17, Warranty
of Supplies of a Noncomplex Nature excludes implied warranties
as follows:
“(4) All implied warranties of merchantability and

‘fit-ness for a particular purpose’ are excluded from any
obligation contained in this contract.”
6-44
CHAPTER 6
Any defects are latent (i.e., a defect that was not known or would
not be known through reasonable inspection and testing at the time
of acceptance).
Notify Contractor Notify a contractor when the defect in an item is covered by an implied
warranty. The procedure for notification is essentially the same as the
one for notifying a contractor concerning express warranties. That is:
Obtain the contractor’s position and its reason for taking that posi-
tion.
Reach agreement on how and when the warranty will be applied.
Document the results and place it in the contract file.
Invoke Appropriate The Government has the same basic rights under implied warranties as
Remedy under express ones. You may, therefore, choose to:
Obtain a corrected deliverable from a contractor,
Have a contractor reperform a service,
Make an equitable adjustment, or
Have the deliverable corrected or the services reperformed by oth-

er means at the contractor’s expense.
WHICH IS IT ... WARRANTY, GUARANTEE, OR GUARANTY?
The whole business of contractors’ promises or affirmations regarding the nature,

use-fulness, or condition of their deliverables has become a murky miasma for many.
Re-alizing there was a need to have everyone sing from the same sheet of music in this
arena, Joanne scheduled a group meeting for her contracts people to square things
away.
The contracting officer made assignments among her staff, asking some to make brief
presentations at the meeting about various aspects of contractors’ promises and
af-firmations. Eric was not left without his. Joanne had asked him to take about 15
minutes in delineating the differences between various types of warranties. “Keep it
simple and try to use examples,” she had told him.
The group meeting had been scheduled for a Friday afternoon, to begin after lunch and
last for a couple of hours. “What a time for a meeting,” the contract administrator had
6-45
CONTRACT REMEDIES
said to himself. “Who’ll be listening at the end of a busy week?” And then he caught
himself when he remembered who had scheduled the meeting.
Came the Friday. Came the staff. And came the opportunity for Eric to give his pitch.
And he was prepared or so he thought. He began by addressing the regulatory
envi-ronment for warranties, crisply citing pieces of FAR Subpart 46.7 and in the process
moving smartly into the Government’s use of warranties for commercial items, both
express and implied. For the latter he used examples dealing with standard commercial
items and services, and reflected on how they mirrored customary commercial practices.
He capped his presentation by telling the group about the warranty of fitness for a
particular purpose that had been included in Platform’s ID/IQ arrangement. Indeed, it
had seemed to go well.
As Eric went to take his place in the audience, his boss spoke up. “Good job, Eric,” she
started, “but I thought you might have expanded somewhat on your coverage of
com-mercial warranties. I’m sure there are those among us who have no practical feel
for what’s becoming increasingly important to our business. That is the need to know
about warranties as they relate to customary commercial practices in the private sector.
And of equal importance, where can we go to find out what they are. Why don’t you
look into that for our next group meeting. And while you’re at it, inform us of the
distinction between (and here she spelled them out) a warranty, a guarantee, and a
guaranty.”
He nodded affirmatively, smiled, and sat down. While others presented, he cheated a bit
and made some notes to himself, mostly questions.
What sources exist to help me uncover information about commercial

warran-ties, and more specifically customary commercial practices for
warranties?
Check out the results of some recent market research that we’ve done. Isn’t
this supposed to give us a heads-up about warranties?
She’s bound to ask me about advantages and disadvantages among

commer-cial warranties. Where can I find out about that?
Seems to me that a warranty and a guarantee may be synonymous. Check

this out.
Guaranty? Sounds like some assurance for something. Like what?

Products? Debts? Security instruments? Check this out.
It was about three o’clock when the group meeting ended. Joanne adjourned the session
by thanking everyone and wishing them all a pleasant and restful weekend.
6-46
CHAPTER 6
6-47
CONTRACT REMEDIES
STEPS IN DETERMINING
LATENT DEFECTS, FRAUD, OR GROSS
MISTAKES
1. Verify that the failure has

been caused by a latent
defect.
A latent defect?
No
2. Determine if acceptance
resulted from fraud (or a
gross mistake amounting
to fraud).
Fraud or a No Pursue other remedies

gross mistake? (e.g., a warranty), if any.
Yes
3. Notify the contractor---

coordinating with the
Inspector General or
debarring official when
fraud is suspected.
Unilateral Actions.
1. Adjust price downward and

collect from the contractor.
4. If the contractor refuses 2. Correct or replace nonconform-
to make restitution, select ing deliverables at the
a course of action. contractor’s expense.
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CHAPTER 6
LATENT DEFECTS, FRAUD, OR GROSS

MISTAKES
6.7 Latent Defects, The Government’s acceptance of a contractor’s supplies or services is fi-
Fraud, or Gross Mis- nal unless:
takes
A defect or failure is latent,
There is evidence of fraud, or
There is evidence of a gross mistake amounting to fraud.
When defects are found after award and no warranties apply to their cor-
rection, your final task in proving or clearing contractor liability is to de-
termine that a latent defect, fraud, or a gross mistake was not involved.
Verify Failure Due to For a defect to be latent it must be:

Latent Defect
Not susceptible to discovery using inspection methods that are
reasonable under the circumstances, and
In existence at the time of acceptance.
A reasonable inspection is one that would normally be performed as a

custom of the trade.
Deciding what is “latent” is essentially deciding what is reasonable. Ex-

hibit 6-8 summarizes the necessary evidence.
Steps in Verifying a Latent Defect
♦ Identify the contractor’s liability for the defect.

♦ Determine if the Government has fulfilled its obligations for inspection and acceptance.
♦ Identify what test could have revealed the defect at the time of acceptance.
♦ Identify whether such tests would have been reasonable under the circumstances.
6-49
CONTRACT REMEDIES
Exhibit 6-8
Contractor Responsi- Under the standard inspection clauses, the contractor is responsible for
bil-ity for Latent De- latent defects discovered at any time after final acceptance. For instance:
fects A latent defect can be in the design of a product rather than in the manu-
facture of it. There is no expiration to liability for a latent defect, but the
FAR 52.246-2(k) extent of the liability is prorated over the useful life of the item.
FAR 52.246-12(i)
Determine Existence of The only difference between fraud and a gross mistake is intent. To pro-
Fraud (or Gross Mis- vide a gross mistake you need only prove that the mistake was truly irres-
take Amounting to ponsible. To prove fraud, you must show that a misrepresentation or
Fraud) con-cealment of fact was made with an intent to mislead.
When the Government cannot establish a contractor’s intent to mislead,

but all the other factors are present, then basing its case on a gross mistake
amounting to fraud is an alternative to pursue.
Prepare Finding of Document evidence of fraud in a finding of facts. A summary of all the
Facts
Necessary Elements of a Finding of Facts for Fraud
A finding of facts for fraud must show evidence of:
♦ A misrepresentation of fact (actual or implied), or a concealment of a material fact.
♦ Contractor knowledge of the fact concealed or misrepresented.
♦ An intent to mislead the Government into relying on a misrepresentation or concealment.
♦ Government injury suffered as a result of the misrepresentation or concealment.
necessary elements for a finding of facts is contained in Exhibit 6-9.
Exhibit 6-9
6-50
CHAPTER 6
Contractor Responsibil- The contractor can be forced to repair or replace supplies or reperform
ity to Correct services at its own cost any time after acceptance when fraud is proven.
The Government can avail itself of all other remedies as well, including
termination for default.
Report Evidence of Po- Provide evidence of potential fraud to your agency’s debarring official,
tential Fraud Inspector General, and other officials who have a need to know.
Most agencies have “hot lines” for reporting incidences of fraud to the
agency’s Inspector General.
DFARS 209.4 Your agency’s debarring official will probably be identified in your
a-gency’s supplement to FAR Subpart 9.4, but use normal supervisory
channels to report information for considering a suspension or debarment.
The designated debarring officials in DoD are set forth in DFARS
209.403.
Contact Contractor If you suspect fraud, notify the contractor only in coordination with your
agency’s Inspector General or debarring official. Otherwise, you are re-
sponsible for:
Obtaining the contractor’s position and its reasons for taking that
position,
Requesting a proposal to repair or replace the deliverable or reper-

form the service and/or make a downward adjustment in price or
cost,
Preparing the Government’s position, using principles of price or

cost analysis as you would on any other proposal, and
Negotiating a supplemental agreement with the contractor reflect-

ing a new delivery schedule and/or some other consideration. As
with any other negotiation, document the results and include it in
the contract file.
Take Unilateral Action You may take unilateral action if a contractor refuses to make restitution.
Unilateral action includes:
Determining a downward price or cost adjustment and collecting it

from the contractor, and
Correcting or replacing nonconforming deliverables from another
source and charging the contractor for the costs incurred by the
Government.
6-51
CONTRACT REMEDIES
6.8 Select Most Ap- Exhibit 6-10 provides a decision table for selecting a remedy for given
propriate Remedy situations. Notice the type of remedy selected is based on the delivery of
an item or service.
6.9 Withhold, Re- Withholding or reducing payment to the contractor is appropriate when
duce, or Demand sufficient funds remain for payment. The Government has the right to
Payment From Con- demand payment from the contractor when the contract has been paid in
tractor full.
As with any modification, attempt to secure a supplemental agreement.

You may reduce payment on a unilateral modification under the authority
of the Disputes clause in the contract when negotiations for a supplemen-
tal agreement fail.
6-52
CHAPTER 6
Decision Table for Selecting a Formal Contractual Remedy

Problem Options Comment
LATE DELIVERY 1. Postpone the delivery date in Appropriate when (1) no liqui-
Note: When the contracting exchange for consideration. dated damages clause was in-
officer has determined that the cluded in the original contract, (2)
deliverable has been or will be there is a reasonable probability
delivered late and that the delay of delivery by the new date, and
is other than excusable. (3) the requiring activity can live
with the new date.
2. Accept late delivery and in- But only if there is a reasonable

voke the liquidated damages probability of delivery by a date
clause. that the requiring activity can
tolerate.
3. Send a cure notice (10 days When there is little probability of

or more prior to the contract’s delivery by a date that the re-
delivery date) or a show quiring activity can tolerate
cause notice (immediately and/or the contractor has not
upon expiration of the delivery offered adequate consideration.
period).
THE DELIVERABLE HAS NOT 1. Accept the deliverable with- When the nonconformance is
BEEN ACCEPTED AND DOES out consideration. minor and obtaining considera-
NOT CONFORM TO tion is not in the Government’s
CONTRACT REQUIREMENTS interest.
Note: When the contracting
officer has determined that the 2. Accept the deliverable in When the requiring activity can
deliverable has not been exchange for consideration. tolerate nonconformance.
implicitly or explicitly accepted
and does not conform to contract 3. Accept the deliverable and When there is an express war-
requirements. invoke an express warranty to ranty and immediate acceptance
have the deliverable brought will benefit the requiring activity.
up to specification after ac-
ceptance.
4. Reject the deliverable and When there is a reasonable ex-

obtain correction or replace- pectation that a satisfactory re-
ment at no cost to the Gov- placement will be provided by the
ernment. delivery date in the contract, or,
for consideration, within a rea-
sonable time thereafter.
5. Reject the deliverable and When there is little expectation of

send a cure or show cause receiving an acceptable delivera-
notice. ble within a reasonable time.
6-51
CONTRACT REMEDIES
Decision Table for Selecting A Formal Contractual Remedy

Problem Options Comment
THE DELIVERABLE HAS BEEN 1. Invoke an express warranty. If an express warranty applies.
ACCEPTED BUT DOES NOT
CONFORM TO CONTRACT 2. Invoke an implied warranty. If an implied warranty applies.
REQUIREMENTS
3. Demand that the deliverable If there was a latent defect or
Note: When the contracting be replaced or corrected acceptance was based on fraud
officer has determined that the and/or that the price or cost or a gross mistake.
Government has a reasonably be adjusted downward.
strong case based on the terms
and conditions of the contract.
OTHER BREACHES 1. Invoke whatever remedy (if
Note: When the contracting any) is established by a
officer has exhausted all efforts clause (e.g., liquidated dam-
at informal resolution of the ages for failing to comply with
problem. the subcontracting plan).
2. Send a cure notice (10 days When the breach is of sufficient

or more prior to the contract’s magnitude to warrant a termina-
delivery date) or a show tion for default if not corrected.
cause notice (immediately
upon expiration of the delivery
period).
6-52
CHAPTER 7
CONTRACT PAYMENT
QUID PRO QUO … PAYMENT FOR PERFORMANCE
Joanne had always cautioned her contract specialists and administrators about the importance
of proper terms and conditions for payment under a Government contract. “Whether you’re
buying the simplest of supplies or the most complex of systems,” she would say, “you must give
attention to the basis for paying a contractor relative to the job to be done. Getting this into a
solicitation is important and covering it by an appropriate contract clause is critical.”
Eric had reflected on Joanne’s point in dealing with three situations before him. Two involved
invoices under firm-fixed-price contracts. And the third had to do with the withholding provi-
sion for fee under a cost-plus-fixed-fee arrangement. “For all that we do to try and make things
clear,” he said to himself, “we seem to end up confusing contractors, who should know better,
and taking it on the chin in the process.”
As he reviewed the invoices, the first one dealt with a performance-based payment arrangement
for the comprehensive operation and maintenance of an agency facility, everything from house-
keeping requirements to building upkeep and repair. The contract had included the clause at
FAR 52.232-32, Performance-Based Payments, and the contractor was complaining that the
agency had applied a liquidation rate to the contract’s line-item for exterior building care in
excess of what the contractor was owed. This complaint came on top of the contractor’s phone
call of a few days ago that the agency had violated its obligation to pay in accordance with the
prompt payment period specified for contract financing. The contractor asserted that it was due
interest on the invoice in question. “Okay,” Eric mumbled, “I’ve got to check this out.” He
made a short list of questions for himself.
♦ Get to and read FAR 52.232-32. What does it say about liquidation of perfor-
mance-based payments?
♦ Check out the performance criteria for exterior building care. What dollar amount did
we place on this line-item?
♦ Aren’t performance-based payments to be treated like progress payments? If so, does

the Prompt Payment Act apply? Also check out the contractor’s invoice to determine if it
was submitted properly.
The second invoice, one for partial payment on the delivery of the first of three lots of roofing
material, had a note appended to it from the requiring activity’s inspection representative. It
read as follows: “Roofing material in both quantity and quality is accepted as delivered. This
first lot, however, was delivered ten days late.” A few more questions for himself.
♦ Seems like we should get something for late delivery. If so, what might it be?
7-1
CONTRACT PAYMENT
♦ Wonder who’s at fault for this? Check out why the late delivery.
♦ If we suffered no damage or inconvenience, do we have any right to some sort of adjust-

ment? Get to counsel on this one.
The third situation dealt with a voucher submitted under a cost-plus-fixed-fee contract. The
voucher had cleared the technical people who had a few comments about questionable costs
concerning some travel the contractor’s staff had incurred in conducting three field visits over
the past month. These had to do with airport-to-location cab fares and return, plus the rental of
a four-wheel drive vehicle for use in visiting what the contractor described as remote agency
sites for required interviews with field personnel. He was certain these could be resolved. The
issue, as Eric saw it, was whether or not to recommend that a portion of the fee be withheld. He
checked his contract file and noted that, as of the last voucher, a bit more than 85 percent of the
fixed fee had been paid. Under the clause at FAR 52.216-8, Fixed Fee, the Government had the
right to withhold further payment beyond the 85 percent level if in its best interest. A final set of
questions for himself.
♦ What constitutes the Government’s best interest as a basis for withholding fee? (Better
get to Joanne on this one.)
♦ With approximately $75,000 of fixed fee yet to be vouchered, how much could be with-
held?
♦ The contractor’s expended almost 65 percent of the estimated cost and reportedly com-
pleted about 50 percent of the envisioned effort. Is this a factor to consider in any deter-
mination to withhold fee?
“And away we go!” he thought. Eric called his administrative assistant to bring him the three
contract files associated with the invoices and voucher he had examined. He was ready to get
on with it.
7-2
CHAPTER 7

Overall: Process contractor invoices and vouchers by determining whether they are accu-
rate and make a further disposition according to that determination.
Individual:
7.1 Inspect an invoice or voucher for completeness and notify a contractor of any de-
fects.
7.2 Identify terms and conditions of the contract that are pertinent to the amount to be
paid.
7.3 Obtain documents and determinations that are pertinent to the amount to be paid.
7.4 Determine the basis for and use of performance-based payments.
7.5 Identify withholdings and deductions or other corrections that are necessary.
7.6 Determine whether an assignee is protected from a deduction or withholding.
7.7 Determine the total amount due a contractor.
7.8 Contact a contractor to explain any differences between the amount of a submit-
ted invoice or voucher and the amount the Government proposes to pay.
7.9 Notify a contractor of a final decision on paying a lesser amount.
7.10 Forward the invoice or voucher to a payment office and set up a follow-up file.
7-3
CONTRACT PAYMENT
INTRODUCTION TO CONTRACT PAYMENT
The Language of “Bil- Every buyer—whether a private consumer, company, or governmental

lings” organization—expects promised contract performance and good work.
When this occurs, a contractor is entitled to compensation based on what-
ever financial arrangement was agreed to. Whatever the financial ar-
rangement, the contractor will present its “billings” to the buyer or buying
organization and expect to get paid.
In Government contracting, the general notion of billings is dealt with in

terms of specific terminology. That is, a billing under any fixed-price
type of contract is called an “invoice,” and a billing under any
cost-reim-bursement type of contract is called a “voucher.”
Invoices Fixed-price types of contracts are billed using invoices. What must be
presented on an invoice is set forth in a contract’s terms and conditions for
payment (i.e., what is to be included, where it is to be sent, and so forth).
There is no FAR-prescribed standard form for an invoice.
Vouchers Cost-reimbursement types of contracts are billed using vouchers. What

must be presented on a voucher is set forth in a governmentwide standard
form prescribed for use in a contract’s terms and conditions. This is
Standard Form (SF) l034 (Public Voucher for Purchases and Services
Other Than Personal) and SF 1035 (Public Voucher for Purchases and
Services Other Than Personal — Continuation Sheet).
Terms Sometimes Even though the distinction between invoices and vouchers is correct,
Confuse there are clauses in cost-reimbursement types of contracts that refer to
both (e.g., FAR 52.216-7, Allowable Cost and Payment Clause). Do not
be confused by this. The fundamental premise for payment under a
cost-reimbursement type of contract requires the submission of a SF
1034/35, whether one refers to it as an invoice or a voucher.
Types of Payments As there is nomenclature for types of contractor billings, so there is no-
menclature for different types of payments under Government contracts.
What type of payment may apply in a given situation depends on the type
of financing that the Government has agreed to.
Lump Sum or Partial Under a firm-fixed-price supply contract, the Government may have
Payments a-greed to the submission of one invoice for a total (lump sum) payment
after the acceptable delivery of all items, or it may have agreed to the
FAR 32.111 submission of periodic invoices based on the acceptable delivery of partial
quantities (partial payments).
7-4
CHAPTER 7
Progress Payments In some fixed-price types of contracts, the Government may have agreed
to provide progress payments to the contractor. A progress payment is a
FAR Subpart 32.5 form of contract financing made before work or deliverables are accepted.
Progress is defined within the context of an affected contract and such
DFARS 232.5 payments are recouped by the Government through the deduction of li-
quidations, determined by an expressed liquidation rate, from payments
DFARS 232.102(e)(2) that otherwise would be due the contractor for completed contract items.
Contractors request progress payments, usually based either on cost in-

curred or on a percentage of completion. Progress payments based upon
percentage or stage of completion are only authorized for use in construc-
tion, shipbuilding, and ship conversion, alteration or repair contracts.
When used, this form of contract financing payment is made without di-
rect reference to costs incurred. Other forms of progress payments are
normally tied to or based upon costs incurred. They do not submit an in-
voice for them. The governmentwide standard form for requesting
progress payments is SF 1443 (Contractor’s Request for Progress Pay-
ment). The Department of Defense has authorized three basic forms of
progress payments based on costs.
Customary uniform progress payments [DFARS 232.501-1(a)(i)]

which establish set rates for large, small and small disadvantaged
businesses (see DFARS 252.232-7004).
Customary flexible progress payments [DFARS 232.501-1(a)(iii)]

which base the rate on a formula that is keyed to the level of con-
tractor investment in working capital to sustain contract perfor-
mance (see DFARS 252.232-7003). This form of progress
payment has not been permitted for use on contracts arising
from solicitations issued on or after November 11, 1993.
Unusual progress payments [DFARS 232.501-2(a)] which must be

reviewed and approved by the Director of Defense Procurement.
Cost Incurred Pay- Under cost-reimbursement types of contracts, the Government does not
ments pay at the conclusion of the work, partially during it, or progressively
along the way. Rather, it pays a contractor periodically based on the con-
FAR Subpart 16.3 tractor’s incurred costs, so long as those costs are determined to be allow-
able (which includes both allocable and reasonable).
7-5
CONTRACT PAYMENT
Advance Payments Advance payments may be provided on any type of contract, but aside
from the use of “commercial advance payments” they must be issued spa-
FAR 32.402(b)
ringly. Except for their possible use in limited situations, they are consi-
FAR 32.202-2 dered the least preferred method of contract financing.
DFARS 232.470 Advance payments may be involved in two special situations also:
Advance payments can be made under an Advance Payment Pool

Agreement (see DFARS 252.232-7000) by which such payments
are made in a consolidated manner involving more than one con-
tract.
Advance payments may be made by a prime contractor to a small

disadvantaged business subcontractor under a Mentor-Protégé
Program (see DFARS 252.232-7005). When made by the prime
contractor to the protégé firm, such payments become eligible for
reimbursement to the mentor firm.
Implications for The general rule is that all contractor billings should be handled expedi-
Prompt Payment tiously and paid promptly. But there are also statutory requirements as-
sociated with the prompt payment of contractor billings. In the case of
FAR Subpart 32.9 in-voices submitted under fixed-price types of contracts, the Prompt Pay-
ment Act (31 U.S.C. 3901, as amended) applies.
DFARS 232.9
It is DoD policy to assist small disadvantaged businesses as much as
possible in contract financing matters by paying their invoices as quickly
as possible after receipt, irrespective of the payment timing guidelines in
the Prompt Payment Act or other agency policy.
FAR 52.216-7 The Prompt Payment Act, however, does not apply to vouchers submitted
under cost-reimbursement types of contracts, except to the final voucher
submitted under the Allowable Cost and Payment clause. The reason for
DFARS 252.232-7005
this: A contractor’s voucher requires an interim or provisional payment
subject to a final audit and resolution under the Allowable Cost and Pay-
ment clause.
Vouchers, as differentiated from invoices, do not represent billings for

work completed (either partially or completely). They represent billings
for costs that have been incurred in the performance of work.
Steps in Performance The steps for determining the appropriateness of an invoice or voucher,
in-cluding the amount to be paid, are charted on the next page. Following
this flowchart, each step is discussed in detail.
7-6
CHAPTER 7
Several of the contract clauses discussed in this chapter require an equita-

ble adjustment in a contract’s price, cost, and/or schedule. Actions asso-
ciated with executing such equitable adjustments are included with the
corrective steps outlined in Chapter 6.
7-7
CONTRACT PAYMENT
STEPS IN PROCESSING
CONTRACT PAYMENT
1. Inspect an invoice or 7. Notify the contractor of

voucher for completeness any differences between the
and provide notice of any amount invoiced or
defects. vouchered and the payment.
8. Notify the contractor of a

final decision on paying a
Notify contractor lesser amount.
Complete?
of defects.
No
9. Forward the invoice or

voucher and set up a follow-
Yes up file.
2-3. Identify contractual

terms and conditions related
to the invoice or voucher and
other relevant documents
and data.
4. Identify any withholding

or deduction.
5. Determine whether an
assignee is protected from
any withholding or deduction.
6. Compute the total amount

due the contractor.
7-8
CHAPTER 7
CONTRACT PAYMENT
7.1 Inspect Invoice A contract may require the contractor to send its invoices or vouchers to:
or Voucher and Notify
Contractor of Any The contract administrator,
Defects
The administrative contracting officer (ACO),
The contracting officer’s representative (COR),
The contracting officer’s technical representative (COTR), or
The payment office directly.
Receipt of Invoice and Under both fixed-price and cost-reimbursement types of contracts, a con-
Importance of Prompt tract will specify an office of payment. In the case of fixed-price types of
Payment Act contracts, the Prompt Payment Act infers that the person who first rece-
ives an invoice in an agency’s name “receives” it for the purpose of pay-
FAR 32.905 ment. Agencies must pay the contractor after the receipt of a properly
completed invoice within strict time limits or the Government will owe
interest for any late payment.
A contractor may inadvertently send its invoice directly to the contract

administrator, whether or not this person is designated as the office of
payment. If so, the contract administrator should date stamp the invoice,
and this date will be used as the date of receipt by the Government.
Check Invoice for An invoice for a fixed-price type of contract must contain eight basic ele-
Completeness ments in order to be considered complete or proper for payment purposes.
These are:
FAR 32.905(e)
Name and address of the contractor;
Invoice date;
Contract number or other authorization for the items or services

performed (including order number and contract line-item num-
ber);
Description, quantity, unit of measure, unit price, and extended

price of supplies delivered or services performed;
Shipping and payment terms, if any (involved Government bills of

lading require that their numbers and the weight of shipment be
shown);
7-9
CONTRACT PAYMENT
Name and address of contractor’s official to whom payment is to

be sent (must be the same name and address as shown in the con-
tract or on a proper notice of assignment);
When applicable, name, title, phone number, and mailing address

of the person to be notified in event of a defective invoice; and
Any other information or documentation required by the contract

such as:
Ê Taxpayer or Employer Identification Number; and
Ê Evidence of shipment or completion.
Notify Contractor of Notify the contractor of any defects found in an invoice. There are two
Any Defects basic rules for this notice:
It must be made within seven calendar days after the agency rece-
ives the invoice.
It must specifically state the defect(s).
Annotate When Defects Keep a record of the number of days a contractor caused a delay by sub-
Are Corrected mitting an incomplete invoice. If you are sent a new invoice showing the
date of the original invoice, annotate a statement, as follows, before send-
ing it to the payment office:
“After receipt of invoice, the contracting office waited _____ days

for the contractor to supply necessary information for invoicing.
Therefore, the invoice was not proper until __________ and any
interest payment that may be due the contractor shall be based on
this later date.”
Review Voucher for A voucher for a cost-reimbursement type of contract must conform to the
Compliance requirements of a SF 1034. It may be possible to tailor some aspects of
the SF 1034 that would represent an Advance Agreement between the par-
ties. Then again, it may be that the parties have agreed to the representa-
tion of certain costs in a certain way reflecting a negotiated contract
man-agement procedure.
Remember: Even though the Prompt Payment Act does not apply to
cost-reimbursement types of contracts, except to their final vouchers, it is
important to deal with a contractor’s vouchers as expeditiously as possi-
ble. Where they may occur, differences over incurred costs should be
resolved with the contractor.
7-10
CHAPTER 7
7.2 Identify Terms Terms and conditions that might generally have an effect on the payment
and Conditions Perti- amount for an invoice include:
nent to Payment
Contract price,
Type of fixed-price contract,
Method of payment,
Discounts,
Liquidated damages, and
Service Contract Act.
Constructive Versus Implied or constructive acceptance may also have a bearing on the com-
Actual Acceptance putation of interest owed a contractor. For the sole purpose of determin-
ing an interest penalty, Government acceptance is based on:
FAR 32.905(a)(1)(ii)
A constructive acceptance period.
Ê Government acceptance is considered to have constructively

occurred on the seventh day after delivery or performance, al-
though the contract may state a longer period.
Actual acceptance. The actual acceptance (not the constructive

acceptance) period used for computing interest when:
Ê Less than the constructive acceptance period was needed for

acceptance, or
Ê Acceptance was beyond the constructive acceptance period due

to a properly documented disagreement over quantity, quality,
or contractor compliance.
7.3 Obtain Docu- Supporting information and data for invoices and vouchers are essential to
ments and Determina- reinforce a contractor’s billings for work that has been completed, for
tions Pertinent to work in process, or for costs incurred for a specified period of time.
Payment While the extent of such information and data may vary considerably un-
der different types of contractual arrangements, the principle of reasonable
doc-umentation for expended public dollars rests behind every Govern-
ment contract.
7-11
CONTRACT PAYMENT
Invoice Supporting information and data for invoice payments might include the
following:
Inspection or receiving reports,
Commercial or Government shipping documents,
Determinations on billing rates,
Reports on contractor indebtedness,
Determinations for reductions in progress payments, and
Determinations for the adjustment of liquidation rates for progress

payments.
Voucher A contractor’s submitted SF 1034/35 must include corroborating informa-

tion or data concerning all incurred costs. These may be provided as
vendor or supplier billings, contractor internal cost sheets or displays, re-
fer-enced cost expenditure files wherein information or data are stored,
and so forth.
Vouchered Costs and All vouchered costs, even though their interim payment is provisional,
Cost Principles and must ultimately stand the test of allowability (including allocability and
Other Rules reasonableness). That is, such costs are subject to a determination of al-
lowability by audit under the cost principles found in FAR Part 31, under
applicable Cost Accounting Standards, or, as in some cases, may be
agreed to by the contractor and the Government and recorded in Advanced
Agreements or some form of contract management procedures.
Application of Cost For any cost-reimbursement type of contract, its total cost is the sum of
Principles and Practices allowable direct and indirect costs allocable to the contract, incurred or to
be incurred, less any allocable credits, plus any allocable cost of money
FAR 31.201-1 (i.e., facilities capital cost of money, as under FAR 31.205-10).
Ascertaining Costs In ascertaining what constitutes a cost under a cost-reimbursement ar-

rangement:
Any generally accepted method of determining or estimating costs

that is equitable and consistently applied (unless a required ac-
counting standard is invoked under Cost Accounting Standards
[CAS]) may be used, including cost properly adjusted for applica-
ble variances.
7-12
CHAPTER 7
Cost Allowability Factors for determining whether a cost is allowable include the following:
FAR 31.201-2 Reasonableness. (A cost is reasonable if, in its nature and

amount, it does not exceed that which would be incurred by a pru-
dent person in the conduct of competitive business [FAR
31.201-3].)
Allocability. (A cost is allocable if it is assignable or chargeable

to one or more cost objectives on the basis of relative benefits re-
ceived or other equitable relationship [FAR 31.201-4].)
Standards promulgated by the Cost Accounting Standards Board, if

applicable. (Otherwise generally accepted accounting principles
and practices appropriate to the particular circumstances).
Terms of the contract.
Any limitations set forth in FAR Subpart 31.1 (Applicability).
Indirect Costs and Their Under a cost-reimbursement arrangement, the closing out of indirect costs
Closeout (i.e., costs not directly identified with a single, final cost objective, but
identified with two or more final cost objectives or an intermediate cost
objective) can be a time-consuming process.
Aside from the normal audit of costs toward contract closeout, there is a
quick-closeout procedure for negotiating the settlement of indirect costs
for a specific contract, in advance of a determination of final indirect
costs, that a contracting officer must use.
Quick-Closeout Proce- The quick-closeout procedure for negotiating the settlement of indirect
dure costs must be used by a contracting officer if:
FAR 42.708 A contract is physically complete;
The amount of unsettled indirect costs to be allocated to a contract

is relatively insignificant. Insignificant indirect cost amounts oc-
cur when:
Ê The amount of unsettled indirect cost to be allocated to any one

contract does not exceed $1,000,000;
Ê Unless agency procedures provide otherwise, the cumulative

unsettled indirect costs to be allocated to one or more contracts
in a single fiscal year do not exceed 15 percent of the esti-
ma-ted total unsettled indirect costs allocable to
cost-reim-bursement types of contracts for that fiscal year; and
7-13
CONTRACT PAYMENT
Agreement can be reached on a reasonable estimate of allocable

dollars.
(A contracting officer may waive the 15 percent restriction based,

in part, on a risk assessment that considers a contractor’s account-
ing, estimating, and purchasing systems.)
Cautions for Quick-closeout procedures provided for by the Allowable Cost and Pay-
Quick-Closeout Proce- ment clause (FAR 52.216-7 or -13) are final for the contracts they cover.
dure No adjustments are to be made to other contracts for over- or un-
der-recoveries of costs allocated or allocable to contracts using the
quick-closeout procedure.
Indirect cost rates used in the quick closeout of a contract are not consi-
dered a binding precedent when establishing final indirect costs for other
contracts.
7.4 Perfor- Performance-based payments are contract financing payments that do not
mance-Based Pay- constitute payment for accepted items. These payments may be used for
ments non-commercial acquisitions, and they do not apply to payments under:
FAR Subpart 32.10 Cost-reimbursement types of contracts,
Contracts for architect-engineer services or construction, or for

ship conversion, alteration, or repair when progress payments are
provided for based on a percentage or stage of completion,
Contracts for research and development, or
Contracts awarded through sealed bidding or competitive negotia-

tion procedures.
Performance-Based Performance-based payments are fully recoverable, in the same manner as

Payments Policy progress payments, in the event of a default. Except when a contract pro-
vides for other methods of contract financing, performance-based pay-
FAR 32.1001 ments are permitted.
FAR 32.1002 For Government accounting purposes, performance-based payments

should be treated like progress payments based on cost, and they are not
subject to the interest penalty provisions of prompt payment.
Performance-based payments are the preferred financing method when a

contracting officer finds them practical and a contractor agrees to their
use.
7-14
CHAPTER 7
Unless otherwise prescribed by an agency’s regulations, perfor-

mance-based payments may be made either on a whole contract or on a
deliverable line-item basis.
Bases for Payment Performance-based payments may be made on any of the following bases:
Performance measured by objective, quantifiable methods,
Accomplishment of defined events, or
Other quantifiable measures of results.
Criteria for Use Performance-based payments are to be used only under the following con-
ditions:
Both the Government and a contractor are able to agree on perfor-

mance-based payment terms,
The contract is a definitized fixed-price type of contract, and
The contract does not provide for other methods of contract fi-
nancing (except that advance payments or guaranteed loans, if ap-
propriate, may be used).
Establish Perfor- A contracting officer must establish a complete, fully defined schedule of
mance-Based Finance events or performance criteria and payment amounts when negotiating a
Payment Amounts contract’s terms and conditions. In case of a contract modification, a
contracting officer must adjust the performance-based payment schedule
FAR 32.1004(b) to reflect any change or alteration resulting from the modification.
FAR 32.1005 When used, performance-based contract financing must insert the clause
at FAR 52.232-32, Performance-Based Payments, in the solicitation doc-
ument and contract with a description of the basis for the prescribed li-
quidation of payments.
In solicitations for undefinitized contracts, a contracting officer may in-

clude the same clause with a provision that the clause is not effective until
the contract has been definitized and a performance-based payment sche-
dule included in the contract.
Rationale for Perfor- The payment of contract financing has a cost to the Government in terms
mance-Based Financing of interest paid by the Treasury to borrow funds to make the payment.
With a contracting officer’s wide discretion as to the timing and amount of
performance-based payments, there must be assurance that the total con-
tract price is fair and reasonable, all factors considered (including the fi-
nancing costs to the Treasury).
7-15
CONTRACT PAYMENT
Payment Rules Performance-based payment amounts may be established on any rational

basis determined by a contracting officer or agency procedures. Such a
FAR 32.1004(b) basis may include, but is not limited to:
Engineering estimates of stages of completion,
Engineering estimates of hours or other measures of effort to be

expended in the performance of an event or the achievement of a
performance criterion, or
The estimated projected cost of performance of particular events.
Total performance-based payments cannot exceed:
90 percent of the contract price (if on a whole contract basis), or
90 percent of the delivery item price (if on a delivery item basis).
Liquidation of Perfor- Performance-based amounts must be liquidated by deducting a percentage

mance-Based Payments or a designated dollar amount from delivery payments, and the contracting
officer must specify the liquidation rate or designated dollar amount in the
FAR 32.1004(d) contract.
Whatever the method of liquidation, it must ensure complete liquidation

no later than final payment under a contract.
If payments are established on a whole contract basis, liquidation

must be by predesignated liquidation amounts or liquidation per-
centages.
If payments are on a delivery item basis, the liquidation amount for

each line-item must be the percent of that delivery item price that
was previously paid under performance-based finance payments or
the designated dollar amount.
Administration and The contracting officer responsible for the administration of a contract is
Payment responsible for the review and approval of performance-based payments,
including the following:
FAR 32.1007
Receiving, approving, and transmitting all performance-based
pay-ment requests to the appropriate payment office,
Specifying the amount to be paid, necessary contractual informa-

tion, and the appropriate account(s) to be charged for a payment
7-16
CHAPTER 7
Payment Cautions Entitlement to a performance-based payment is solely on the basis of the

successful performance of specified events or performance criteria. In
this regard:
A contracting officer is prohibited from approving a perfor-

mance-based payment for a specified event or performance crite-
rion or for a cumulative event until whatever has been prescribed
contractually has been successfully accomplished.
If there is a Government-caused delay, a contracting officer may

renegotiate the performance-based payment schedule to facilitate
the contractor’s billings for any successfully accomplished por-
tions of the delayed event or criterion.
FAR 52.232.32(e) A contracting officer may reduce or suspend performance-based

payments, liquidate such payments by deduction from any pay-
ment under the contract, or take a combination of these actions af-
ter finding any of the following conditions:
Ê The contractor failed to comply with any material requirement

of the contract,
Ê Performance is endangered by the contractor’s failure to make

progress or its unsatisfactory financial condition, or
Ê The contractor is delinquent in the payment of any subcontrac-

tor or supplier under the contract in the ordinary course of
bus-iness.
Request for Perfor- A contractor’s request for a performance-based payment must contain the
mance-Based Payment following:
FAR 52.232-32(l) Contractor’s name and address,
Date of request for payment,
Contract number and/or other identifier of the contract under

which the request is made,
Such information and documentation as is required by the con-

tract’s description of the basis for payment, and
Contractor’s certification that the request for payment is true and

correct, signed by an official authorized to bind the contractor.
7-17
CONTRACT PAYMENT
7.5 Identify With- A withholding implies that a subtracted amount may be paid at a later
holdings, Deductions, date. A deduction implies that an amount is permanently subtracted, un-
or Other Corrections less a contractor provides appropriate supporting evidence for the reins-
tatement of any deducted amount.
The special terms of a contract may specify the Government’s right to de-
ductions under certain circumstances. Likewise for the case of withhold-
ings. Unresolved late delivery may serve as the basis for a deduction in a
contract’s amount. Some service contracts specify deductions for defects
that do not meet an “acceptable quality level,” usually referring to the
number of defects in a sampled service area.
Common deductions include amounts for items shown on Exhibit 7-1.
7-18
CHAPTER 7
Common Deductions
FAR Reference Topic
52.232-8 Discounts for prompt payment.
46.407 Nonconforming supplies or services.
52.232-11 Extras.
52.232-1(b) Requested partial payments amounting to at least $1,000 or 50 percent of the
total contract price.
52.222-4 Violation of and liability for unpaid wages.
52.222-41
52.211-11 and 12 Liquidated damages.
52.233-1(c) Adjustments for amounts that are disputed.
52.233-1(c) Adjustments the contracting officer makes by issuing a final decision on a claim.
32.804 Setoffs for the collection of contractor debts, unless:
È An assignee has not made a loan or commitment for a setoff, or
È The amount due on the contract exceeds the amount of any loans made or in
process under a firm commitment for financing.
52.216-10(c) Payment on the basis of a lesser fee under cost-plus-incentive fee contracts;
that
is, when the contractor is not likely to achieve the target cost.
52.242-1 Unallowable costs.

52.232-10 Payment and withholding provisions under fixed-price architect-engineer
contracts.
52.216-7(g) Reduced or adjusted payments under audit rights.
Costs that are in excess of an estimated amount. Restrictions may be in
in reference to:
52-232-20 È A limitation of cost in a cost-reimbursement type of contract;
52.232-22 È A limitation of funds in a cost-reimbursement type of contract;
52.232-7 È Time-and-materials or labor-hour contract ceilings;
52.216-26 È The limitation of reimbursement and reimbursement rates in letter contracts;
52.216-12 È The cost-share limit on matching payments in cost contracts; or
35.003(c) È Recoupment under research and development contracts; that is, recovery by
the Government of Government-funded nonrecurring costs from contrac-
tors
that sell, lease, or license products.
Taxes the Government is exempt from paying when the tax is a state or local tax,
furnishing the contractor evidence of the tax exemption. These include:
52.229-3 È “After-imposed” federal taxes;
52.229-6 È “After-imposed” or “after-relieved” foreign taxes; and
52.229-8 and 9 È Any tax or duty of a foreign Government from which the U.S. is exempt by
specific agreement and that is vouchered under the terms of a
cost-reimburse-
ment type of contract.
42.1403 Improperly supported reimbursement for transportation charges.
7-19
CONTRACT PAYMENT
Exhibit 7-1
Royalties Another deduction covers royalties in excess of the amount the Govern-
ment owes. Royalty payments are improper under circumstances in
FAR 52.227-9 which royalty payments are excessive. Approving invoiced amounts un-
der fixed-price types of contract for a royalty is improper when:
The Government has a royalty-free license covering the royalty.
Amounts are billed at a rate in excess of the rate for which the
Government is licensed.
The royalties in whole or in part otherwise constitute an improper

charge.
The Government is entitled to a refund under FAR 52.227-9, Re-

fund of Royalties.
Identify Appropriate
Withholdings
Common Withholdings
FAR Reference Topic
52.232-16 Suspended or reduced progress payments.
52.216-11 Retaining 1 percent or $100,000, whichever is less, of total

estimated costs, when appropriate, in a cost contract (with no fee).
52.216-8 Retaining up to 15 percent or $100,000, whichever is less, of the

fixed fee in a cost-plus-fixed-fee contract.
52.232-7 Retaining up to 5 percent of amounts billed for time charges under

time-and-materials and labor-hour contracts, but not greater than a
total withholding of $50,000.
DFARS 252.232-7006 Reduction or suspension of contract payments based upon a find-

ing
of fraud by the head of the agency.
Exhibit 7-2 identifies several common withholdings.
7-20
CHAPTER 7
Exhibit 7-2
7.6 Determine If As- An assignee is a bank, trust company, or other financial institution that has
signee Is Protected been transferred the right to receive a Government contractor’s payment
From Deductions or due under a Government contract.
Withholdings
You may find a no-setoff commitment in a Government contract that pro-
FAR 32.804 tects the assignee from withholdings and deductions that might otherwise
be appropriate according to the contract’s terms and conditions.
Guidance on No-setoff Any contract of a department or agency of the executive branch of the
Commitments U.S. Government, except a contract under which full payment has been
made, may include a no-setoff commitment only when a determination of
FAR 32.803(d) need is made by the head of the department or agency in accordance with
the Presidential delegation of authority of October 3, 1995, and after such
a determination has been published in the Federal Register.
The following guidance for the Presidential delegation of authority has

been approved by the Office of Federal Procurement Policy (OFPP) for
the appropriate use of a no-setoff provision:
To facilitate the national defense,
To meet the exigencies of a national emergency or natural disaster,

or
When its use may facilitate the private financing of contract per-
formance.
In any case, a contracting officer must consider whether the inclusion of a

no-setoff provision is in the best interests of the U.S.
DFARS 232.803 The Director of Defense Procurement issued a determination on May 10,
1996 that DoD would not reduce or set off any money due or to become
due under a contract the proceeds of which had been validly assigned.
Assignee’s Protection When it applies, this protection from withholding and deduction extends
to:
FAR 32.804
Any contractor liability to the Government independent of the
con-tract you are administering;
7-21
CONTRACT PAYMENT
Any of the following contractor liabilities to the Government re-

sulting from the assigned contract you are administering:
Ê Renegotiation under any statute or contract clause,
Ê Fines,
Ê Penalties except for amounts being withheld or collected for

failure to comply with the terms of the contract,
Ê Taxes or social security contributions,
Ê Withholding or nonwithholding of taxes or social security con-

tributions.
However, even when there is a no-setoff commitment, you can still pursue
withholdings or deductions when:
The assignee has not made a loan under the assignment and has not
committed to do so, or
The amount due on the contract exceeds the amount of any loans
made or loan commitments.
In the latter case, you can withhold or deduct as long as the setoff does not
exceed an amount that it is in excess of loans or loan commitments. You
will have the amounts of any loan assignments in your contract file.
7.7 Determine With all appropriate withholdings and deductions identified, determining
Amount Due Contrac- the amount due is merely a mathematical calculation.
tor
7.8 Notify Contrac- As with other notifications you make to contractors, your main reason for
tor of Differences Be- giving notice of payment for a lesser amount is to get feedback. Present
tween Invoiced or all factual data that justifies the lesser amount and be willing to listen to
Vouchered Amounts any evidence for paying an increased amount or the full amount.
and Amounts to Be
Paid Another reason for prior notice is to defuse any unfavorable reactions.
Providing the supporting facts in a businesslike manner may diminish an
adverse emotional response.
7.9 Notify Contrac- If a contractor presents no evidence rebutting the initial decision, advise
tor of Final Decision the contractor of the Government’s final decision to:
on Paying Lesser
Amount Pay in full,
Pay after withholding or deducting an appropriate amount, or
7-22
CHAPTER 7
Reject the invoice or voucher, specifying the exact reasons for re-
jection and return it to the contractor for correction and resubmis-
sion.
In the case of an invoice under a fixed-price type of contract, make this

notification within seven days after receipt of a properly submitted invoice
and carefully document it to avoid any interest payment that might other-
wise be due the contractor under the provisions of the Prompt Payment
Act.
7.10 Forward Invoice Certify the proper invoice or voucher for payment and send it on to the
or Voucher payment office. Follow your agency’s procedures. One of the purposes
for certifying the invoice or voucher is to acknowledge that the supplies or
services were acceptable or the effort expended is reflected in incurred
costs. Paying offices cannot make a payment until they have received:
A proper invoice or voucher, and
Evidence that the supplies, services, or performance were accepta-

ble.
You may be required to provide a certification on an original or duplicate

invoice or voucher, or you may need to provide a separate receiving report
evidencing the approval of supplies or services.
Create a Follow-up File A reasonable follow-up date is 30 days after receipt of a proper invoice
under a fixed-price type of contract. However, individual contract terms
DFARS 232.905 may require quicker payment. They would rarely, if ever, authorize a
later payment. DoD paying offices are encouraged to make payments to
small disadvantaged businesses as soon as possible after receipt of a
voucher or invoice.
Examples of standard earlier payment requirements are:
FAR 8-709 Payments under contracts with a sheltered workshop for the Blind
or Other Severely Handicapped, for which a payment within 30
days is normal;
Payments under contracts with UNICOR, a program associated

with Federal Prison Industries, Inc., for which a 20-day payment is
standard. Carefully read payment terms for individual UNICOR
product schedules.
7-23
CHAPTER 8
CONTRACT CLOSEOUT
THE WHOLE IS GREATER THAN THE SUM OF ITS PARTS
Joanne had convened another of her Friday sessions for contracts people. This topic of this one
was contract closeout. As he expected, Eric was assigned 15 minutes to deliver a message on
the contract administrator’s role in preparing a contract administration office contract file as a
principal function of the contract closeout process. As he chatted with others about the upcom-
ing session, he wondered how difficult it all could be. “After all,” he muttered to himself, “by
the time one gets to closing out contracts, it doesn’t take much more than a storage box to depo-
sit all the paper. Tape it up, store it away, and that’s that.”
He was to leave the session far more educated than he suspected would be the case. For his
own time frame, he went to the well and ferreted out from FAR Subpart 4.8, Government Con-
tract Files, the requirements for a contract administration office contract file. He had never
really examined much of FAR Part 4, Administrative Matters, and he assumed others were in the
same boat. As one of his colleagues had mentioned earlier, “Closeout is really a clerical func-
tion. Lots of mechanical requirements. One of those things you get to when you’ve got the time,
which, or so it always seems, you never have.”
In preparing his 15-minute pitch, Eric noted there were 19 specified content requirements for a
contract administration office contract file. And these requirements were by no means the
lengthiest of those set forth for Government contract files. Looking at what a contracting office
contract file should generally consist of, he noted 43 specified content requirements. There
seemed to be no end to it. Curious, he looked beyond the content requirements for contracting
office and contract administration office contract files and found yet another set of four re-
quirements for a paying office contract file. Indeed, it was revealing.
Eric decided to titled his presentation “The Blind Contract Administrator and the Elephant.”
That seemed engaging enough, and the group was filled with smiling faces, including Joanne’s,
when he began. His initial burst went right to the content requirements for a contract adminis-
tration office contract file. He laid those out in crisp and definitive fashion in about 10 minutes.
But he saved the best for last, at least as he saw it.
Eric may not have had them on the edge of their seats, but his concluding remarks brought eve-
ryone to appreciate his presentation’s title. In sum, he made the following points:
♦ If you think that a contract administration office contract file is something that grows in-
dependent of other actions ... take off your blinders and look around.
♦ If you think that contract administration documentation is cut from its own cloth ... take off
your blinders and look around.
8-1
CONTRACT CLOSEOUT
♦ If you think that the content requirements for contract administration documentation derive
entirely from postaward management actions ... take off your blinders and look around.
♦ And if you think that your piece of the contractual elephant is a separate, sovereign state ....
take off your blinders and look around.
And then to the joy of Joanne, whose face would have cracked wide open had she smiled any
more brightly, he made his final point. “The problem with all of us ... in contract administra-
tion ... contract formation and placement ... or whatever ... is that we fail to recognize that we’re
all touching the same contractual elephant. Hey, read ... no study ... FAR Part 4 and let the sun
shine in!”
As he was about to sit down, four of Eric’s buddies held up individual 8 1/2 by 11 sheets of pa-
per. On each had been recorded the number 10. Not a bad Friday afternoon. Not bad at all!
8-2
CHAPTER 8

Overall: Develop the ability to carry out closeout procedures effectively and efficiently.
Individual:
8.1 Verify that a contract is physically complete.

8.2 Obtain all forms, reports, and clearances required for closeout.
8.3 Verify that the Government and a contractor have met other applicable terms and
conditions for closeout.
8.4 Settle any outstanding issues.
8.5 Verify that there are no outstanding claims or disputes.
8.6 Make final payment or collect overpayments from a contractor.
8.7 Identify and recommend the deobligation of excess funds.
8.8 Prepare a contract completion statement and dispose of contract files.
8.9 Determine whether to invoke the Government’s rights under the clause at FAR
52.237-3, Continuity of Services, for phase-in, phase-out services.
8-3
CONTRACT CLOSEOUT
INTRODUCTION TO CONTRACT CLOSEOUT
Contract Closeout Contract closeout refers to the procedure for verifying that all administra-
tive matters have been concluded on a contract that is otherwise physically
complete. That is, the contractor has delivered the required supplies or
performed the required services and the Government has inspected and
accepted them.
Policy on Contract The office administering a contract is responsible for initiating (automated
Closeout or manual) the administrative closeout of a contract after receiving evi-
dence of its physical completion.
FAR 4.804-2, -3, and -5
The cognizant contracting officer must ensure that all contractual actions
FAR 4.804-5(b) required have been completed and prepare a statement to that effect. This
statement is authority to close a contract file and must be made part of the
official contract file. In preparing for and performing contract closeout,
DFARS 204.804
the contract administration office will normally use DD For 1597, Con-
tract Closeout Checklist, DD Form 1593, Contract Administration Com-
pletion Record and DD Form 1594, Contract Completion Record. These
forms help to ensure that all required actions have been planned and ex-
ecuted and that all involved parties have been appropriately informed of
actions required and taken to complete the closeout process.
The cognizant paying office must close the contract file on its issuance of
the final payment instrument.
Time Standards for Except for a contract in litigation or under appeal, or in the case of an in-
Closeout complete termination action, the following are time standards for closing
out contract files:
FAR 4.804-1
Files for contracts using simplified acquisition procedures should
be considered closed when the contracting officer receives evi-
dence of completed performance and final payment, unless agency
regulations specify otherwise.
Files for firm-fixed-price contracts, other than those using simpli-

fied acquisition procedures, should be closed within six months
af-ter the date on which the contracting officer receives evidence
of physical completion.
Files for contracts requiring the settlement of indirect cost rates

should be closed within 36 months of the month in which the con-
tracting officer receives evidence of physical completion.
8-4
CHAPTER 8
Files for all other contracts should be closed within 20 months of

the month in which the contracting officer receives evidence of
physical completion.
Required Closeout Contracting officers are required to use the procedures set forth at FAR
Procedures 4.804-5 for closing out contract files with the following exceptions:
FAR 4.804-5 Closeout actions may be modified to reflect the extent of adminis-
tration that has been performed.
FAR 42.708
Quick-closeout procedure must be used, when appropriate, to re-
duce administrative costs and to enable the deobligation of excess
funds.
Steps in Performance The steps in closing out a contract are charted on the next page. Follow-
ing the flowchart, each step is discussed in detail.
8-5
CONTRACT CLOSEOUT
STEPS IN CONTRACT CLOSEOUT
1. Verify that the contract is

physically complete.
2. Obtain all forms, reports, and

clearances.
3. Verify that all other terms and

conditions have been met.
4. Settle any outstanding issues.
5. Verify that there are no

outstanding claims or disputes.
6-7. Make final payments and,

if appropriate, deobligate funds.
8. Prepare contract completion

statement; dispose of files.
9. Determine whether to invoke

phase-in, phase-out rights under
FAR 52.237-3.
8-6
CHAPTER 8
CONTRACT CLOSEOUT
8.1 Verify Contract A contract is considered to be physically complete when one of two events
is Physically Complete has occurred:
FAR 4.804-4 All required supplies or services have been delivered or performed,
inspected, accepted and all existing options have been exercised or
have expired, or
A notice of complete contract termination has been issued to the

contractor.
Facilities contracts and rental, use, and storage agreements are considered
physically complete when:
The Government has given the contractor a notice of complete

con-tract termination, or
The contract period has expired.
8.2 Obtain Forms, The purpose of closeout is to ensure that there is no further administrative
Reports, and Clear- action necessary on a contract. Part of this task is to make sure that all
ances Required at paperwork has been submitted. Forms, reports, and clearances that may
Closeout be outstanding after a contract is physically complete include:
FAR 4.804-5 Contractor’s final invoice or voucher,
Contractor’s closing statement or release of claims,
Final patent report,
Clearance for the final patent report,
Final royalty report,
Clearance for the final royalty report,
Plant clearance report,
Property clearance, and
Closeout audit report for cost-reimbursement types of contracts.
8-7
CONTRACT CLOSEOUT
Meet Agency Require- Your agency may also have forms to evaluate contractor performance.
ments Document the contractor performance file in whatever form or format
your agency requires.
FAR 4.801
8.3 Verify Other Administrative tasks incidental to contract performance may need to be
Terms and Conditions accomplished before a contract file can be closed out. Final payment
Have Been Met cannot be authorized until a contractor has accomplished all administra-
tive tasks, such as:
Return or other disposition of Government-furnished property,
Proper disposition of classified material,
Settlement of terminated subcontracts, and
Procedural requirements of termination proceedings.
8.4 Settle Any Out- There may be unsettled issues related to basic contract performance that
standing Issues have not been resolved. These kinds of unsettled issues include:
Unresolved value engineering change proposals,
Disallowed costs,
The final total price of a fixed-price incentive contract,
The award amount of an award-fee contract,
The final fee of a cost-plus-incentive-fee contract, and
Contractor settlement costs under terminated contracts.
8.5 Verify No Out- There may be some issues that a contractor may not have raised before
standing Claims or contract closeout action is undertaken. To avoid having to reopen a con-
Disputes tract file that has been closed, some agencies make it a standard practice to
request a release of claims from a contractor as a condition of final pay-
ment. An example of a format for obtaining a release of claims and other
required information is contained in Exhibit 8-1.
When a contractor provides a conditional release, document the file with

as much information as you can gather on the issue that the contractor ex-
cepts from the general language of the release. If the contractor does
pursue the issue, say, a year after closeout, the unrecorded memories of
your contract administration team may be of little value.
8-8
CHAPTER 8
Notification of Closeout Action Format
(Contractor name and address)
Dear _________________ :
Reference __________(agency) Contract No.
for (describe supplies or services) .
In order to expedite final payment and contract closeout, please forward the following items
to my attention by (date) :
(List only items that apply, renumbering paragraphs after deleting an item.)
1. Any outstanding reports or data items such as technical manuals or instruction ma-
nuals per (reference contract line-item number or paragraph citation) .
2. Government-furnished property.
3. Inventory schedules for Government property.
4. Contractor’s release of claims (form enclosed).
5. Final voucher (cost-reimbursement types of contracts only).
6. Other (cite specific requirement).
(Use the following paragraph only if it applies.)
Under the terms of the contract, a warranty (describe) is still in effect. Final payment and
contract closeout do not relieve you of your obligations to the Government under the
warranty clause.
(signed)
________________________________
Contracting Officer
Exhibit 8-1
8-9
CONTRACT CLOSEOUT
8.6 Make Final Pay- A contract may not give its contract administrator an active role in final
ment or Collect payment. The payment office may make payment based on the contrac-
Overpayment From tor’s invoice or voucher and its receipt of a receiving report from a re-
Contractor quiring activity.
On more complex requirements, a contract administrator may have a much

more active role.
Overpayments can result from a variety of reasons. For instance,
Assessing excess costs of reprocurement on a defaulted contract,
Assessing liquidated damages can result in an overpayment,
Adjustments after an audit on a cost-reimbursement type of con-

tract,
Unliquidated progress payments,
Retroactive price reductions, and
Advance payments.
8.7 Identify and Identify the amount of any funds remaining on a contract, and if there is
Recommend Deobli- no known potential for their future use on the contract, then recommend
gation of Excess Funds their deobligation. Since many agencies have taken cuts in some basic
programs, this step becomes increasingly important in order to maximize
the use of scarce funds.
8.8 Prepare Contract As noted earlier, the contracting officer in charge of contract administra-
Completion Statement tion is required to sign a contract completion statement that contains all of
and Dispose of Files the information required by Exhibit 8-2. It may be the contract adminis-
trator’s job to prepare this statement.
FAR 4.804-5(b)
8-10
CHAPTER 8
Content Requirements of a Contract Completion Statement
♦ Contracting administration office name and address (if different from the contracting of-
fice).
♦ Contracting office name and address.
♦ Contract number.
♦ Last modification number.
♦ Last call or order number.
♦ Contractor’s name and address.
♦ Dollar amount of excess funds, if any.
♦ Invoice or voucher number and date, if final payment has been made.
♦ Invoice or voucher number and date, if the final approved invoice or voucher has been
forwarded to a disbursing office of another agency or activity and status of the payment is
unknown.
♦ A statement that all required contract administration actions have been fully and satis-
factorily accomplished.
♦ Name and signature of the contracting officer.
♦ Date.
Exhibit 8-2
Placement of Contract Place the signed original of the contract completion statement in the con-
Completion Statement tracting office contract file. When preaward and contract administration
responsibilities are split between two offices, forward the original to the
FAR 4.804-5(c) contracting office for inclusion in its official contract file and place a copy
in the contract administration office file.
8-11
CONTRACT CLOSEOUT
Disposition of Files Individual agencies prescribe procedures for the handling, storage, and
disposal of contract files. Sometimes files are stored in a different build-
FAR 4.804-5(a) ing and occasionally in a different part of the city or even in another city.
In these cases, retrieving files to deal with and settle unresolved issues can
DFARS 204.805 be time-consuming, thus making your thoroughness of closeout review
particularly important. Completed contract files are to be held by the of-
fice responsible for the contract for a period of 12 months after comple-
tion. Any files relating to certified cost and pricing data must be retained
for 6 years following final payment. If the exact date of final payment
cannot be accurately determined, then such files must be retained for 9
years after contract completion. The contract administration activity may
keep a log of closed out files containing such information as:
The date the file was closed out,
The date the file was physically transferred to a storage center,
Where it was sent for storage, and
A filing location provided by the storage facility. (It is of vital

importance to record and safeguard the container number for
stored contracts. The storage facility may not retain such and may
not be able to locate your particular contract without this number.)
FAR 4.805(b) Some information in contract files must be kept for a specific number of
years. These record retention requirements are sometimes the result of a
statutory requirement and sometimes the result of administrative regula-
tions.
8.9 Determine When the Government anticipates difficulty in transitioning from an in-
Whether to Invoke cumbent contractor to a follow-on (successor) contractor for essential ser-
Rights Under Conti- vices, it includes the clause at FAR 52.237-3, Continuity of Services.
nuity of Services
Clause This clause specifies that the incumbent contractor agrees, on written no-
tice from the contracting officer and subject to the contracting officer’s
FAR 37.110(c) approval, to:
FAR 52.237-3 Furnish phase-in, phase-out services for up to 90 days after its
con-tract expires, and
Negotiate in good faith a plan with the follow-on contractor to de-

termine the nature and extent of required phase-in, phase-out ser-
vices, including a training program and a date for transferring
re-sponsibilities.
8-12
CHAPTER 8
The incumbent contractor must be reimbursed for all reasonable phase-in,

phase-out costs and a profit or fee not to exceed a pro rata portion of the
profit or fee under its current contract.
When continuity of services is required, the Government must notify the

incumbent contractor of its need for phase-in, phase-out services. Such a
notice must include all the elements shown in Exhibit 8-3. Once acti-
vated, the requirement for phase-in, phase-out services should be admi-
nistered like any other contract.
When Continuity of A requirement for continuity of services may not be appropriate if the fol-
Services May Not Be low-on contractor:
Required
Has provided the services under another contract, or
Is hiring a substantial number of employees of the incumbent con-

tractor for work on the successor contract.
Minimum Content Requirements for Phase-In, Phase-Out Notice
♦ Specify a time frame, by calendar date, during which the Government requires phase-in,
phase-out services.
♦ Specify a date for the contractor to submit a training program for Government review.
♦ Outline specific areas that the training program should cover.
♦ Specify a date when the responsibility for contract performance will be transferred from
the incumbent contractor to the follow-on (successor) contractor.
Exhibit 8-3
8-13
CHAPTER 9
DISPUTES, CLAIMS, AND TERMINATIONS
TO BE FOREWARNED IS TO BE FOREARMED
One of the contracts that Eric had inherited as a contract administrator had been assigned by
Joanne. It was an ongoing effort performed by Rotchfort, Inc., a well-known and highly re-
garded firm. The contract was for road paving and general sidewalk repair. It had been
awarded under FAR Part 12 (Acquisition of Commercial Items) using FAR Part 14 (Sealed Bid-
ding) as the method of contracting. The specification for the buy was straightforward, includ-
ing specific stretches of roadway requiring paving and designated walkways, including cited
intersections, that required repair. The procurement had been competitive and resulted in a
firm-fixed-price contract of $850,000.
Several contract modifications had been issued over the past year. Most were required to deal
with changed conditions associated with subsurface problems that neither the Government nor
Rotchfort anticipated at the outset of the work. Fortunately, all of these changes had been mu-
tually agreed to as required by FAR 52.212-4(c).
A bit late for work one morning, Eric arrived at his office and found his phone already hard at
work ringing persistently. Grabbing it quickly, he blurted out “Schmidt here. Can I help you?”
At the other end of the line was Pat Frazier, a road construction engineer and the COTR for
Rotchfort’s contract. “Eric, this is Pat Frazier. Got to talk to you about Rotchfort’s contract.
Gordon Rotchfort, the contractor’s project manager, left my office yesterday afternoon in a
huff.”
Having navigated himself into his chair after placing his briefcase on the floor, his lunch bag in
its usual desk drawer, and picking up the phone, Eric was quick to respond. “In a huff you say,
Pat. Why? What’s the problem?”
Frazier was equally quick to respond to Eric. “Rotchfort’s upset about our inspection of the
recent quarter-mile stretch of road and accompanying sidewalk repairs that were completed
about two weeks ago. He’s complaining that the applied inspection standards went way beyond
what the contract calls for. The bottom line is that the inspector found subsurface gravel levels
not deep enough and the consistency of sidewalk concrete susceptible to cracking at the first sign
of a deep frost.”
With pen and paper in hand, the contract administrator began to take some notes. “Tell me,
Pat, why would our inspector apply any different inspection standards now than have been ap-
plied over the past several months? That doesn’t seem to make much sense to me. Do you
think that Rotchfort’s complaint has any legitimate basis in fact?”
9-1
“Well, I’ve got to check it out, Eric. The inspector is a new guy but not unfamiliar with the con-
tract. I briefed him on the job over a month ago. Maybe he mistook, or overreacted to, what I
told him about the importance of staying on top of it. I don’t know.”
All kinds of things were going through Eric’s mind. “Do you think, Pat, that Rotchfort’s … an-
ger, I guess … is a ploy to get the inspector off his back, or something about which he might
pursue some form of relief?”
“What? What do you mean, Eric? I haven’t the foggiest notion about any ploys or forms of re-
lief. Hey, the guy was in my office wearing a wrinkled brow and evidencing a testy voice. He
just sounded mad. When he left, he added some final sentiments about Rotchford’s good per-
formance track record and that he didn’t want that compromised by an inspector who appeared
to be on a different wavelength. He left saying that unless things were rectified, he’d have to
turn the inspection problem over to his company lawyer. Given everything, I thought you
should be informed.”
“And right you are,” said Eric. “What I want you to do, Pat, is E-mail me a note … doesn’t have
to be long … about what occurred in your office yesterday with Gordon Rotchfort. Make it as
factual as you can, and relate the key points that you believe he made. Then get your inspector
on the phone, or better yet in your office, and ask him about Rotchfort’s complaint. Is there
something substantive to it, or may it be a matter of personalities? We don’t want something
like this to fester for any length of time.”
An audible sigh was heard from Frazier. “Okay, Eric, I’ll get after the E-mail and talk with the
inspector. But I don’t want us to get involved in some useless shouting contest with Rotchfort.
Been there, done that. Nobody ever wins those things, and it takes time for wounds to heal.”
“I hear you, Pat,” interrupted the contract administrator, “and I don’t want something like this
to blossom into a needless problem. But to be forewarned is to be forearmed, and we’ve got to
be prepared to deal with it.”
Having ended the conversation with “Have a nice day, Pat,” Eric turned on his computer and
clicked in the following:
Get Rotchfort contract file and check requirements for inspection and acceptance.
Check on receipt of E-mail from Frazier and call him to see what inspector related
about the Rotchfort job.
Check with former inspector. Any problems he had with inspection and acceptance?
If not, why the difference now?
When information gathered, see Joanne and be ready to: (1) give her the facts; (2)
discuss the chronology of events; and (3) lay out the risks, if any, for moving to re-
solve the situation.
9-2
CHAPTER 9
Best case … only a misunderstanding between the parties. Worst case … overzeal-
ous inspection resulting in a dispute with Rotchfort and a claim for damages if unne-
cessary rework is required.
Eric was careful to save his notes and paused to think about what else he might jot down.
“Seem like there’s always a wrinkle or two,” he thought to himself, “that one fails to consid-
er in these cases. Is there anything else I should get after?”
9-3

At the completion of this course, you will be able to:
Overall: Understand when a claim is valid and know the steps for processing claims.
Identify the actions required for terminating a contract for default or convenience.
Individual:
9.1 Given a dispute between the Government and a contractor:
♦ Identify the major provisions of the Contract Disputes Act of 1978.

♦ Recognize when a dispute becomes a claim.
♦ Identify the features of a contractor’s demand that establish the validity of a
claim.
♦ Know the prescribed procedures once a demand becomes a claim.
9.2 Use the termination remedy as a last resort.
9.2.1 Termination for default.
9.2.2 Termination for convenience.
9-4
CHAPTER 9
INTRODUCTION TO DISPUTES, CLAIMS

AND TERMINATIONS
Disputes A dispute is formed under a contract when a controversy develops as to

the interpretation of:
FAR 52.233-1
Payment,
Time, or
Money due to either party.
Claims A claim is a written demand or written assertion by one of the contracting

parties seeking, as a matter of right:
FAR 33.201
Payment of money in a sum certain,
Adjustment or interpretation of contract terms, or
Other relief arising under or relating to a contact.
Terminations Termination of contract, either in whole or in part, for either convenience

or default, is a right of the Government if a contracting officer deter-
FAR 49.101 mines that exercising this right is in the Government’s interest.
The Government’s termination of a contract requires a:
Written notice to the terminated contractor,
Determination as to the method of termination settlement, and
Final accounting of all matters affected by the termination.
Contracting Officer’s The contracting officer plays a major role prior to and during matters in-
Role volving disputes, claims, and terminations. For instance:
Being the “arbiter of first resort” concerning contract disputes,
Being responsible for final decisions that must be made under the
Disputes clause of a Government contract, and
Resolving dilemmas concerning possible termination actions.
9-5
Policy on Disputes, The Government’s policy is to try to resolve all contractual issues, to the
Claims, and Termina- maximum extent practicable, by mutual agreement at the contracting of-
tions ficer’s level. This includes, if permitted and appropriate, the use of al-
ternative disputes resolution procedures. Where not possible to do so,
remedies usually exist within the construct of a Government contract that
may be opted (or must be followed) in pursuit of protecting the public in-
terest.
Contract Disputes Act The Contract Disputes Act (CDA), as amended, establishes procedures
of 1978 and requirements for asserting and resolving claims by or against contrac-
tors arising under or relating to a contract subject to the Act. It requires
FAR 33.202
that its disputes procedures be used by all federal agencies. The major
provisions of the Act are illustrated in Exhibit 9-1.
Major Provisions of the Contract Disputes Act of 1978
♦ Civil penalties for contractor claims that are fraudulent or based on a misrepresentation of
fact.
♦ The requirement for contracting officers’ final decisions.
♦ Certification of contractor claims in excess of $100,000.
♦ The payment of interest regarding claims.
♦ Provides the contractor a choice to proceed to boards of contract appeals or directly to the
United States Court of Federal Claims.
♦ Introduced the language all claims “relating to a contract” as opposed to “arising under a
contract.”
♦ Gives the Government the right to appeal board decisions to the courts.
♦ Allows agencies to require the contractor to continue performance pending final appeal,
suit, or settlement.
♦ Provides that all claims must be in writing and submitted directly to a contracting officer.
Exhibit 9-1
9-6
CHAPTER 9
DISPUTES AND CLAIMS
9.1 Disputes and There are usually warning signs that signal a potential dispute. Exhibit
Claims 9-2 explores some of the signals that may indicate a potential dispute
which, in turn, may ultimately lead to a claim. Some are subtle, others
Warning Signs of a Potential Dispute
♦ A lack of specific information from a contractor during a preproposal conference as to

how the job will be completed.
♦ Failure of a contractor to begin work within approximately 10 percent of a contract’s to-
tal duration.
♦ Repeated failure of a contractor to meet dates on the critical path of a project’s schedule.
♦ Repeated safety violations or accidents, indicating poor management.
♦ Repeated incidents of poor quality or rework.
♦ Complaints from site workers to Government personnel about conditions.
♦ Refusal by a contractor to sign bilaterally negotiated contract modifications or agree-
ments containing the required “release” language.
♦ Letters received from a contractor that allude to field problems, but without specific de-
tails regarding those problems.
♦ Receiving a barrage of correspondence from a contractor requiring replies to very insig-
nificant matters, creating a nightmare of paperwork.
♦ Persistent complaints from a contractor concerning the behavior, motives, or require-
ments of the inspector or contract administrator that are found to be without foundation.
♦ Receipt of complaints from subcontractors concerning late payments or nonpayment.
are graphic.
Exhibit 9-2
9-7
Sources of Disputes and Many controversies stem from disagreements over an agreed-to bargain.
Outcomes For instance:
The complexity of projects in terms of interrelationships can be

troublesome.
Lengthy contract documents and numbers of drawings can create
misinterpretations.
Changing weather conditions can disturb delivery schedules and
create nonperformance ramifications.
Unforeseen conditions can create downstream problems.
Constructive changes can result from well-intended actions.
The resolution of disagreements that lead to disputes under contracts may

determine the:
Amount or quality of work to be performed,
Price to be paid, and
Identity of the party responsible for problems that occur.
Ascertaining Intent When interpreting contract clauses, there is no set of standard rules or
well-defined analytical framework to follow as far as courts and boards of
contract appeals are concerned. Ascertaining a party’s intent requires:
Performing an analysis of the language contained in contract

doc-uments, and
Examining evidence, extrinsic to contract documents, pertaining to

facts and circumstances surrounding contract formation and per-
formance.
If this fails to provide an applicable interpretation, it is appropriate to

consult with legal counsel to review the various rules of interpretation that
courts and boards of contract appeals have applied.
In reasonable, logical interpretations, courts and boards of contract ap-

peals look to find the real meaning of contract language and usually reject
interpretations that:
Are twisted or strained,
Would render any provision meaningless, or
Would cause a conflict.
9-8
CHAPTER 9
Exhibit 9-3 outlines the interpretive rules that are generally followed by
courts and boards of contract appeals.
Rules in Aid of Contract Interpretation
♦ Read the contract as a whole.

♦ Determine the order of precedence by reading the clauses.
♦ If enumerated items are called for in one place and not in another, apply one of two basic
rules:
Ê If the contract contains a specific list of items without words of qualification, the
contractor may reasonably assume, absent other contract provisions to the con-
trary, that those items not listed are not included.
Ê Where words of qualification are included, and where the meaning of a word is
doubtful, it will take its coloring from, and be limited by, the words with which it
is associated.
♦ Consider evidence outside the contract document (i.e., extrinsic evidence):
Ê Discussions and concurrent actions. This type of evidence consists of parties’
discussions and actions occurring prior to the submission of offers, such as:
Ä Requests for clarification,
Ä Pre-bid or proposal conferences,
Ä Pre-dispute interpretations,
Ä Pre-dispute actions that may have led to evidencing an interpretation, or
Ä Failure to act, which was interpreted to be acquiescence by the Government.
Ê Prior dealings in similar matters.

Ê Custom and trade usage.
♦ Post-interpretation ambiguities.
Ê Interpretation against the drafter of the specification.
Ê Duty to seek clarification.
Exhibit 9-3
Good Intentions Some- Remember: Honest disputes over performance and the interpretation of
times Fail contract clauses occur in the smoothest of contractual relationships. Even
9-9
clear contract terms and conditions can give rise to the necessity of inter-
pretation.
Resolving Disputes Techniques for avoiding a claim and settling a dispute include:
Continuing to consider, discuss, and negotiate the various elements

of any disagreement, especially during the early stage of any po-
tential controversy.
Dividing a problem into its separate elements, such as the technical

and monetary aspects. (This method provides the parties with an
opportunity to discuss the merits of the technical aspect without
considering the dollar impact. From that may spring the basis of
entitlement and the financial aspects can then be considered).
Talking with individuals who have not participated substantially in

the matter, particularly if an impasse is reached.
Documentation is Es- Both the Government and contractor must be in a position to “rebuild” on
sential paper the events leading to a dispute. Only by careful documentation can
the interest of both parties be protected.
Disputes and Ac- The acquisition of commercial items under FAR Part 12 requires the use
quiring Commercial of terms and conditions set forth in FAR 52.212-4 (Contract Terms and
Items Conditions—Commercial Items).
FAR 52.212-4(d) FAR 52.212-4(d) covers disputes and relates that:
DFARS 233.215 The contract is subject to the Contract Disputes Act of 1978, as
amended;
Failure of the parties to reach agreement on any request for an

equitable adjustment, claim, appeal or action under or related to
the contract is a dispute to be dealt with under FAR 52.233-1; Al-
ternate I of this clause is to be used when:
Ê acquiring aircraft, space craft and launch vehicle, naval ves-

sels, missile systems, tracked combat vehicles related electron-
ic systems; and either
Ê the contracting officer determines that continued performance

by the contractor is vital to national security or the public wel-
fare; or
9-10
CHAPTER 9
Ê the head of the contracting activity determines that continued

performance is necessary while the matter is being resolved,
and
The contractor is obligated to proceed diligently with performance

pending the final resolution of any dispute under the contract.
Effective Disputes The need for effective disputes management is critical. Exhibit 9-4 lists
Management criteria that reinforce the importance of good disputes management.
9-11
Criteria for Effective Disputes Management
♦ Meet the issues head-on. Before arguments and disputes escalate, both parties
should recognize that a difference of opinion exists.
Separate the side issues and concentrate on the real
ones.
♦ Resolve disagreements quickly. After the issues have been identified and the facts
gathered, the parties should move to resolve disputes
quickly.
♦ Manage the dispute. Managing a dispute does not end with its identifica-
tion. Resolution is often difficult because of “unrea-
sonable” positions. Avoid the attitude that a situa-
tion is “hopeless.” Reassess your own position and
request the contractor to do the same. Don’t person-
alize an issue. Don’t hesitate to ask for assistance.
It may be helpful in analyzing a current dispute or
claim to obtain information from other contracting
officers concerning previously filed claims by the
contractor (DFARS 233.204).
♦ Negotiate the dispute. Be timely, be prepared, and know the issues for which
you may (or may not) be able to compromise. Be
fair,
be professional, and once a bona fide compromise is
reached, delineate all the matters discussed and
promptly obtain full accord and a satisfactory
agreement.
♦ Recognize that disputes are Whether you are looking at internal disposition pro-
“time sensitive.” cedures, the contractor’s demands, or time constraints
pursuant to regulations, there are constant pressures
brought to bear. Given the nature of what may be re-
quired, take reasonable time to act, but act with pur-
pose to bring about closure.
♦ Perform proper contract file This is the key to having the critical documentation
maintenance. the Government requires in order to provide a timely
response to a dispute.
Exhibit 9-4
9-12
CHAPTER 9
Claims A contractor that believes your arguments over a dispute carry little or no
merit will usually make it known to you that a claim will be filed. This is
referred to informally as “putting you on notice of a claim.” Exhibit 9-5
defines a claim.
Definition of Claim
FAR 33.201
“Claim” means a written demand or written assertion by one of the contracting parties seek-
ing, as a matter of right, the payment of money in a sum certain, the adjustment or interpreta-
tion of contract terms, or other relief arising under or relating to the contract. A claim
arising under a contract, unlike a claim relating to that contract, is a claim that can be re-
solved under a contract clause that provides for the relief sought by the claimant. However,
a written demand or written assertion by the contractor seeking the payment of money ex-
ceeding $100,000 is not a claim under the Contract Disputes Act of 1978 until certified as
required by the Act and 33.207. A voucher, invoice, or other routine request for payment
that is not in dispute when submitted is not a claim. The submission may be converted to a
claim, by written notice to the contracting officer as provided in 33.206(a), if it is disputed
either as to liability or amount or is not acted upon in a reasonable time.
Exhibit 9-5
The Ubiquitous Ele- Everyone involved in contracting needs to develop an appreciation of

ment of Claims claims because they are an important element of managing contracts.
From the time that a dispute manifests itself until final action is
taken, the manner in which claims are handled is a reflection on
your organization.
You need to know not only the basics for analyzing a claim but to
be able to put together a quality claims package as well.
Handling Claims It takes skill, persistence, and clear knowledge of the regulations concern-
ing disputes and claims in order to deal with them, and you may find that
there are few new skills required for analyzing them. For example:
The same skills are used in evaluating the merits of an agency pro-
test against a proprietary specification or an “experience” clause in
a construction contract.
9-13
If you have looked at a request for bid correction in terms of

whether a contractor has presented clear and convincing evidence
of the existence of a mistake and the intended bid, you have per-
formed the same kind of examination that takes place when re-
viewing a claim submitted under the Disputes clause.
The skills required for allowing time extensions are the same as
those used in analyzing a delay claim.
Responding to a Claim When “trouble” initially appears and a claim seems to be inevitable, the
matter is not merely placed in the hands of a Government lawyer to re-
solve. Everyone who participated in the situation leading to “the trouble”
will be directly or indirectly involved. Although the contracting officer is
ultimately responsible for arriving at and issuing a final decision, you may
be responsible for:
Assembling all of the needed information,
Proposing a recommendation based on your analysis, or
Identifying and consulting with those who will be:
Ê Conducting the legal review,

Ê Providing a technical analysis, and
Ê Responsible for making a final decision at a higher level.
Contracting Officer Contracting Officers are authorized to decide or settle all claims arising
Authority under or relating to a contract subject to the Contract Disputes Act, except
for:
FAR 32.211
Claims or disputes for penalties or forfeitures prescribed by statute
DFARS 233.210 and or regulation that another federal agency is to administer, or
243.105(a)
Claims covered by the False Claims Act.
Claims requesting an adjustment in price under a shipbuilding

contract (entered into after December 7, 1983) arising out of events
that occurred more than 18 months before submission of the claim
or request.
Non-Monetaray Claims The bulk of contract claims involve equitable adjustments resulting from
contract performance, although there are other claims issues such as:
Data rights,
Warranty responsibilities, and
9-14
CHAPTER 9
Reinstatements of terminations.
Appropriate Claims In many instances, determining what is a claim is neither obvious nor
Under the Contract easy. Unfortunately there is no criterion that can be applied in every in-
Disputes Act stance to reach a fail-safe decision. If you receive a letter from a con-
tractor that raises more questions than it answers and you are uncertain
about the contractor’s intentions, you may consider:
Talking to someone who may have dealt with the problem you are
facing for the first time,
Consulting a staff attorney and seeking advice, or
Writing a letter to the contractor that asks if a claim is being sub-

mitted, offering at the same time some reminders about what needs
to be furnished.
The contracting officer’s denial of a contractor’s request (for whatever)

does not automatically convert it into a claim. A claim does not arise on
the occurrence of a dispute or controversy. The contractor must first as-
sert a “demand” upon the Government by requesting that a final decision
be issued by a contracting officer. For a contractor’s communication to
constitute a claim it must manifest a clear intent to seek relief as a matter
of right.
Time for Initiation of Contractor claims must be submitted, in writing, to:

Contractor Claims
A contracting officer within six years after accrual of a claim, un-
FAR 33.206(a) less the parties agree to a shorter time period.
(This six-year time period does not apply to contracts awarded

prior to October 1, 1995.)
Time for Government A contracting officer must issue a written decision on any Government
Decisions claim initiated against a contractor within six years after accrual of the
claim, unless the parties agree to a shorter time period.
FAR 33.206(b)
This six-year period does not apply to:
FAR 32.209
Contracts awarded prior to October 1, 1995, or
A Government claim based on a contractor claim involving fraud.
9-15
Accrual of Claim The accrual of a claim occurs on the date when all events, which fix the
alleged liability of either the Government or the contractor and permit as-
FAR 33.201 sertion of the claim, were known or should have been known.
For liability to be fixed:
Some injury must have occurred;
But monetary damages need not have been incurred.
Non-Monetary Actions There are some Government actions taken under a contract that do not in-
volve immediate Government claims for money, but these may (or may
not) give rise to Government or contractor claims for later monetary relief.
Some common examples:
Default termination,
Asserting rights under the Patents Rights clause,
Rejection of work under inspection or warranty clauses, and
Rescission (revocation) of a contract.
There is some uncertainty as to whether the Contract Disputes Act re-

quires that these non-monetary actions be made the subject of a contract-
ing officer’s decision in order to be adjudicated under the disputes
process. In the case of default terminations, however, the Government
has traditionally followed disputes procedures. In contrast, the Govern-
ment has not followed these procedures in cases involving rescission.
Subcontractor Claims Subcontractors have no privity of contract with the Government. A sub-
contractor, therefore, cannot file a direct claim but must file its claim
through a prime. An exception is made for SBA 8(a) contracts. Even
though the prime contractor is technically SBA and the subcontractor is
the 8(a) firm, 8(a) contractors are allowed to submit claims directly to a
Written Requirements Before a dispute can achieve the formal status of a claim, the following
for Proper Certification must occur:
FAR 33.207 The contractor must submit the claim in writing.
It must be submitted directly to the contracting officer.
It must assert any specific rights or basis for the specific monetary
relief being sought.
9-16
CHAPTER 9
The contractor must request a valid contracting officer’s final de-

cision.
The claim must be properly certified if in excess of $100,000.
Proper certification means:
A statement is provided that the claim is made in good faith.
Supporting data are accurate and complete.
The amount requested accurately reflects the contract adjustment

for which the contractor believes the Government is liable.
When the written demand does not meet all the criteria for a claim, return
it, explaining how it is deficient according to the Disputes clause of the
contract.
Determining Amount of To determine the dollar amount of a claim, you must aggregate the in-
Claim creased and decreased costs that are involved. For example: A $15,000
claim resulting from a contractual decrease of $85,000 and an increase of
$25,000 would require the claim to be certified, since the combination of
the decreased and increased costs exceed $100,000.
Reaction to a Claim On receipt of a claim, the recipient may develop an adversarial attitude.
Although some claims may lack merit, not every one is fraudulent or in-
flated. When confronted with a contractor’s demand for extra compensa-
tion:
Set personal feelings aside and give the claim careful, unbiased,
thorough, and reasonable consideration.
Solicit technical advisors to provide information that bears on the

claim’s validity. Take advantage of technical expertise that is fa-
miliar with the project.
Assuming that a contractor gives you a complete claims package, the gen-
eral procedure that should be followed in analyzing the claim is outlined
in Exhibits 9-6 and 9-7.
9-17
Initial Claim Review
♦ Read the contractor’s letter and identify the issues involved. It is the contractor’s claim.
Allow ample opportunity and give your undivided and impartial attention to examine the
basis of the claim.
♦ Review the contractor’s documentation to develop a chronology for each of the separate
issues involved.
♦ Review the contract file and other contract documents to further develop or substantiate
the chronology of events.
♦ Review the relevant contract provisions and identify the kind and type of information
called for.
♦ Return to the contractor’s letter and identify each of the allegations made. Using the da-
ta provided by the contractor and data you have collected, prepare a point-by-point re-
sponse to each of the allegations.
Exhibit 9-6
9-18
CHAPTER 9
Detailed Analysis of Claim
♦ Step One: Based on the initial analysis, ascertain whether the alleged basic facts
are true, not true, or partially true and determine if the claim has stand-
ing.
♦ Step Two: Make a technical analysis of the claim, which should consist of a thor-
ough analysis of the specifications, for instance, both as originally
written and as changed. This should be performed, whenever possi-
ble,
by persons connected with the initial drafting of them or by someone
who has the technical expertise to do so.
♦ Step Three: Have a technical expert perform an analysis of the engineering ap-
proach that was employed by the contractor, if necessary. From an
engineering standpoint, establish the reasonableness of any additional
time and person-hours expended.
♦ Step Four: Perform a cost analysis (including an audit if applicable)* of the costs
claimed by the contractor to verify that:
Ê The costs are actually recorded on the contractor’s books in accor-
dance with generally accepted accounting principles,
Ê They are allowable and allocable to the contract as claimed, and
Ê Their recovery is not prohibited by law or regulation.
♦ Step Five: Subject the claim to a legal analysis.
*The Defense Contract Audit Agency or other audit organization.
Exhibit 9-7
Checklist for Claims A checklist of factors for analyzing claims is particularly useful in briefing
team members and planning an agenda in preparation for negotiations to
settle a claim. Exhibit 9-8 provides a checklist of factors to be reviewed
prior to meeting with a contractor.
9-19
Factor Analysis Checklist for a Claim
Contract Number ________________________________ Date ___________________________

Government Estimate _____________________________ Contractor’s Proposal _____________
♦ Job size, points, and areas of work. (Brief description)
_________________________________________________________________________________________
_________________________________________________________________________________________
♦ Plans and specifications have been examined. ______
♦ Quantity and quality of materials has been verified. ______
♦ Labor and equipment usage and cost. Cost $ ______
♦ List idle time, wasted time, or dragged-out time. (List dates extracted from monitoring reports).
♦ List possible over-personing or over-equipping.
♦ List materials, labor, equipment and overhead over-consumption or diversions into this change.
♦ Note contractor diligence and production efficiency.
♦ Work environment factors:

Dust.
Weather.
Temperature.
Access and congestion.
Quality and availability of labor.
Superintendency.
Overhead support.
Supplier support.
Government cooperation.
Morale.
♦ Quality of work.
Contractor quality control.
Contractor on schedule.
Contractor behind schedule.
By _____ number of days.
♦ Number of change orders to date.
♦ Audit available.
Exhibit 9-8
An Early and Informed Once a claim has been identified it is never too early to begin preparing
Start the claim’s file. The assembly of evidence must be undertaken if the case
goes to litigation, so it is worth doing at the outset and worth doing well.
9-20
CHAPTER 9
Evidence can be obtained from many places and take many forms. The
documents submitted by both parties constitute the appeal file. Exhibit
9-9 presents a list of some important items that need to be assembled in
order to research and prepare a claim file.
Preparation of a Claim File
♦ The contract specification and drawings. Include all modifications.

♦ Correspondence files. At minimum, these should include the engineering
preaward, contract administration, and legal files.
♦ Working drawings. Of particular importance are those that were origi-
nally approved, plus those that have incorporated
all of the changes. An analysis as to why changes
were made, and their dates, is important.
♦ Inspection records. Daily records, if applicable, and logs or reports by
inspectors and contractor personnel.
♦ Memoranda of meetings. Include only those pertinent to the claim.
♦ All progress charts and information Bar and other charts and all changes.
concerning progress.
♦ Copy of the postaward orientation These may be particularly useful because these
meeting notes. notes are frequently of critical value in establish-
ing expectations and understandings of both par-
ties concerning a particular provision of the
specifications or anticipated problems.
♦ Copy of contract clauses. These are important for general reference pur-
poses and should be reviewed during the course of
a claim’s preparation. In some cases, the contract
may incorporate by reference a clause that should
be studied in full text.
♦ Copy of all photographs taken (as for a Photographs can and should be used to document
construction contract). key points whenever possible.
♦ Copies of pertinent logs. Logs, such as change order logs, or submittal ap-
proval logs are often beneficial.
♦ Copies of interim or final performance Interim evaluations are sometimes issued during a
evaluations of the contractor. contractor’s performance. These will usually
point out weaknesses.
Exhibit 9-9
9-21
The Final Decision Conceptually, the analysis process leading up to a contracting officer’s
final decision may be categorized into five phases:
FAR 33.211(a)
Identify the issue(s),
Perform an impact analysis,
Evaluate project documentation,
Perform a price/cost analysis and damage apportionment, and
Prepare a report.
In some offices, the contract specialist, with technical assistance, is ex-

pected to perform this process.
A Decision of Last A final decision under the Dispute clause is the last resort after efforts to
Resort settle the matter by agreement have failed. The decision may reflect:
FAR 52.233-1 Complete rejection of the claim,
Complete acceptance of the claim, or
Partial acceptance or rejection of the claim.
Content Requirements The decision must be in writing and should be dispatched to the contractor
by certified mail, return receipt requested, or by any other method that
provides evidence of receipt. It should contain the following elements:
Reference to the contract involved;
A summary of the contractor’s claim, including a statement of the

additional compensation sought, and a succinct statement of the
factual basis of the contractor’s claim, including a reference to par-
ticular parts of the specification (and drawings, if applicable), and
how the contractor uses them to support its position;
Findings of fact;
A determination and reasons therefore supporting a rationale and a

statement of factual areas of agreement and disagreement; and
A closing statement, identifying it as the final decision of the con-

tracting officer and advising the contractor of the right to appeal.
9-22
CHAPTER 9
Coverage of Decision The contracting officer’s final decision is the very foundation of the ap-
peal process. Without it, there is no issue, no appeal, and no review.
The final decision must be:
Responsive to all issues of the claim,
Personal and independent,
Impartial and unbiased, and
Able to withstand a sound legal opinion.
Timely Response The contracting officer must issue a decision within the following statuto-
ry time limitations:
FAR 33.211(c)
For claims of $100,000 or less, 60 days after receiving a written
request from the contractor that a decision be rendered within that
time period, or within a reasonable time after receipt of the claim if
the contractor does not make such a request.
For claims over $100,000, 60 days after receiving a certified claim;

provided, however, that if a decision will not be issued within 60
days, the contracting offer must notify the contractor, within that
period, of the time within which a decision will be issued.
Undue Delay in Deci- In the event of an undue delay by the contracting officer in rendering a
sion decision on a claim, the contractor may request the tribunal or board con-
cerned to direct the contracting officer to issue a decision in a specified
FAR 33.211(f) time period determined by the tribunal or board.
Failure to Issue Deci- A contracting officer’s failure to issue a decision within a required time
sion period is deemed a decision by the contracting officer denying the claim
and authorizes the contractor to file an appeal or suit on the claim.
FAR 32.211(g)
Amount Payable Under The amount determined payable under a decision, less any portion already
Decision paid, should be paid, if otherwise proper, without awaiting a contractor’s
action concerning an appeal. Such payment should be made without pre-
FAR 32.211(h) judice to either party’s rights.
Appealing the Final A contracting officer’s final decision is final and conclusive and not sub-
Decision ject to review by any forum, tribunal, or Government agency unless ap-
pealed by the contractor after receipt of the decision to:
A board of contract appeals within 90 days, or
9-23
The United States Court of Federal Claims within 12 months.
The contractor must initially choose one or the other. It may not seek a
ruling from both.
A contracting officer’s final decisions committed to discretionary meas-

ures by law or contract terms are not reviewable by boards of contract ap-
peal under the Contract Disputes Act. For example, decisions concerning
the following:
Processing of payment invoices or vouchers,
Settlement of contract claims,
Reinstatement of a previously terminated contract,
Termination of a breached contract for default, or
The acceptance or rejection of nonconforming items.
An appeal made to a board of contract appeals is considered an adminis-

trative review while an appeal to the United States Court of Federal
Claims is a judicial review.
Where to File The Contractor may make its selection of where to file as follows:
Board of Contract Appeals: Offers a quicker review, particu-

DFARS 233.215-70 and larly for smaller claims. Generally this is less expensive for a
252.233-7001 contractor. A contractor may proceed under a board’s small
claims procedure (for claims under $50,000) or its accelerated
procedure (for claims of $100,000 or less).
United States Court of Federal Claims: The Court’s time limit on
filing an appeal is longer than the board’s time limit: 12 months
as opposed to 90 days after the contracting officer’s final decision
is issued. If a contractor procrastinated in deciding whether to
appeal, it may have no other choice than to “take it to court.”
If a contract is to be performed outside the United States, its pos-

sessions or Puerto Rico, the contractor must normally waive any
right to invoke the jurisdiction of a foreign court or tribunal.
(This may be important to contractors for claims involving an

agency-wide practice that is not standard Governmentwide. A
contractor may feel the Court is a wiser choice because of its orga-
nizational independence and broader experience with practices of
other agencies.)
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CHAPTER 9
Further Appeal A decision rendered by either a board of contract appeals or the United
States Court of Federal Claims can be further appealed to the Court of
Appeals for the Federal Circuit.
Continuing Effort to The issuance of a final decision and the filing of an appeal by a contractor
Settle does not deprive the contracting officer of the authority to negotiate and
execute an agreement settling a claim at any time. The contracting offic-
er may settle a claim during litigation at boards of contract appeals but not
during litigation at the United States Court of Federal Claims.
Decision Not to Appeal There are practical and legal considerations a contractor must weigh in
deciding whether or not to appeal a final decision. Some of the most fre-
quently cited are:
Chance of success,
Cost of litigation,
Impact on business relations,
Desire to establish a legal precedent, and
Extent of disruption.
Notice of Appeal To appeal the contracting officer’s decision, a contractor must submit a
Notice of Appeal. To be legally effective, it must contain six basic re-
quirements as noted in Exhibit 9-10.
Notice of Appeal Requirements
♦ Be in writing.
♦ Express discontent with the final decision.
♦ State an intention to seek review of the decision by higher authority.
♦ Identify the contracting officer, the agency, or departmental location.
♦ Provide the contract number and description.
♦ State the decision from which relief is being sought.
Exhibit 9-10
9-25
Modify the Contract If an appeal’s decision favors a contractor, the contracting officer may
negotiate an equitable adjustment, unless the dollars and time have already
been established in the decision. In any event, a contract modification is
the vehicle that would be used.
The Government must pay interest on a contractor’s claim on the amount

found due and unpaid computed from:
The date the contracting officer receives the claim (certified if re-
quired by FAR 33.207(a)), or
The date payment otherwise would be due, if that date is later, un-
til the date of payment.
Pay Interest Interest rates are adjusted every six months by the Secretary of Treasury
and vary considerably. These rates are published in the Federal Register
FAR 33.208 every six months, but may also be obtained from the appropriate office
within your agency. A claim that has gone from a “final decision”
through the appeal process can span several periods of different interest
rates that must be calculated on a daily basis.
For claims having defective certifications:
Interest must be paid from either the date the contracting officer
initially processes the claim or October 29, 1992, whichever is lat-
er.
If a contractor provided a proper certificate prior to October 29,

1992, after submitting a defective certificate, interest must be paid
from the date of receipt by the Government of the proper certifi-
cate.
Claims Against Con- The filing of a claim and the availability of remedies are not one-way
tractor streets. The Government may also file claims “under the contract” and
seek remedies against the contractor for reasons such as:
Defective performance,
Violation of statutes (civil and criminal),
Violations of the regulations, or
Demands for excess costs in reprocurement resulting from a de-

fault.
In order to file a claim against a contractor, the contracting officer must:
9-26
CHAPTER 9
Be familiar with all of the available remedies and what actions are
necessary, and
Fully understand the principal elements of each type of claim, its

defenses, and how to invoke the best remedy.
Guidelines are found in Exhibit 9-11 on what steps to take when the Gov-
ernment wishes to file a claim against a contractor.
Guidelines for Filing Claims Against Contractors
♦ Take prompt action to determine the claim’s dollar amount and collect it.
♦ The claim must be thoroughly researched and reviewed before it is asserted. Have it re-
viewed by engineering, accounting, and legal experts in order to assure that the claim is
well founded.
♦ The demand for payment should contain a concise statement of the claim. Where there
is reason to believe that negotiations may be futile, or there is reason to expedite collec-
tion, the demand should be cast in the form of a final decision.
♦ Make sure any deferment agreement is in agreement with agency policy.
♦ Make sure that all Government claims are represented in bankruptcy proceedings.
♦ Do not overlook the possibility of asserting common law damage claims (e.g., a supple-
ment to an excess reprocurement cost claim, delay in performance, and defective perfor-
mance not covered by the inspection and warranty clauses).
♦ Final decisions should be prepared in the same manner as for a contractor claim and in-
clude, at least, a statement of original contract requirements, the conduct that gave rise to
the liability, and the amount and nature of the price adjustment or damages claimed. It
should state that it is issued under the Disputes clause and contain advice concerning the
appeal process.
Exhibit 9-11
9-27
TERMINATIONS
9.2 Terminations Contract termination involves the administrative process that exercises the
Government’s contractual right to discontinue performance under a con-
tract, either in whole or in part. There are two types of termination:
Termination for Default: The contractor fails to perform in ac-

cordance with the contract.
Termination for Convenience: The contractor is required to dis-

continue performance when it is in the Government’s best interest.
The preferred method of contract termination is to effect a no-cost settle-

ment without using termination procedures, but only if:
The contractor will accept one,
No Government property was furnished under the contract,
There are no outstanding payments, debts due the Government, or

other contractor obligations, and
The supply or service can readily be obtained elsewhere.
Resorting to Termina- The high price that may be paid for a wrongful termination warrants a
tion careful review of contract clauses and surrounding circumstances before
making a decision to recommend termination. The Government’s legal
right to do so is not the only factor to be considered. The most crucial
issue is how best to complete the project or the work.
It may be decided that the most promising of choices is to continue

working with the contractor in spite of a continued delinquency; or
Immediate default action may be the quickest and best means of

completing the project or work.
The decision to terminate is highly discretionary, based on the business

judgment of the contracting officer and the advisors who will assist in
making it. Exhibit 9-12 lists some criteria to consider before initiating a
termination action.
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CHAPTER 9
Considering Factors Before Terminating
FAR 49.402-3
♦ Clauses of the contract and applicable laws and regulations.
♦ Specific failure of the contractor and “reasons” provided by the contractor for such fail-
ure.
♦ Availability of supplies or services from other sources.
♦ Urgency of the need and the period of time that would be required for work by other
sources as compared with the time in which completion could be obtained from the de-
linquent contractor.
♦ Degree of essentiality of the contractor, such as unique contractor capabilities.
♦ Availability of funds to finance reprocurement costs that may prove uncollectible from
the defaulted contractor, and the availability of funds to finance termination costs if the
default is determined to be excusable.
♦ Any other pertinent facts and circumstances.
Exhibit 9-12
Termination Action Events that surface the possibility of a termination action include:
Alerts
A contractor’s response to the Government’s cure or show cause
notice fails to show that a contract will be completed in accordance
with its terms.
There is no longer a need for the item or service called for under
the contract.
Funds are not available for continued contract performance.
There has been a radical change in the requirement that goes

beyond the contractor’s expertise.
A surety notifies you that it is aware that the bonded contractor is

in default and requests the Government to withhold progress pay-
ments because of the contractor’s:
Ê Failure to progress,
Ê Bankruptcy, or
Ê Failure to pay subcontractors.
9-29
(Not complying with the bonding company’s request may result in

the Government being liable to the surety.)
9.2.1 Termination The right to terminate a contract may originate from either the general
for Default principles of contract law or the express terms of the contract. Contracts
may be terminated for default in accordance with the following:
FAR Subpart 49.4
Failure to make progress so as to endanger performance. If a
contractor fails to perform in a timely manner, it is in default and
its contract can be terminated.
Failure to deliver supplies or to perform services within the

time specified. Prior to 1966, the general rule was that the Gov-
ernment could insist on completion by the exact due date, because
timely delivery on any Government contract was considered “of
the essence.” However, in 1966 the former Court of Claims is-
sued an important decision indicating that contractors may be en-
titled to a reasonable time after the contract completion date to
correct minor deficiencies in work that was considered substan-
tially complete.
In the years following this decision, boards and courts have increa-
singly applied the doctrine of substantial completion. In most
cases the Government does not consider termination for default ac-
tions when only minor corrective work remains to be done.
Repudiation of the contract by the contractor. A repudiation

or anticipatory breach occurs when a contractor clearly indicates
that it cannot or will not perform.
Examples pointing to an anticipatory repudiation include:
Ê A letter stating an intention of nonperformance,

Ê Job abandonment, and
Ê A bankruptcy filing.
The contractor’s intent must be clear and unequivocal. Whenever

possible it should be obtained in writing.
Failure to perform any other provisions of the contract. Ter-
mination or default clauses are not the only elements in a contract
that authorize terminating a contract for default. Exhibit 9-13
provides a list of other clauses, statutes, or regulations.
9-30
CHAPTER 9
Termination Clauses, Statutes, or Regulations
♦ Covenant Against Contingent Fees clause.

♦ Equal Opportunity clause.
♦ Anti-Kickback Act violations.
♦ Walsh Healey, Service Contract, or Davis Bacon Acts.
♦ Failure to obtain required bonds within a specified time.
♦ Defective workmanship.
♦ Failure to submit progress schedules or reports.
♦ Fraud or other criminal behavior.
Exhibit 9-13
Exercising Termination Even though the power to terminate is expressly reserved by a contract,
in Good Faith the power of termination must be exercised in good faith based on the sti-
pulated conditions of a termination clause or on a material breach of con-
tract terms.
In determining matters such as the Government’s “good faith,” courts will

look beyond the facts that immediately proceeded the termination and in-
vestigate all the circumstances under which a contract was executed, in-
cluding the conduct of the parties throughout performance.
Protecting the Govern- Default clauses are included in a contract solely for the purpose of pro-
ment’s Interest tecting the Government from loss or damage. They are not to be used for
arbitrary, coercive, or punitive damages.
A termination for default decision has broad ramifications for all parties.
Exhibit 9-14 examines some of them from each party’s viewpoint.
9-31
The Effect of Default Termination on Parties
Viewpoint Impact
Contractor Termination for default is a traumatic experience for any con-
tractor. Not only does the action put an end to contract perfor-
mance but in all probability to a contractor’s hopes for a profit.
It also subjects a contractor to possible liability for the Govern-
ment’s extra costs of having the contract completed by another
source. It has a negative connotation concerning the contrac-
tor’s management and ability to perform on future contracts.
Not infrequently, it can lead to a contractor’s financial ruin.
Government For the Government, a default termination is the ultimate method
of dealing with a contractor’s unexcused present or prospective
failure to perform in accordance with a contract’s specification
and schedule. The default action for failure to perform is per-
missive; it is not mandatory. Since termination causes a cessa-
tion of performance, with still further delays to be encountered in
carrying out the procedure, to terminate for default is considered
a drastic action. For this reason, it is unusual for the Govern-
ment to immediately take action to default a contractor on its ini-
tial failure to perform.
Contracting Officer Termination for default procedures under fixed-price types of
contracts provide for excess costs to the Government in repro-
curement. Since the procedure is unanticipated, the extra ad-
ministrative burden must somehow be absorbed into an already
busy schedule. It is a necessary act at times, but one that no
contracting officer relishes.
Bankruptcy Court Occasionally, the Government will find itself “holding the bag”
by a contractor filing for bankruptcy and abandoning the project
either before, during, or after termination proceedings. When a
contractor files for bankruptcy, the Government must participate
in the bankruptcy proceedings to protect its interest. In such
cases, the Government is generally bound by the same restric-
tions as any other creditor. There are, however, some important
exceptions. The Bankruptcy Act provides, for example, that
“contingent debts and contingent contractual liabilities” and
“claims for anticipatory breach” may be proved and allowed. It
also allows priority in recovery, second to that of payment of
taxes.
9-32
CHAPTER 9
The Effect of Default Termination on Parties
Viewpoint Impact
Boards and Courts A termination for default is considered by the courts to be a dras-
tic measure; thus, the Government is accordingly required to be
strictly accountable for any such termination. Absent complete
substantiating evidence, the Government’s decision to terminate
may be overturned for such reasons as:
È Terminating too soon,
È Terminating too late,
È Substantial completion by the contractor has been
accomplished, or
È Government actions constituted a waiver due to lack
of
discretion.
When the courts or boards are convinced that discretion has been
exercised in making the decision to terminate a contract, it will
not substitute its judgment for that of a contracting officer.
Bonding Company The obligation of a surety under a performance bond is to in-
demnify the Government up to the amount of the bond in the
event of a contractor’s default. However, courts have ruled that
the Government owes an equitable obligation to a contractor’s
surety. In Ohio Casualty Ins. Co. v. US., 12 Cl. Ct. 590 (1987),
the Claims Court held that by failing to terminate an irresponsi-
ble, dishonest, incompetent, and abusive contractor whose per-
formance was two years behind schedule, the Contracting
Officer had abused the discretion and consequently violated the
equitable duty owed to the surety. A surety does not contract to
assume the risk of a contracting officer’s unreasonable conduct
that results in excess payments to subcontractors, suppliers, or
for other expenses. The surety has a right to demand partial
payments be made directly to it in certain instances when default
is imminent or in process. Courts have consistently held that a
surety which satisfies a contractor’s obligations to pay laborers
and material persons under a payment bond has an equitable in-
terest in the contract. In addition, the bonding company has the
right to decide whether to complete the work, provide a subcon-
tractor to complete the work, or rely on the Government to com-
plete the work in-house (cases were there is substantial
com-pletion) or via a reprocurement contract.
9-33
Alternatives to Default The Government does have some alternatives that should be considered in
lieu of default. Some of the Government’s alternatives to default that
must be considered in order to demonstrate that discretion was used are
contained in Exhibit 9-15.
Alternatives to Default Action
♦ No action with respect to default proceedings. Permit the contractor to continue as long
as it provides clear and convincing evident that performance will be cured by the comple-
tion date already established. However, the Contracting Officer should document the
findings of fact and notify the contractor in writing that:
Ê The Government accepts the contractor’s commitment to cure performance, and
Ê The contractor’s failure to cure performance and/or to fulfill contractually specified
requirements will reinstate the Government’s right to terminate for default.
♦ Revision of the completion schedule. Permit the contractor or the surety to continue un-
der a revised completion schedule. Advise the contractor that under the revised schedule
liquidated damages will not be assessed until after the revised delivery date passes. Ob-
tain consideration for the change in the form of a reduced price, improved work methods,
or whatever.
♦ Completion of the contract by a third party contractor. You may allow continued per-
formance by a subcontractor or other comparable arrangement. The third party must be
acceptable to the Government. Assurances must be provided that performance and
payment bonds, as well as insurance, will be provided. [See FAR 49.402-4(b)]
♦ Surety-Takeover Agreement. If the surety for the failing contractor offers another firm to
complete the work, this can be accomplished by a four-party agreement (i.e., the Gov-
ernment, the existing contractor, a new contractor, and the surety). This is normally an
agreeable arrangement unless there is evidence that the proposed contractor is neither
competent nor qualified. [See FAR 49.404].
♦ No-cost settlement. Occasionally, a requirement is no longer valid and default proceed-
ings are contemplated. In this case, you may use the no-cost settlement arrangement if
the contractor has not incurred costs and is not liable for damages. [See FAR
49.402-4(c)].
♦ Deductive contract modification. You may consider a deductive modification for a
project that is nearing completion. With this method, you can quickly resolve the issues
and complete the project by other means.
Exhibit 9-15
9-34
CHAPTER 9
Forbearance Because of the gravity and consequences of a decision to terminate for

default, boards of contract appeals and courts generally recognize the need
for some period of time beyond scheduled performance during which the
Government may pause and reflect on such action. This is called a period
of forbearance.
A default termination is a drastic sanction. Exercising a reasonable pe-

riod of forbearance also demonstrates the exercise of discretion.
Waiver of Rights A waiver of the Government’s right to terminate may come into play if the
forbearance period is too lengthy. During the forbearance period, the
contracting officer may terminate at any time without notice. However, it
is frequently difficult to establish when a forbearance period ends and a
waiver of rights has occurred.
Precluding a Waiver of The Government frequently attempts to preclude a finding of waiver of

Rights rights by expressly reserving its right to terminate during a period of rea-
sonable forbearance. One version included in a “show cause” letter
states:
“Any assistance given to you on this contract or any acceptance by

the Government of delinquent goods or services will be solely for
the purpose of mitigating damages, and it is not the intention of the
Government to condone any delinquency or to waive any rights the
Government has under the contract.”
Another version is more specific:
“None of the following shall be regarded as an extension, waiver,

or abandonment of the delivery schedule or a waiver of the Gov-
ernment’s right to terminate for default: (i) the delay by the Gov-
ernment in terminating for default; (ii) acceptance of delinquent
deliveries; and (iii) acceptance or approval of samples submitted
either after default in delivery or in insufficient time for the con-
tractor to meet the delivery schedule.”
The exact time that may be allowed for forbearance is not clear, nor have
higher authorities agreed about what constitutes a reasonable time. Exhi-
bit 9-16 contains general information that offers guidance concerning
waivers based on court and board findings. You are cautioned, however,
not to use these statements as precedents. Every situation must be eva-
luated on its own merits.
9-35
General Guidance Concerning Waivers
♦ If you encourage a contractor to continue performance and in reliance on this inducement

the contractor does, then a waiver may have occurred.
♦ Approving a revised schedule may create a waiver if the contractor follows the approved
schedule.
♦ Entering into negotiations for or issuing a change order to the contract will constitute a
waiver if a new completion date is required but not established.
♦ If a contractor is incurring costs in a continuing effort to perform, you have an obligation
to act quickly in making a decision on whether to terminate.
♦ An indispensable element toward waiving the Government’s right to terminate for default
is an indication, in some manner, of a willingness to have a contractor continue perfor-
mance. This can be manifested by such actions as stalling for an unreasonable length of
time in initiating default actions, making express statements to a contractor about a de-
linquency, or leading a contractor to believe that a late completion “is forgiven.”
♦ If by silence your action would be interpreted as meaning that you have elected (or ac-
quiesced) to permit a contractor to continue performance, you may have waived the right
to default.
Exhibit 9-16
Maintaining the Right If statements are made reminding a contractor that liquidated damages will
to Terminate be collected on late completion, it does not constitute a waiver. This de-
monstrates that withholding liquidated damages has not waived the Gov-
ernment’s right to default.
Following a waiver, and in order to assert that time once more is of the
essence, the right to terminate must be reestablished. Failure to do so will
waive future rights to terminate. This can be accomplished by giving a
contractor notice of a new completion date established unilaterally by the
Government or by bilateral agreement. If the date has been set unilate-
rally, the Government has the burden of proving that the date is reasona-
ble.
Notice of Termination Contracting officers must terminate contracts for convenience or default
by giving written notice to a contractor. When the notice is mailed, it
FAR 49.102 must be sent by certified mail, return receipt requested. If hand delivered,
a written acknowledgment must be obtained from the contractor.
9-36
CHAPTER 9
Distribution of Notice A termination notice must be distributed to:
DFARS 249.105-1 A surety, if any,
Any known assignee or guarantor of the contractor, and
The same Government personnel to whom an initial distribution of

the contract was made.
When a contract administration office receives notice of a termination it

will prepare and distribute a Contract Termination Status Report (DD
Form 1598).
Notice Inclusions A termination notice must state:
The contract is being terminated for convenience or default under

the contract clause authorizing the termination,
The effective date of the termination,
The extent of the termination,
Any special instructions, and
The steps the contractor should take to minimize the impact on

personnel if the termination, together with all other outstanding
terminations, will result in a significant reduction in the contrac-
tor’s workforce.
Exhibit 9-17 gives five practical rules you should remember when exer-
cising the right to issue a termination notice.
DFARS 249.7000 The U.S. Department of Defense and the Department of Defense Produc-
tion (Canada) are parties to a special letter of agreement that covers the
termination of contracts with the Canadian Commercial Corporation.
This Agreement provides for special processing of the actual termination
actions by Canadian authorities.
DFARS 249.501-70 and In certain incrementally funded R&D contracts the head of the agency
252.249-700 may approve the inclusion of a clause covering special termination costs
(DFARS 252.249-7000). In these cases, the contractor and the contract-
ing officer must work together to establish the amount and procedures for
the special termination costs.
9-37
DFARS 249.7001 Congressional notification of a termination or potential termination may

be required if the impact of the termination involves a reduction in em-
DFARS 249.7003 ployment of 100 or more contractor employees. Also, termination or sig-
nificant reduction in major defense programs may give rise to a
DFARS 252.249-7002 requirement to notify the Secretary of Labor and all affected prime con-
Rules to Remember in Issuing Termination Notices
♦ If the contractor receives notice of a termination and it does not state whether it is for de-
fault or convenience, and the contractor believes it to be a termination for convenience
and acts accordingly, boards of contract appeals and courts have held that under these
circumstances it will be considered a termination for convenience.
♦ You may not call a termination for default a termination for convenience in order to pro-
tect the contractor’s reputation.
♦ If there is genuine uncertainty on the part of the Government when either a termination
for default or one for convenience is appropriate, the termination for convenience should
be used.
♦ Termination for convenience is a final action; you cannot issue a termination for conven-
ience and tomorrow change it to a termination for default.
♦ You can, in fact, reinstate a terminated part of a contract, either in whole or in part, but
only with the contractor’s written permission.
tractors.
Exhibit 9-17
Involvement of Surety You must accompany a notice of termination for default with a request
and Disbursing Office that the Government be advised if a surety desires to enter into any ar-
rangement for completion of the work.
In addition, you must also notify your activity disbursement officer to

withhold further payments under the terminated contract pending further
advice that will be furnished at the earliest practicable time. You will
need to work closely with the disbursement officer during all phases of
any reprocurement or takeover procedures.
9-38
CHAPTER 9
Exhibit 9-18 explores the impact from the Government’s and contractor’s
points of view as to what takes place on the issuance of a termination for
default notice under a fixed-price type of contract.
Some Consequences of Termination for Default
Government Contractor
♦ Government not liable for un- Liable for excess costs of reprocurement.
accepted work.
♦ Entitled to return of all payments Liable for actual and liquidated damages.
for defaulted work (e.g., progress,
advanced, or partial).
♦ Government has the right, (not Subcontractors are notified to stop work
duty) to appropriate any residual immediately.
material. (Negotiate a price for
material.)
♦ Delays. Inventory of material on hand must be
initiated.
Must cooperate with any bonding company
in an effort to mitigate damages.
Exhibit 9-18
Warning Signs On occasion you may see evidence or hear rumors that a contractor is in
“financial trouble.” Warnings of an impending bankruptcy or financial
difficulties sometimes go hand in hand with a delinquent contract when:
A contractor fails to pay subcontractors on time.
Late deliveries are being made of materials to the job site, usually
brought in on a C.O.D. basis.
A contractor is falling behind the schedule.
Complaints occur by laborers on the job.
Telephone calls go unanswered.
Sloppy performance and workmanship is evident.
9-39
If all indications point in the direction of a possible bankruptcy and you

are already contemplating default actions, discuss your concerns with the
contracting officer and legal counsel at once.
Exhibit 9-19 is the full text of the Bankruptcy clause (FAR 52.242-13)
that sets forth the actions a contractor must take on entering into bank-
ruptcy proceedings.
Bankruptcy (JUL 1995)
If the event the Contractor enters into proceedings relating to bankruptcy, whether voluntary
or involuntary, the Contractor agrees to furnish, by certified mail or electronic commerce
method authorized by the contract, written notification of the bankruptcy to the Contracting
Officer responsible for administering the contract. This notification shall be furnished
within five days of the initiation of the proceedings relating to bankruptcy filing. This noti-
fication shall include the date on which the bankruptcy petition was filed, the identify of the
court in which the bankruptcy petition was filed, and a listing of Government contract num-
bers and contracting office for all Government contracts against which final payment has not
been made. This obligation remains in effect until final payment under this contract.
Exhibit 9-19
Surety Having notified the surety of a termination for default, you must provide
an opportunity for a bonding company to assess the situation and make its
decision as to what course it may choose to follow.
If the surety decides not to complete the work and you are so informed in
writing, then other options include:
Accomplishing the work by other forces, or
Proceeding with a reprocurement.
If the surety decides to complete the work, completion should normally be

permitted, unless you have reason to believe it is not in the Government’s
best interest (i.e., you believe that the firm the surety proposes to employ
would be neither reliable nor competent under a surety-takeover agree-
ment).
9-40
CHAPTER 9
Surety-Takeover Because of the possibility of conflicting claims over the unpaid, prior
Agreements (Primarily earnings of a defaulted contractor, a surety may condition its offer of
for Construction completion on the execution by the Government of a surety-takeover
agreement, fixing the surety’s rights to payment from those funds.
FAR 49.404
Under a surety-takeover agreement:
The surety will take over management of the contract in order to

assure its completion.
This will be done in accordance with all the terms and conditions
of the original contract.
The Government will pay the surety’s costs and expenses, which
will be the balance of the contract price at the time of default, sub-
ject to several conditions. (See Exhibit 9-20)
Conditions of a Surety-Takeover Agreement
♦ Any unpaid earnings of the defaulted contractor, including retained percentages and
progress estimates for completed work prior to default, are subject to claims by the Gov-
ernment against the contractor.
♦ The agreement does not waive or release the Government’s rights to liquidated damages.
♦ If the contract has been assigned to a financial institution, the proceeds from the contract
will not be available to the surety unless it enters into an agreement with the bank.
♦ In no event will the surety be entitled to be paid any amount in excess of its total expend-
itures made in completing the work and discharging its liabilities under the payment
bond.
Exhibit 9-20
Accomplishing Work The default clause gives the Government the right to take over the work
by In-House Forces and complete it by contract or otherwise.
This normally occurs only when the work is substantially com-

plete.
It is done with the approval of a bonding company, if applicable.
9-41
It may use materials brought to the site, but not yet incorporated.
Excess costs are generally recoverable when:
An urgent need can be demonstrated.
There is no reasonable alternative under the circumstances.
It can be proved that there would have been such excess costs if a
completion contract had been awarded to a private firm.
Accomplishing Work Reprocurement is one of the Governments rights in the event it suffers
by Reprocurement damages resulting from a contractor’s default under a fixed-price type of
contract. The Government can assess the costs of reprocurement against
FAR 49.402-6 the account of the defaulted contractor.
FAR 49.405 The Government is expected to act reasonably in the solicitation and
award of a reprocurement contract in order to protect both the interests of
the contractor and the Government. Failure to do so could result in the
conversion of a termination for default into one for convenience if the
contractor can demonstrate that the Government failed to act reasonably in
mitigating costs.
In order to successfully assess damages against a defaulted contractor, you

must present a good case that:
Reprocurement was done within a reasonable time.
The price obtained was reasonable.
Reasonable efforts were made to mitigate damages.
The reprocurement contract was performed and the reprocurement

contractor was paid.
Reprocurement by the Government is subject to various limitations such

as those found in Exhibit 9-21.
9-42
CHAPTER 9
Guidelines for Reprocurement
♦ Work will need to be completed by awarding a new contract based on the same plans and
specifications.
♦ The Government must reprocure substantially according to the terms and conditions of
the original contract.
♦ Equitable adjustments due the contractor prior to default will have to be offset against
excess costs.
♦ The Government cannot recover overhead or routine administrative costs in the repro-
curement.
♦ The Government may utilize negotiation rather than sealed bidding. It may also nego-
tiate a sole-source award, if justified.
♦ The contracting officer must exercise reasonable diligence to obtain the lowest price
available for completing the contract.
♦ Failure to act reasonably to minimize reprocurement costs in awarding the reprocurement
contract may result in a failure to recover excess costs.
Exhibit 9-21
Common Contractor Two of the most common defenses raised by contractors in excess cost
Defenses assessment cases are that the Government:
Acquired dissimilar work or the reprocurement contract was dis-

similar in material respect, and
Failed to mitigate its damages as a result of an unreasonable re-

procurement method, time, or price.
Timeliness The Government is allowed a reasonable time in which to conduct a re-

procurement. Unreasonable delays, however, that result in higher repro-
curement costs can be used by a defaulted contractor to demonstrate that
its case has been prejudiced by a delay.
For example, fluctuating steel prices may have escalated in price, or some
other commodity may have taken a rapid increase. Labor wage rates
could have also escalated due to a new bargaining agreement.
9-43
Appeals A contractor who believes that its contract has been defaulted unfairly or
improperly can contest that action by appealing to:
An appropriate board of contract appeals, or
The United States Court of Federal claims.
Even when a contractor fails to take a timely appeal from a termination for
default, it can still challenge the propriety of that termination, as well as
the propriety of any reprocurement procedure.
Damages The Government is entitled to recover actual damages for breach of con-
tract just as any other party to a contract. For instance:
The cost of Government supervisory personnel, such as inspectors

and engineers, incurred during a contractor-caused delay;
The costs caused by the delay that the Government had to pay to
another contractor on the same or a related projected; or
Any unliquidated progress payments.
9.2.2 Termination The right of the Government to terminate a contract when its completion
for Convenience is no longer in the Government’s best interest has long been recognized.
The Government has the right to terminate without cause and limit the
contractor’s recovery to costs incurred, profit on work done, and the cost
of preparing a termination settlement proposal. Recovery of anticipated
profit is precluded.
Decision to Terminate There is little guidance in the FAR concerning criteria that should be con-
for Convenience sidered before a termination for convenience, except for some instances
when it may be in the best interest not terminate a contract. A logic chart
FAR 49.101(b) in Exhibit 9-22 provides some criteria for making a decision to terminate
for convenience.
Although recommendations may be made by engineers, legal, or technical

staff, it is the contracting officer who makes the final decision.
9-44
CHAPTER 9
Logic For and Against Termination for Convenience
FOR AGAINST
♦ When in the best interest of the Cost of termination for convenience should
Government. not be expended when a no-cost settlement
can be effected.
♦ Budgetary considerations make it The undeliverable balance of a contract is
necessary. $5,000 or less.
♦ The requirement no longer exists.
♦ Termination for convenience would Relationship the termination may have to
eliminate unnecessary losses. other contracts.
The propriety of an award must be Contractor’s reputation would be affected if
resolved. terminated for default. (Termination for
convenience should not be used in lieu of
default merely to save a contractor’s reputa-
tion.)
Requested by GAO, courts, or
boards of contract appeals.
Exhibit 9-22
The Termination for Once a decision is made to terminate, there are procedures prescribed in
Convenience Process the FAR that must be followed. Exhibit 9-23 describes each briefly.
9-45
The Termination for Convenience Process
FAR Reference Requirement

Notice of Termination: The contractor must be notified in writing that the contract has
FAR 49.102 terminated for convenience.
Initial Conference: The contracting officer, the contractor, and important subcon-
FAR 49.105(c) tractor personnel discuss the effect of termination and the pro-
cedures to be followed in effecting a settlement.
Prepare and Submit Inventory The contractor must list the property acquired for and alloc-
Schedules by the Contractor: able to the terminated arrangement.
FAR 45.508-1
Disposal of Termination Inventory: The terminated inventory must be disposed of by: purchase or
FAR 45.603 retention by the contractor; return of material to suppliers; use
by the Government; or by donation, sale, destruction, or aban-
donment. Termination inventory may result in a credit against
the amount the Government owes the contractor in the final
settlement.
Submission of Settlement Proposal: The contractor must submit a proposal for compensation.
FAR 49.206-1
Inventory or total cost basis: Use of the inventory basis for termination proposals in pre-
FAR 49.206-2 ferred over the total cost basis. A contractor must submit its
settlement proposal within one year from the effective date of
a termination, unless the Government extends this period.
Audit Report: Obtain audit report, as appropriate.
FAR 49.107 or FAR 49.303-2
Settlement by Negotiation: The Government and the contractor negotiate the amount of
FAR 49.109 the final settlement. If both parties agree to a sum of money,
the settlement is by negotiation. If the parties fail to agree, the
contracting officer must make a unilateral determination of the
amount due the contractor. This determination may be ap-
pealed.
Memorandum of Negotiation: The memorandum must be written explaining the basis for the
FAR 49.110 settlement in order to assist reviewing authorities.
Settlement Agreement: The Government and the contractor enter into a final agree-
FAR 49.109 or FAR 49.303-4 ment on the amount of the settlement. If some areas of the
settlement are disputed, the contractor will be paid the amount
the Government believes proper, pending final resolution of an
appeal concerning the disputed amount.
Exhibit 9-23
9-46
CHAPTER 9
Termination and Ac- The Government reserves the right to terminate a contract for commercial
quiring Commercial items either for convenience or cause, when to do so would be in its best
Items interest. The word “cause” related to a termination action is the term
customarily used in the commercial marketplace, and for acquisitions
FAR 12.403 under FAR Part 12 it replaces the word “default” as traditionally used in
Government contracting.
The termination clauses for the acquisition of commercial items contain

concepts that differ from those contained in the termination clauses set
forth in FAR Part 49. Because of this, the follow prescriptions apply to
FAR Part 12 acquisitions:
The requirements of FAR Part 49 do not apply when terminating

contracts for commercial items.
Contracting officers are not to follow the requirements of FAR

Part 49, but they may use FAR Part 49 as guidance to the extent it
does not conflict with FAR Part 12 and the termination provisions
of FAR 52.212-4.
Before taking action to terminate for cause, a contracting officer

should consult with counsel.
Commercial Items: Contractors are required to notify a contracting officer as soon as possible,
Termination for Cause after commencement, of any excusable delay (see FAR 52.212-4(f)). In
most instances:
FAR 52.212-4(m)
Such notification should eliminate the need for a show cause no-
tice prior to terminating a contract for cause;
But in all instances for other than late delivery, a contracting offic-
er must send a cure notice.
The Government’s rights after a termination for cause include all remedies
available to any buyer in the marketplace. When a termination for cause
occurs, the Government’s preferred remedy is:
To acquire similar items from another contractor, and
To charge the defaulted contractor with any excess reprocurement

costs together with any incidental or consequential damages in-
curred because of the termination.
When a termination for cause is appropriate, a written notification must be

sent to the contractor and include, at least, the following:
Indicate the contract is terminated for cause.
9-47
Specify the reason(s) for the termination.
Indicate which remedies the Government intends to seek or pro-

vide a date by which the Government will inform the contractor of
a chosen remedy.
Specify that the notice constitutes a final decision of the contract-

ing officer and that the contractor has the right to appeal the deci-
sion under the Disputes clause.
Commercial Items: When the Government takes action to terminate for convenience, the par-
Termination for Con- ties should mutually agree on the requirements for a termination proposal.
venience The Government’s interest is to obtain sufficient documentation to support
payment against the goal of having a simple and expeditious settlement.
FAR 52.212-4(l)
The contractor must be paid:
The percentage of the contract price reflecting the percentage of

work performed prior to the notice of termination, and
Any charges the contractor can demonstrate resulted directly from

the termination.
For any charges beyond the contract price reflecting the percentage of
work performed, the contractor may demonstrate those charges using its
standard record-keeping system. In doing this, the contractor is not re-
quired:
To comply with Cost Accounting Standards, or
To comply with the contract cost principles in FAR Part 31.
The Government has no right to audit the contractor’s records solely be-
cause of a termination for convenience.
9-48
CHAPTER 9
CONVENIENCE, CAUSE, OR WHAT?
Excel Products was a small business concern that had been awarded a contract for
grounds maintenance and external cleaning at an agency field installation. Excel’s
contract had been awarded using FAR Part 12 (Acquisition of Commercial Items)
procedures and FAR Part 13 (Simplified Acquisition Procedures). It had been a
competitive set-aside for small business concerns, and the total firm-fixed price for the
job was $87,500. The work was to be completed in three months from the date of award.
The work called for a series of general grounds maintenance tasks, including minor
repairs, and the high-pressure hosing of some external surfaces and metal awning areas.
The outside surfaces of two small buildings were to be cleaned and painted. After-work
cleanup was a general requirement.
About two months into performance, the COTR for the contract, Ray Lawson, called Eric
and explained that he had overheard Excel’s subcontractor, a small groundskeeping
company, complaining loudly about Excel’s late payment of billings. And, from what he
had overheard, a failure on Excel’s part to pay for work that had been done was
affecting the subcontractor’s performance of work. As a small disadvantaged business
concern, the subcontractor had to delay some grounds maintenance until Excel could pay
its bills. As Lawson told Eric, “I heard the guy say that his company simply couldn’t
afford to carry some people over several weeks without being paid for them. And in the
case of grounds maintenance, the subcontractor hired on mostly daily laborers to get the
job done.”
“So what’s the problem, Ray?” interjected Eric. “Is Excel behind in meeting the
schedule? Do you have any proof that what you heard is other then the babbling of a
disgruntled person who got up on the wrong side of the bed? Do you have any
indication that Excel’s work is suffering from what might be attributable to an alleged
failure to pay its subcontractors on time?
“Whoa, Eric!” shot back Lawson. ”I’m merely try to pass along what I believe is a
fairly significant message that may have ramifications for the completion of Excel’s
work.”
Eric knew that he had reacted too quickly and sharply to Lawson’s call. “I didn’t mean
to take you to task, Ray. Sorry if I sounded harsh. Look, I appreciate your call, and
that’s exactly what you should have done. Let me think about what you’ve said, and I’ll
get back to you over the next day. Until then, I’d appreciate your sending me a brief
E-mail conveying what you heard and what your concerns might be as the result of it.”
“Glad to, Eric,” replied the COTR, “and I understand that you can’t do much with
something if you don’t have some facts to support it. But we’ve been there before with
these kinds of things … and had to run through some troublesome wickets to make
things right.”
9-49
“Okay,” said Eric, “and thanks for the call, Ray. I’ll be back to you about this.”
As he reflected on Lawson’s call, Eric clicked into his computer, yet again, and tapped
out the following notes:
We’ve got an $87,500 fixed-price deal with a small business that usually does
good work.
Someone says the contractor is not honoring the billings, in a timely manner,
from a small disadvantaged business subcontractor.
If we have a fixed-price deal, why should we worry about any subcontracting

relationships? There’s no privity between the Government and any subcon-
tractor under a firm-fixed-price contract. Right?
But what if what Lawson heard was right? Do we have any recourse to effect
a remedy on behalf of the subcontractor? Or is it none of our business?
And if it comes to a no good end, might we have to consider a termination

action? (I hope not.) But if we do, will it be for cause or convenience?
And on what basis will Joanna make the decision?
9-50
CHAPTER 10
CONSENT TO SUBCONTRACTS
THERE’S MORE TO IT THAN MEETS THE EYE
Brenda Stilson, one of Joanne’s contract administrators, was on the phone with Bradley Moore,
the purchasing agent for Kingman & Foster (K&F), a firm known for its excellence in the field
of integrated logistics support. The agency had recently awarded the firm a completion-form,
cost-plus-fixed-fee contract. The award has been made after an aggressive competition among
several offerors, and Brenda has been assigned as the contract administrator.
Bradley Moore was fairly new to the firm’s purchasing function. He had been on the job for
about 18 months, attended some training sessions, and talked with Brenda on several occasions.
Whenever possible, she had been helpful in pointing him in the right direction to better under-
stand what cost-plus contracting was all about.
Bradley’s call to Brenda concerned the Subcontracts clause of K&F’s cost-reimbursement ar-
rangement. He was anxious to confirm his understanding of some of the clause’s requirements,
especially those dealing with a contractor’s responsibilities to inform the Government about in-
tended subcontracts.
“What’s up, Brad?” was Brenda’s opening question.
“Hey listen, Brenda,” he replied, “I’m a bit confused about the business of what we have to do
to award subcontracts, and I’ve got five on my desk that my boss wanted to award ... like last
week!”
“So, what’s the problem?” she asked.
“Well, I’m not sure I really know. I’ve got two firm-fixed-price subcontracts for off-the-shelf
items with Integron for analytical software programs, one on a time-and-materials basis for lo-
gistics support computer runs with Keltney Resources, one on a cost-plus basis for constructing
a logistics model dealing with inventory stockage levels with Logomods Inc., and ... oh yes, one
on a firm-fixed-price basis for the rental of a computer from Logomods that can do things that
none of ours can. That’s about the size of it.”
“That’s sounds like a pretty husky group of subcontracts,” the contract administrator com-
mented. “What’s it all add up to in dollars?”
“Ah ... let’s see,” he responded. “The fixed-priced ones come to $30,000, The T&M has a ceil-
ing of $13,500, and the cost-plus rings in at a respectable $90,000. The whole thing comes to
$130,000 plus change.”
10-1
Brenda breathed heavily. “That’s a good deal of work to subcontract, Brad. And what was the
total estimated cost of K&F’s cost-plus-fixed-fee contract? I haven’t got it in front of me, but I
think it was about $700,000, wasn’t it?”
“You’re close, Brenda, but on the short side by fifty grand. It’s $750,000. So tell me, what do
I have to do to get your approval of these subcontracts so I can award them?”
Brenda had grown a bit impatient with the discussion, but as always her inclination was to help.
She asked Bradley if he had a pencil in hand and a pad close by. He answered yes, and she ad-
vised him to take down whatever he felt would be helpful. She began with a series of questions,
“Where did you get the idea that the Government has to approve your subcontracts? And do
you remember that I pointed out the importance of your contract’s Subcontracts clause at K&F’s
postaward orientation conference? I understand what you mean by fixed-price and
time-and-materials deals, but what do you mean by cost-plus?” Then she added somewhat
brusquely, “Cost-plus what, Brad?”
He responded quickly. “I thought the approval business was because we have a relatively in-
experienced purchasing system in dealing with Government contracts. Sure, I remember the
post-award orientation, but that Subcontracts clause is included in our contract by reference,
and I’m told the newest version is dated February 1997. Haven’t got that version in my com-
puter-based FAR as yet. And cost-plus means cost-plus-fixed-fee.”
The contract administrator continued on. “Your contract sets forth quite clearly what K&F’s
responsibilities are in the matter of obtaining the Government’s agreement to specified subcon-
tracts you want to award, including the requirement for advance notification in some cases and
what that means.”
“Excuse me, Brenda,” Bradley interrupted, “but I’m under considerable pressure to get these
deals out the door to vendors that have been selected to deliver the goods or perform the work.
Have you got any shortcuts I can use to get, as you put it, ‘the Government’s agreement’ to the
subcontracts I’ve identified?”
“Huh ...?” she interjected. “Shortcuts? No, I’m afraid not. Uncle Sam doesn’t deal in sub-
contracting shortcuts. I strongly suggest you get a current version of the Subcontracts clause
for K&F’s contract. What you’ve got to do, or whoever has to do it, is set forth therein.”
The purchasing agent felt that he had run into a stone wall. “Well look, Brenda, can you give
me some key words or phrases that will help me zero in on the right things about what we’ve got
to do?”
“Sure,” she said. “I have no problem doing that, Brad. But I’ve got a few pressing things my-
self to handle before the end of this day. So here’s what I’ll do. I’ll call you ... or your voice
mail ... before six o’clock this evening and leave some key words or phrases. Better yet, I’ll fax
them to you. Let me do that, although I’ll call to see if you got them. In the meantime, I suggest
you get the current version of that Subcontracts clause to read.”
10-2
CHAPTER 10
Bradley thanked her and said he looked forward to her fax and phone call later in the day.
Tapping the keys of her computer, Brenda began a list of key words and phrases to send the
purchasing agent. She titled the list, “There’s More to It Than Meets the Eye.” She came up
quickly with the following: consent, proposed subcontract, dollar values, more than one sub-
contract with a single subcontractor, advance notification, ratification, and purchasing system.
“What others can I add?” she asked herself.
10-3

Overall: Consent or decline to consent to the placement of proposed subcontracts.
Individual:
10.1 Determine whether Government consent to individual subcontracts is required

under a contract.
10.2 Determine if a contractor is required to submit advance notifications of subcon-

tracts for consent and identify the types of subcontracts for which prime contrac-
tors must submit such notifications.
10.3 Review advance notifications for subcontracts, obtaining revisions or modifica-

tions when necessary, as well as Equal Employment Opportunity (EEO) clearance
from the Department of Labor, when required.
10.4 Determine whether the Federal Acquisition Regulation (FAR) prohibits consent.
10.5 Determine whether to withhold consent and identify any changes or corrections
necessary prior to consent.
10.6 Negotiate changes or corrections in a contractor’s subcontracting procedures or a

contract itself, when appropriate, obtaining the contracting officer’s approval in
writing for those changes or corrections if they conflict with previously approved
plans.
10.7 Consent, decline to consent, or make appropriate recommendations to a contract-

ing officer concerning any changes or corrections for a contractor’s subcontract-
ing procedures, or a contract itself, and obtain the contracting officer’s decision,
document it, and transmit it in writing to a contractor.
10.8 Monitor contract performance to ensure that subcontracts are not awarded without
required consent.
10-4
CHAPTER 10
INTRODUCTION TO CONSENT TO
SUBCONTRACTS
Definition for Sub- Subcontract means any contract, as defined in FAR Subpart 2.1, entered
contracting into by a subcontractor to furnish supplies or services for the performance
of a prime contract or subcontract, including purchase orders, and changes
FAR 44.101 and modifications to purchase orders.
Subcontractor means any supplier, distributor, vendor, or firm that fur-

nishes supplies or services to a prime contractor or another subcontractor.
Consent to subcontract means a contracting officer’s written consent for a

prime contractor to enter into a particular subcontract.
Policy On Consent Consent to subcontracts is required when a subcontract is complex, the

Requirements dollar value is substantial, or the Government’s interest is not adequately
protected by competition and the type of prime contract or subcontract.
FAR 44.102
Consent requirements may be waived when a contractor’s purchasing sys-
tem has been reviewed and approved in accordance with FAR Subpart
44.3 (Contractors’ Purchasing Systems Reviews).
Consent Responsibili- A cognizant administrative contracting officer is responsible for consent

ties to subcontracts, except when the contracting officer retains a contract for
administration or withholds the consent responsibility from delegation to
FAR 44.202-1 an administrative contracting officer.
Approval Versus While the Government may reserve the right “to approve” a contractor’s
Consent purchasing system, it grants its “consent” to subcontracts. What the
Government consents to is not the capacity and credit of a subcontractor to
perform, but rather the cost or pricing arrangement between one contractor
(a prime) and another contractor (a subcontractor) or, in some cases, sub-
contracts selected by a contracting officer requiring special surveillance.
Subcontracts for Contractors and subcontractors, at all tiers, are required, to the maximum
Commercial Items extent practicable, to incorporate commercial items or nondevelopmental
and Components items as components of items delivered to the Government.
FAR 44.402 In doing so, contractors and subcontractors are not required to apply to
any of their divisions, affiliates, subcontractors, or suppliers that are fur-
nishing any commercial items or commercial components any clause, ex-
cept those:
10-5
Required to implement provisions of law or executive orders ap-

plicable to subcontractors furnishing such items or components, or
Determined to be consistent with customary commercial practice

for the item being acquired.
Subcontracting Clause FAR 52.244-6, Subcontracts for Commercial Items and for Commercial
for Commercial Items Components, implements the policy requirements of FAR 44.402(a) and is
and Components required for use in solicitations and contracts for supplies or services other
than commercial items. Notwithstanding any other clause in a prime
FAR 44.402(b) and contract, only those clauses identified under FAR 52.244-6 are required to
44-403 be in subcontracts for commercial items or commercial components.
DFARS 244.403
In contracts that contain the clause mandating a preference for domestic
specialty metals (DFARS 252.225-7014), these requirements must be
flowed down to subcontracts at any tier when the items being acquired
under those subcontracts contain specialty metals.
Steps in Performance Steps in providing consent to subcontracts are charted on the next page.
Following the flowchart, each step is discussed in detail.
10-6
CHAPTER 10
STEPS IN CONSENTING TO
SUBCONTRACTS
1. Determine whether 6. Negotiate changes or

consent is required under corrections in contractor’s
the contract. subcontracting procedures
where necessary.
7. Consent or decline to
consent.
Required? No Consent not

necessary.
8. Monitor to ensure sub-

Yes contracts are not awarded
without required consent.
2-3. Identify types of sub-
contracts for which con-
sent is required; obtain
advance notifications.
Is consent
required for No Consent not
subcontract necessary.
at issue?
Yes
4. Determine whether
the FAR prohibits consent.
Consent Yes
Do not consent.
prohibited?
No
withhold consent for other
reasons; establish con-
ditions for consent.
10-7
TO CONSENT OR NOT TO CONSENT
10.1 Determine There are three major steps involved in determining a contract’s require-
Consent Requirements ments for consent to subcontracting.
Step 1 Review the contract. The key to determining whether the Government
has the right to consent to or to reject a subcontract is found in the contract
itself. The first step is to review it carefully. In this review, pay close
attention to:
FAR clauses incorporated in the contract,
Special clauses relating to subcontracting,
The type of contract and subcontract, and
The contract and subcontract dollar amounts.
Generally, Government consent to a subcontract is required in a prime

contract when the Government’s interests in subcontract arrangements are
not protected by the contract type or when the Government’s interests are
not protected by the competitive practices of the prime contractor.
Breadth of Consent Consent may also be required when a subcontract is recognized in the
preaward phase of a procurement as being particularly critical to overall
FAR 44.201-1(b) performance, even though the Government’s interests are generally pro-
tected by the contract type and/or competitive practices. Such subcon-
tracts may be specified in the schedule of a prime contractor’s contract as
requiring consent, while others will not. A prime contract may even spe-
cify other special surveillance requirements for critical subcontracts, such
as approval of a subcontractor’s quality control program.
Step 2 Determine if the Government’s interests are protected by the contract

type. Generally, consent to a subcontract is not required under prime
FAR 44.201 contracts that are firm-fixed price or fixed-price with economic price ad-
justment clauses. Consent is generally required for other contract types.
Consent may also be required under fixed-price prime contracts, depend-
ing on the nature of the subcontract. For instance, consent is required
when:
The subcontract results form an unpriced modification to a prime

contract, or
10-8
CHAPTER 10
The subcontract is a cost-reimbursement, time-and-materials, or

labor-hour type of arrangement.
Step 3 Determine if the Government’s interest is not adequately protected by

competition. If a prime contractor has a Government-approved purchas-
FAR Subpart 44.3 ing system, consent is generally not required, because part of the review
for approval for such a system is its adherence to Government competition
requirements and general good business practices. Exceptions occur
when:
Contracts that are not facilities contracts are issued as letter con-
tracts or as cost-reimbursement types of contracts, or
A contract is for a major system, subsystem, or for component

parts of the system or subsystem.
Contractors’ Purchasing There is assurance that the Government’s interests in a prime’s subcon-
Systems Reviews tracting procedures are being protected when a contractor purchasing sys-
tem review (CPSR) has been conducted and the system has been
approved. These reviews are usually required for each contractor whose
negotiated sales (not sealed bid or sales of commercial items pursuant to
Part 12) to the Government are expected to exceed $25 million during the
next 12 months. Generally, the Government analyzes a prime contrac-
tor’s overall purchasing system. A CPSR is not done to satisfy the needs
of a specific contract.
SOME FOLKS JUST DON’T GET IT
Joanne was at her desk at eight o’clock this morning and checking her voice mail for any
messages. She noted a call from Harlan Shoemaker, Director of Purchasing and Supply
Management for ACME Construction and Supply . “Wonder what he wants?” she said to
herself. ACME was a worldwide company and recently had grown its business with the
Government to the point where it anticipated more than $25,000,000 of negotiated prime
and subcontract awards over the next 12 months. Given this expected level of sales, the
company became a candidate under FAR Subpart 44.3, Contractors’ Purchasing Systems
Reviews, for a CPSR.
So far as Joanne knew, ACME’s CPSR had been conducted by the Defense Contract
Management Command (DCMC), and she was expecting to hear the results in the near
future. The “near future,” unbeknown to her, was about to occur when she responded to
Harlan Shoemaker’s call of the previous day.
“Mr. Shoemaker, this is Joanne Davidson responding to your phone call. What can I do
for you?”
10-9
“Thanks for calling, Ms. Davidson. I appreciate your prompt response. Chances are
that if we had connected yesterday, I’d have tried to chew your head off.”
“Really,” Joanne said with a sound of mild surprise in her voice. Then she added,
“What seems to be the problem?” Harlan seized the opportunity to respond. “As you
know, we had DCMC in here for a CPSR. Turned the place inside out for them. They
must have been here for the better part of a month. Looked at more paper and records
than I thought we had. Nice people, I guess, but we came up short. We got a letter
from the cognizant DCMC leader indicating that the Government was withholding
approval of our purchasing system. Said we showed weaknesses in the submission of
required cost or pricing data, that our small, small disadvantaged, and women-owned
small business subcontracting practices were out of whack with our rules, and some
other things as well. Wanted to call you to see what might be done about all this.”
“Well, I haven’t seen the CPSR report as yet,” the contracting officer began. “Will
probably be on my desk in a day or two. Before I can suggest anything, Mr. Shoemaker,
I’ve got to see what it says. But in the meantime, I think it appropriate for you and your
staff to take account of the period within which you’ve been asked to submit a plan that
responds to the deficiencies in your purchasing system that require correction.”
“Look, Ms. Davidson,” Harlan interrupted, “all our company is trying to do is good
work at a good price to be of good report. And it troubles me no end when the
Gov-ernment steps in and tries to tell us how to run our business. Do you think it’s fair
to do that ... or what?”
How many times had she heard this over the years? And she responded as she always
had. “Mr. Shoemaker, our objective is not to run your business. No sir, our objective, in
the case of a CPSR, is to evaluate your purchasing procedures and practices to see if the
business you conduct is compatible with requirements that speak to the protection of
public funds spent for public purposes.”
“Well, that all sounds mighty nice, Ms. Davidson, and you can put it any way you want,
but I’ll never understand why we just can’t do it the way we know that works.”
Thanking Harlan for calling, Joanne ended the conversation, hung up the phone, and
began to deal with the many items on her desk.
10.2 Identify Sub- Having identified prime contracts that contain clauses requiring the sub-
contracts Requiring mission of subcontract information, you must now consider which sub-
Consent contracts need a notification for consent from the contractor. A prime
contractor is not required to submit an advance notification for all of them.
Prime contractors need only submit notifications for those subcontracts
with a substantial dollar value or those that contain complex requirements.
Two steps may be used to ascertain substantial dollar value or complex

requirements.
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Step 1 Determine if the dollar value is substantial. For fixed-price types of

contracts, other than firm-fixed price or fixed-price with economic price
Fixed-Price Types of adjustment, FAR 52.244-1, Subcontracts (Fixed-Price Contracts), sets
Contracts forth that a contractor must notify the contracting officer reasonably in
advance of entering into any subcontract if the contractor does not have an
FAR 52.244-1 approved purchasing system and if the subcontract:
Is proposed to exceed $100,000;
Is one of a number of subcontracts with a single subcontractor,

under the contract, for the same or related supplies or services that
in the aggregate are expected to exceed $100,000; or
Results from unpriced modifications to the contract.
Cost-Reimbursement For cost-reimbursement types of contracts, FAR 52.244-2, Subcontracts

Types of Contracts (Cost Reimbursement and Letter Contracts), sets forth that a contractor
must notify the contracting officer reasonably in advance of entering into
FAR 52.244-2 any subcontract if the subcontract:
Is one of the following types: cost-reimbursement,

time-and-materials, or labor-hour (the contractor may enter into
these subcontracts without consent if it has an approved purchas-
ing system, but advance notification is still required);
Is fixed-price and exceeds either $25,000 or five percent of the to-

tal estimated cost of the contract under which it would be awarded
(the contractor may enter into this subcontract without consent if it
has an approved purchasing system, but advance notification is
still required);
(For DoD, Coast Guard, and NASA, the fixed-price amount is the
greater of the simplified acquisition threshold or five percent of the
total estimated cost of the prime contract.)
Has experimental, developmental, or research work as one of its

purposes; or
Is to be awarded under a non-facilities prime contract and provides

for the fabrication, purchase, rental, installation, or other acquisi-
tion of special test equipment valued in excess of $25,000 or of
any items of facilities.
10-11
Consent to Advance When advance notification is required, a contractor is required to obtain a

Notifications and Rati- contracting officer’s written consent before placing any subcontract.
fications When a contracting officer ratifies (after the fact), in writing, consent to a
subcontract, such ratification constitutes the same consent as if it had been
given before the fact.
Step 2 Determine if the requirement is complex. A subcontracted require-

ment is considered complex if it is for:
FAR 44.201-2(a) Special test equipment valued at more than $25,000 under a
cost-reimbursement type of prime or letter contract that is not a fa-
cilities contract, whether for the fabrication, purchase, rental, in-
stallation, or other acquisition of the special test equipment;
Experimental, developmental, or research work;
FAR 44.201-2(c) A major system, subsystem, or components;
FAR 44.201-3 Mortuary services, refuse services, or the shipment and storage of
personal property when an agency requires prior approval of sub-
contractor facilities; or
A subcontract selected by the contracting officer as needing spe-

cial surveillance.
A contractor may be required to submit an advance notification to subcon-

tract for complex requirements not otherwise specified in a subcontracts
clause, but only if such a requirement for advance notification is set forth
in a contract’s schedule.
10.3 Obtain and Re- In obtaining and reviewing advance notifications and identifying EEO re-
view Advance Notifi- quired clearances, four steps must be taken.
cations
FAR 52.244-1
FAR 52.244-2
Step 1 Check advance notifications for content requirements. FAR Subcon-

tract clauses at FAR 52.244-1 and -2 not only require an advance notifica-
tion, but also outline content requirements for it. These content
re-quirements are listed in Exhibit 10-1. Use this checklist to make sure
that an advance notification meets all of the content requirements.
10-12
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Assessing the Adequacy of An Advance Notification to Subcontract
A “No” answer to any question on this list indicates that you do not have all the required
content information, as described in paragraph (c), FAR 52.244-1, Subcontracts (Fixed-Price
Contracts) (FEB 1995) and paragraph (b)(2) of FAR 52.244-2, Subcontracts
(Cost-Re-imbursement and Letter Contracts) (FEB 1997).
YES NO
N/A
♦ Does the notification describe the supplies or services to be
subcontracted?
♦ Does the notification identify the contract type of the proposed

subcontract?
♦ Does the notification identify the proposed subcontractor, with an

explanation of why and how it was selected, including the
competition obtained?
♦ Does the notification identify the proposed subcontract price,

accompanied by the prime contractor’s cost or price analysis?
♦ If required by the contract, does the notification contain the sub-

contractor’s accurate, complete, and current cost or pricing data?
♦ If required by the contract, does the notification include a

Certificate of Current Cost and Pricing Data?
♦ If required by the contract, does the notification include the sub-

contractor’s Disclosure Statement or Certificate relating to Cost
Accounting Standards?
♦ Does the notification include a memorandum of negotiation, if

appropriate, from the prime contractor for the proposed sub-
contract?
10-13
Assessing the Adequacy of An Advance Notification to Subcontract
YES NO
N/A
♦ Does this memorandum of negotiation reflect:
¾ The principal elements of any subcontract price negotiations?
¾ The most significant considerations controlling the establish-

ment of initial or revised prices?
¾ The reason why cost or pricing data were or were not required?
¾ The extent, if any, to which the prime contractor did not rely
on the subcontractor’s cost or pricing data in determining the
price objective and in negotiating the final price?
¾ The extent, if any, to which it was recognized in the negotia-

tion that the subcontractor’s cost or pricing data were not
accurate, complete, or current?
¾ The resulting action, if any, taken by the prime contractor and

subcontractor as a result of any defective pricing?
¾ The effect of any defective pricing data on the total price

negotiated?
¾ The reasons for any significant difference between the prime

contractor’s price objective and the price negotiated?
¾ If incentives were used in the subcontract, a complete expla-

nation of the incentive fee or profit plan?
10-14
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Step 2 If all required information is not received, request revisions or addi-

tions to the advance notification. A review of the content requirements
as referenced in Step 1 may surface:
Any obvious mistakes or inconsistencies,
Omissions, or
Other deficiencies.
If so, request either a revised notification or a modification that clarifies

mistakes or inconsistencies, adds omitted material, or otherwise corrects
deficiencies in the original notification. Request a modification only
when a few corrections are required. Otherwise, return the original noti-
fication and request a revised one that conforms to content requirements.
Step 3 Check advance notifications for any EEO clearance requirements.

One piece of information contained within an advance notification is the
proposed subcontract price. This, along with other notification content
requirements, determines if an EEO clearance is required for the subcon-
Determining When EEO Subcontract Clearances Are Required
IF AND THEN
The prime contract contains: The proposed subcontract EEO clearance is

price is: required.
FAR 52.222-28, Equal 1. For a first-tier sub-

Opportunity Preaward contract, and
Clearance of Subcontracts. 2. Equals or exceeds
$1 million.
tract. Refer to the decision chart in Exhibit 10-2.
Exhibit 10-2
10-15
Step 4 Request the EEO clearance. Your agency must request the EEO clear-
ance from the appropriate regional office of the Department of Labor’s
Office of Federal Contract Compliance Programs. A contracting officer
may not consent to a subcontract unless fully within the conditions shown
on Exhibit 10-2, and the prime contractor cannot award it unless this
clearance is obtained.
10.4 Determine If After determining that all advance notification content requirements have
FAR Prohibits Con- been met, examine the notification for any FAR prohibitions requiring the
sent contracting officer to withhold consent to the subcontract. These prohibi-
tions are shown in a checklist format in Exhibit 10-3.
FAR 9.405-2
FAR 44.203
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FAR Prohibitions Against Subcontracting
A “Yes” answer to any question on this list indicates that the FAR prohibits consent to a
subcontract. If your checkmarks appear in the “No” or “N/A” columns, other discretionary
factors must be considered by the contracting officer before making a determination on
whether to consent to a subcontract. See FAR 44.202-2 and Exhibit 10-4.
YES NO
N/A
♦ If the subcontract is for experimental, development or research
work performed under a cost-plus-fixed-fee agreement, does the
fee exceed 15 percent of the subcontract’s estimated cost?
♦ If the subcontract is for architect-engineering services for public

works or utilities, does the estimated cost and fee for the production
and delivery of designs, plans, drawings, and specifications exceed
6 percent of the estimated cost of construction?
♦ If the subcontract is for another cost-plus-fixed-fee arrangement,

does the fee exceed 10 percent of the subcontract’s estimated cost?
♦ If the subcontract is for a cost-plus-incentive-fee or cost-plus-

award-fee subcontract and a deviation has not been obtained, does
the fee(s) exceed 15 percent of the estimated cost for experimental,
developmental or research work or 10 percent of the estimated cost
for other requirements?
♦ Are payments under the subcontract to be made on a cost-plus-a-

percentage-of-cost basis?
♦ Does the subcontract obligate the contracting officer to deal directly

with the subcontractor?
10-17
FAR Prohibitions Against Subcontracting
YES NO
N/A
♦ Does the subcontract make the results of arbitration, judicial
determination, or voluntary settlement between the prime and sub-
contractor binding on the Government as well?1
♦ Does the subcontract, in consonance with other subcontracts under

a prime contract, show a repetitive or unduly protracted use of cost-
reimbursement, time-and-materials or labor-hour contracts?
♦ Is the proposed subcontractor on the List of Parties Excluded

From Procurement and Nonprocurement Programs?2
♦ If the subcontract requires an EEO clearance (see Exhibit 10-2),

has it been refused clearance by the appropriate regional Office of
Federal Contract Compliance Programs?
♦ If the proposed subcontract contains a requirement for jewel bear-

ings and related items, is a clause requiring that these items be
obtained from the William Langer Plant absent from the subcontract?
1
You are not to answer “yes” to this question merely because the subcontract contains a clause giving the sub-
contractor the right of indirect appeal to an agency board of contract appeals, as long as this clause does not
attempt to obligate the contracting officer or the appeals board to decide questions that do not arise between the
Government and the prime contractor or that are not a matter for dispute under FAR 52.233-1, Disputes.
2
The contracting officer has some leeway to consent to a subcontract award to a firm on this List. See FAR
9.405-2, FAR 52.209-6 and DFARS 209.405.
10-18
CHAPTER 10
10.5 Determine to After examining a contractor’s advance notification to subcontract as de-

Withhold Consent for tailed in 10.3 and after discarding all FAR consent prohibitions as inap-
Other Reasons or Es- plicable, you are ready to consider whether consent would be appropriate
tablish Conditions for and to make a recommendation to the contracting officer. Follow three
Consent steps in doing so.
FAR 44.202-2
Step 1 Research the appropriateness of providing consent. Base your re-

search on the considerations listed in FAR 44.202-2 and in Exhibit 10-4.
Provide your recommendation promptly to the contracting officer on the

evaluation of the contractor’s advance notification to subcontract. A de-
lay in acting on this notice may constitute, depending on the terms of the
contract:
An excusable delay for additional time or compensation, or
Implied consent, since no refusal to consent was provided.
Step 2 Pay close attention to previous commitments the prime has made that
affect subcontracting. Notice the first item in Exhibit 10-4. The clause
at FAR 52.219-14, Limitations on Subcontracting, is only required for
prime contracts that were awarded as a small business set-aside or are
Section 8(a) procurements. For nonconstruction services, this clause re-
quires that at least 50 percent of the cost of performance must be expended
for employees of the subcontractor.
Notice the third item in Exhibit 10-4. The term “make-or-buy program”
is that part of a contractor’s written plan for a contract that identifies:
Major items to be produced or work efforts to be performed at the

prime’s own plant, and
Those items to be subcontracted.
10-19
Discretionary Factors in Consenting to Subcontracts
The contracting officer may take the following discretionary factors into account in deciding
whether to consent or withhold consent to a subcontract.
♦ The subcontract’s effect on the total amount of subcontracting when the clause at FAR
52.219-14, Limitation on Subcontracting, is included in the prime contract.
♦ The necessity for subcontracting.
♦ The consistency of the subcontract with the prime contractor’s make-or-buy program.
♦ The availability of special test equipment or facilities from Government sources that
would otherwise be procured under the subcontract.
♦ The technical justification for the selection of specific supplies, equipment, or services.
♦ The prime contract’s requirements concerning small, small disadvantaged, and wom-
en-owned small business subcontracting, including, if applicable, its subcontracting plan,
as discussed in FAR Subpart 19.704, Subcontracting plans requirements.
♦ The adequacy of price competition or justification for its absence.
♦ The contractor’s assessment and disposition of alternate proposals from subcontractors, if
offered.
♦ The basis for selecting the particular subcontractor and determining its responsibility.
♦ The adequacy of the contractor’s cost or price analysis.
♦ Whether the contractor obtained accurate, complete, and current cost or pricing data, in-
cluding any required certifications.
♦ The type of subcontract given the risks involved and current policies on the use of that
type of contract.
♦ The adequacy of consideration to the Government for any proposed subcontract involv-
ing the use of Government-furnished property or facilities.
♦ The adequacy and reasonableness with which the contractor has translated prime contract
technical requirements into subcontract requirements.
♦ Compliance with applicable Cost Accounting Standards for awarding the subcontract as
discussed in FAR 30.201-2, Types of CAS Coverage.
Exhibit 10-4
10-20
CHAPTER 10
Make-or-Buy Consid- Although there are some exceptions, prospective prime contractors are
erations generally required to submit make-or-buy programs for negotiated acqui-
sitions with an estimated value of $5 million or more.
FAR Subpart 15.7
DFARS 215.704 In DoD procurements, the requirements for a formal make-or-buy program
applies to actions with a minimum value of $1 million.
When the Government obtains a make-or-buy program, it is required to

give primary consideration to the effect of the proposed program on price,
quality, delivery, and performance, including the technical or financial
risk involved. Approval of a make-or-buy program involves careful con-
sideration in the preaward phase of an acquisition and constitutes an en-
dorsement of the way the prime contractor intends to manage contract
performance. Any divergence from that program warrants an inquiry.
Reasons to Examine Variations From Make-or-Buy Programs
♦ When a make-or-buy program has been incorporated into a contract, it is an enforceable

contract requirement.
♦ When FAR 52.215-21, Changes or Additions to Make-or-Buy Program, is in a contract,

the Government may be entitled to an equitable reduction in contract price for any altera-
tion to an agreed-to make-or-buy program.
♦ If a program was an evaluation factor for award, allowing changes that would be less
beneficial to the Government may prejudice the rights of others who competed for the
acquisition.
♦ If a program was not incorporated into a contract, it may be necessary to review and
agree on the program during an acquisition’s postaward phase.
Exhibit 10-5 summarizes why.
Exhibit 10-5
10-21
Small Business Sub- Notice the sixth item in Exhibit 10-4. Small, small disadvantaged, and
contracting women-owned small business subcontracting plans are, with few excep-
tions, required in contracts that are:
FAR 19.702
Expected to exceed $500,000 ($1,000,000 for construction), or
FAR 19.704
Otherwise offer a substantial potential for subcontracting.
DFARS 219.702
DFARS 219.704 The DoD is participating in a test program through the end of fiscal year
1998 in which contractors will prepare corporate, division or plant-wide
subcontracting plans that are comprehensive of all contracts in those
business units.
Reasons for closely observing subcontracting inconsistencies with these
Reasons to Examine Variations From Subcontracting Plans
♦ When FAR 52.219-16, Liquidated Damages—Subcontracting Plan, is included in a con-

tract, the Government may be entitled to monetary damages for the prime contractor’s
divergence from its Small, Small Disadvantaged and Women-Owned Small Business
Subcontracting Plan.
♦ Examining inconsistencies fulfills other responsibilities you have in monitoring these
programs (see FAR 19.706, Responsibilities of the cognizant administrative contracting
officer).
♦ As with a make-or-buy program, if a subcontracting plan were an evaluation factor for
award, condoning changes that would be less beneficial to the Government may prejudice
the rights of others who competed for the acquisition.
♦ The DoD can also utilize an incentive provision to encourage aggressive subcontracting
to small, small disadvantaged, and historically black colleges and universities and minor-
ity institutions. Under this provision, a contractor can earn incentive payments (of up to
10 percent) of the excess subcontracting actually done with such organizations. This
incentive may not be used in contracts with contractors who have comprehensive sub-
contracting plans. (see DFARS 252.219-7005)
plans are summarized in Exhibit 10-6.
Exhibit 10-6
10-22
CHAPTER 10
Step 3 Obtain assistance in the evaluation from Government support per-

sonnel. Support personnel who may provide valuable assistance in de-
ciding the appropriateness of factors listed in Exhibit 10-4 include:
Auditors,
Pricing specialists, and
Technical experts.
Use their expertise especially when you have cause for concerns but do
not have enough information to base a reliable judgment on your con-
cerns.
10.6 Negotiate Sub- Assume you have contacted the contractor regarding missing or inconsis-
contracting Changes tent data, and you now have all the information your contract requires for
or Corrections the submission of a consent notification. Three steps should be taken in
coming to a conclusion about consent.
Step 1 Distinguish between legitimate concerns and micromanagement. You

may be in complete accord with the prime’s subcontracting decision. In
fixed-price types of contracts, you normally would be. The prime has
assumed most of the risk of successful contract performance under these
arrangements. Micromanaging them is not appropriate. Voice sub-
con-tracting concerns about fixed-price types of contracts only when there
is an obvious cause for them. For instance, when you discover that the
subcontractor is on the List of Parties Excluded From Procurement and
Nonprocurement Programs.
Step 2 Concentrate negotiation efforts on the extent of subcontracting com-

petition. Competition at the subcontractor level should be strongly en-
couraged. The Office of Federal Procurement Policy (OFPP)
recommends that agencies develop procedures to reach this goal in specif-
ic areas. Exhibit 10-7 summarizes these recommendations.
In the process of consenting to subcontracts, you can strongly support the

goals for the second and fourth items on Exhibit 10-7. It is useful, how-
ever, to keep the other goals in mind when asked to participate in early
acquisition planning.
10-23
Ways to Increase Subcontractor Competition
♦ Plan for subcontract competition early in the acquisition process.
♦ Emphasize the importance and benefits of competition in subcontracting and consider it

in the evaluation and source selection process.
♦ Increase emphasis on Contractors’ Purchasing Systems Reviews.
♦ Direct prime contractors to seek second sourcing on key noncompetitive subcontract

components in major contracts where a potential for competition exists.
♦ Use award fee provisions, where appropriate, to motivate prime contractors to increase
competition for subcontracts.
Exhibit 10-7
Step 3 Voice legitimate concerns. Do not hesitate to voice legitimate concerns.

For instance, you would have a legitimate concern if the submission of
cost or price analysis information shows that an estimate of cost or price
for a subcontract was based on a prime’s own estimate because no offers
were received from prospective subcontractors. Query your technical
experts about the contractor’s estimate. Most certainly query the contrac-
tor about what appears to be a lack of competition. Have the contractor
document, if the case, that an attempt to solicit subcontracting competition
produced no results and why.
Voicing concerns based on suspicions or baseless information does not

encourage an effective business relationship. A contractor may consider
it to be a form of harassment, one that obstructs its authority to manage its
own business. Where changes are required or additional information is
necessary to support a consent decision, then so inform the contractor in a
businesslike way.
10.7 Document the Document the consent or nonconsent decision in the contract file. As for
Decision other aspects of contract administration, you must back up the decision for
your actions so there is no second-guessing at some later date, if problems
should arise that cast doubt on the wisdom of the decisions you made or
recommended.
Use the checklists provided in this chapter as means for documenting the
decision process.
10-24
CHAPTER 10
FAR 44.202-1(b) Document the decision to the prime contractor. There are only a few
rules regarding this documentation:
It must be prompt,
It must be in writing,
It can include a requirement for changes or corrections.
Those are the requirements, but you might include suggestions for the
prime’s consideration. For example, in consenting to a subcontract, you
could voice concern over any noncompetitive aspects of the subcontract,
even though price analysis appeared adequate. You might include sug-
gestions for enhancing competition, perhaps with the help of your agen-
cy’s Competition Advocate’s Office.
10.8 Monitor to En- When the Government exercises its right to inspect a prime’s books and
sure Subcontracts Are records, compliance with contract clauses requiring the Government’s
Awarded Properly consent to subcontracts should be among an auditor’s checklist of items.
There is one instance when close and timely monitoring of subcontract

consent clauses is most appropriate. That is, when the Government has
refused consent to a subcontract and an unusual period of time elapses
without any feedback from the prime. In this case, informal inquiries will
usually get to the cause and indicate if and when further action is neces-
sary. There may be legitimate reasons for a lack of feedback. The prime
may have decided to perform the work originally earmarked for subcon-
tracting, or the prime may just be ignoring subcontract consent require-
ments. In this case, specific monitoring efforts are justified.
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CHAPTER 11
LIMITATION OF COSTS
COST PLUS WHATEVER … A DIFFERENT WORLD
Among the most interesting facets of a contract administrator’s responsibilities are those asso-
ciated with the administration of cost-reimbursement types of contracts. Dealing with cost-plus-
whatever arrangements was, as Eric had come to believe, a different world. Most of Eric’s con-
tracts were firm-fixed price, but he had several cost-reimbursement arrangements to administer.
These represented performance requirements that were difficult to describe in other than rea-
sonably well-written statements of work. Among these contracts, one was a cost-plus-fixed-fee
arrangement that had been near the top of Eric’s agenda for the past 48 hours. He was working
on it now.
It was a cost-plus-fixed-fee contract with Haverford Laboratories for a research study on envi-
ronmental pollution controls, including a required worldwide search for bibliographic resources
on the subject of pollution-induced illnesses. The estimated cost of performance was $350,000,
exclusive of fee, and work had been in progress for about 12 months. So far as he could deter-
mine from progress reports and talking with the requirements side of the house, Haverford had
been performing well.
Eric’s attention had been drawn to Haverford’s effort when Joanne forwarded a letter she had
received three days ago from Casey Maynard, the contractor’s chief financial manager. She
asked her contract administrator to check it out. Maynard had sent the contracting officer, in
part, the following:
“Under our contract, we are required to inform you in writing when we expect to reach
an expenditure level over the next 60 days, when added to all previously incurred cost,
that will exceed 75 percent of the estimated cost of performance (FAR 5.232-20 - Limita-
tion of Cost). As of this date, we have expended about 87 percent of the estimated cost
and, given our ongoing effort, will reach the 100 percent mark over the next month.
Our expenditure rate for the past month rose rather precipitously as a result of unfore-
seen circumstances encountered by our team of professional bibliographic researchers.
An intended one-week trip to London by half of the team and a similar trip to Moscow by
the other half resulted in unexpected difficulties attributable to translation problems and
breakdowns in the transmission of electronic databases. What had been planned as one-
week trips developed into at least two-week trips, with all the associated costs of travel,
per diem, salaries, and the like.
Our accounting system reports to me on a monthly basis concerning incurred costs for
the preceding month. As of our last voucher, I had no indication, of course, of any antic-
ipated cost growth as it happened over the past month. Quite clearly, the increase in our
rate of expenditure was the result of conditions beyond our control.
11-1
LIMITATION OF COSTS
Given what has occurred, and considering what is yet to be done under our contract, we
estimate that completing performance will require an additional $70,000 which, when
supplemented by our current 6 percent fee, approximates $74,200.
We stand ready to be advised by you in this matter, and trust that you will understand the
circumstances that have caused cost growth to occur.”
“Okay,” Eric thought, “what do I do with Haverford Laboratories?” It appeared from the com-
pany’s letter that there was enough money left for about one month of effort. And while Casey
Maynard sounded almost a bit naïve, the contract administrator had the strong feeling that the
company’s next letter might indicate that the money had run out and the contractor was under
no further obligation to perform.
Another set of questions for himself before he dug into it.
How come we get a letter at the 87-percent level when reporting was required at the 75-
percent level?
Aside from what may have happened, do we have a case of breach here?
Better check with the requirements people. They’re not going to take lightly to all this.
They’ll be anxious to know what’s in an additional $70,000, plus fee, to complete per-
formance.
Contact finance and payment. What’s the status of Haverford’s vouchers? What does
Joanne know about them?
Bottom line: What alternatives are open to us?
Much to do as Eric picked up the phone and tapped in the number of the agency’s project leader
for the study.
11-2
CHAPTER 11

Overall: Know the steps to take in responding to situations of cost overruns or funding
depletions on cost-reimbursement types of contracts.
Individual:
11.1 Determine if a contractor is approaching the estimated cost or limit of funds allot-
ted, as reflected in an estimated amount in a cost-reimbursement type of contract.
11.2 Meet with contract administration team members, including requiring activity
representatives and/or a contracting officer’s technical representative to examine
and resolve cost limitation problems.
11.3 Resolve cost limitation problems by making appropriate choices among possible
solutions.
11.4 Deobligate and remove excess funds in the event of a cost underrun.
11-3
LIMITATION OF COSTS
INTRODUCTION TO LIMITATION OF COSTS
Contract Funding Re- If a contract is fully funded, funds are obligated to cover the price or target
quirements price of a fixed-price type of contract or the estimated cost and fee, if any,
of a cost-reimbursement type of contract.
FAR 32.703-1
If a cost-reimbursement arrangement is incrementally funded, funds are
DFARS 232.703-1 obligated to cover the amount allotted and any corresponding increment of
fee. Although the general policy is that fixed price contracts shall be fully
DFARS 232.703-70 funded, they may be funded incrementally if:
the contract is funded with an R&D appropriation, and either
Congress has incrementally appropriated program funds, or
the head of contracting activity approves the practice for base ser-
vices or hazardous/toxic waste remediation contracts.
In any event, such fixed price contracts shall be fully funded as soon as
practicable after sufficient funds are available.
Limitation of Cost or An important part of the backbone of cost-reimbursement contracting is

Funds the function served by limitation-of-cost coverage for fully funded con-
tracts and limitation-of-funds coverage for incrementally funded contracts.
FAR 32.705-2
Limitation-of-cost and limitation-of-funds coverage provides protection
DFARS 232.705-70 for both the Government and a contractor in cost-reimbursement arrange-
ments, a protection not needed under fixed-price types of contracts.
DFARS 252.232-7007
For incrementally funded fixed price contracts, the funding limitation con-
cept is termed a limitation of the Government’s obligation.
Basic Differences in Under a fixed-price type of arrangement:

Fixed-Price and Cost-
Reimbursement Ar- The contractor bears the greater cost risk.
rangements
The contractor guarantees completion of the job or work.
Overruns are the contractor’s to pay.
Under a cost-reimbursement type of arrangement:
The Government bears the greater cost risk.
11-4
CHAPTER 11
The parties agree that performance of the work will not cost the
Government more than the negotiated cost estimate, exclusive of
any fee(s).
The contractor’s promise is to use its best efforts to perform the
work within the negotiated cost estimate, and this promise is con-
tingent on performance within this estimate.
There is no obligation of the contractor to continue performance
when costs exceed the negotiated cost estimate or funding level in
the contract unless and until the Government provides additional
funding and a revised estimated cost of performance.
There is no obligation by the Government to pay for any work the
cost of which exceeds the negotiated cost estimate.
Caution Concerning No officer or employee of the Government may create or authorize an ob-
Anti-Deficiency ligation in excess of available funds. Government personnel encouraging
a contractor to continue performance in the absence of funding may be
subject to a civil or criminal penalty (Revised Statutes, Section 3670 (31
U.S.C. 1341).
Additional Cautionary Note: Military construction contracts, other than

those for environmental restoration at installations being closed or realized
or those specifically approved for environmental work, may not be of a
cost plus fixed-fee type when funded under an annual military construc-
tion appropriations act.
Steps in Performance The steps in monitoring and controlling costs through cost-limitation pro-
visions are charted on the next page. Following the flowchart, each step is
11-5
LIMITATION OF COSTS
STEPS IN LIMITATION OF COSTS
1. Determine if the contractor

is approaching the estimated
cost or allowed limit of funds.
No
Nearing the limit?
Continue monitoring.
Yes
2. Meet with Government

contract administration team
members.
Possible Solutions
3. Resolve the problem. 1. Provide additional funding and/or

time to complete the contract.
2. Downscope the work to fit
remaining funds.
3. Defer a decision until factfinding.
4. Terminate the contract.
5. Take no action (if the contract is
4. Deobligate excess funds, on schedule).
if any.
11-6
CHAPTER 11
LIMITATION OF COSTS
11.1 Determine If To monitor and control costs and stay within the funding limitations of a
Contractor Nearing cost-reimbursement type of contract, you must be able to determine if a
Estimated Cost or contractor is approaching:
Limit of Funds
The negotiated cost estimate specified in a contract’s schedule, or
The limit of allotted funds.
Contractual Coverage A cost-reimbursement arrangement may contain either or both of the fol-
lowing clauses:
FAR 52.232-20, Limitation of Cost, for a fully funded contract,

and
FAR 52.232-22, Limitation of Funds, for an incrementally funded

contract.
Whether or not they provide for the payment of a fee, cost-reimbursement

arrangements for consolidated facilities, facilities acquisition, or facilities
use must contain the clause at FAR 52.232-21, Limitation of Cost (Facili-
ties).
Contracting Officer Re- When learning that a contractor is approaching the estimated cost or the
sponsibility limit of allotted funds, a contracting officer must promptly obtain funding
and programming information pertinent to the continuance of work and
notify the contractor in writing that:
Additional funds have been allotted, or the estimated cost has been
increased, in a specified amount;
There will be no further funding of the contract and the contractor

should submit a proposal for an adjustment of fee, if any, based on
the percentage of work completed relative to the total work called
for under the contract;
The contract is to be terminated; or
The Government;
Ê Is considering whether to allot additional funds or increase the

estimated cost,
11-7
LIMITATION OF COSTS
Ê Recognizes the contractor is entitled to stop work when the

funding or cost limitation is reached, and
Ê Reaffirms that any performance done beyond the funding or

cost limitation will be at the contractor’s own risk.
Contractor Responsibil- A contractor is usually the first to become aware of any problem concern-
ity ing the amount of available funds, especially those that remain for the per-
formance of work. Under the clauses at FAR 52.232-20 and -22, the
FAR 52.232-20 contractor has responsibility to notify the contracting officer, in writing,
when it has reason to believe one or the other of the following:
FAR 52.232-22
That the total cost for performance expected to be incurred within
DFARS 252.232-7007 an expressed time period (set forth in the clause) when added to all
costs previously incurred will exceed an expressed percentage (al-
DFARS 232.704-70 so set forth in the clause) of the estimated cost, or
That the total cost for performance, exclusive of any fee(s), will be
either greater or substantially less than had been previously esti-
mated.
For incrementally funded fixed price contracts, the contractor has an obli-
gation to report to the contracting officer when total cost to the Govern-
ment will reach 85 percent of the allotted amount within the next 90 days.
The concepts of and processing for these types of contracts are similar to
incrementally funded cost reimbursement type contracts.
As a part of this notification, the contractor must provide a revised esti-

mate of the total cost of performance.
Consequence of Con- If a contractor’s notification specifies that the estimated cost will not per-
tractor Notification mit the completion of performance until the Government increases the es-
timated cost, then any contractor incurred costs before the increase that are
in excess of the initially estimated cost:
Are to be treated as allowable
To the same extent as if incurred after the increase in the estimated

cost.
Obtain Input From Oth- Relying solely on a contractor’s indication of cost problems could create
er Government Repre- some last-minute difficulties. Effective monitoring should provide early
sentatives warnings when cost or available funds are approaching a specified percen-
tage of cost under limitation of cost or funding clauses.
11-8
CHAPTER 11
Receiving input from other Government representatives is particularly im-

portant when it may alert the contract administration function to problems
that otherwise might have gone unnoticed and caused a work stoppage
prior to the completion of performance.
Early warning systems provide the contract administrator with the ability
to:
Verify a contractor’s notification under limitation-of-cost or limi-

tation-of-funds clauses, and
Prohibit a contractor from performing without funding.
11.2 Meet With Gov- When a problem of limitation of cost or the availability of funds is identi-
ernment Contract fied, you will need to meet with involved Government officials. The pur-
Administration Team pose of this meeting, reinforcing what has been mentioned earlier, is to
discuss:
Alternatives available under a contract’s terms and conditions;
The best estimate of the requiring activity or program office con-

cerning the following:
Ê Cost to complete the work,
Ê Time required to complete the work,
Ê Minimum tasks yet to be completed, and
Ê What can be accomplished within the current level of funding;

and
The ability and willingness of the requiring activity or program of-

fice to provide sufficient additional funds to cover a cost overrun.
This meeting should result in:
Funding and program information pertinent to the contractor’s

continuance, and
Sufficient information to determine an appropriate course of ac-

tion.
11.3 Resolve the Based on the information provided by the contractor and other Govern-
Problem ment officials, select the most appropriate course of action. For instance:
11-9
LIMITATION OF COSTS
If the course of
action is to: Then perform these steps
Provide extra ♦ Meet with the contractor to review the statement
funds or time. of work and verify that the contractor and the
Government understand the remaining tasks or
work.
♦ Negotiate the contractor’s proposal for additional

cost and/or time to complete performance.
♦ Establish the amount of additional funds required

and, if necessary, a new delivery schedule.
♦ Obtain clearance from the finance office to obli-

gate additional funds..
♦ Determine what consideration is due the Gov-

ernment (frequently completion of the contract
with no increase in fee(s), if a fee-bearing con-
tract).
♦ Prepare and execute a supplemental agreement.
Downscope the ♦ Obtain the contractor’s proposal for an adjust-

statement of work. ment of any fee(s).
♦ Negotiate an altered statement of work and

fee(s).
♦ Prepare and execute a supplemental agreement.
Defer the decision. ♦ Either:

Ê Allot additional funds to the contract or in-
crease its estimated cost, or
Ê Stop work when the dollar limitation under

the contract has been reached.
♦ Advise the contractor that any work done beyond

the limitation of cost or funds is at the contrac-
tor’s own risk.
End the contract. ♦ Either:
11-10
CHAPTER 11
Ê Close out the file,
Ê Terminate for default,
Ê Terminate for convenience, or
♦ Terminate for convenience at no cost to the Gov-

ernment.
Take no action ♦ Record the decision for the contract file.

(Expectation that
limitation of cost ♦ Continue to monitor costs closely.
or funding will not
be exceeded).
WHEN EMOTIONS RUN HIGH
Eric’s call to Dr. Volker, the agency’s project leader for the study being conducted by
Haverford Laboratories, started slowly and threatened to become explosive. After ex-
changing amenities, the contract administrator informed the project leader that the
contractor was at the 87-percent expenditure level and projected a cost overrun of 20
percent. He added that there would be, in all likelihood, a need to extend Haverford’s
delivery schedule.
Dr. Volker’s reaction was unexpected. “What!” was his initial response. And then he
quickly added more. “I don’t believe it,” he started. “When we cut the deal almost a
year ago, Haverford swore up and down that the probability of an overrun was zero.
Ever since then, they’ve been all smiles and doing decent work, but never a whisper from
anyone that an overrun was in the making. Hey, if they want more money, let them print
it! Our budget is down to virtually nothing. We haven’t got 70,000 of anything,
especially dollars. How come we’re in this position, Eric? I thought we had the right
kind of deal with the right kind of controls in place to obviate anything like this.”
As Volker drew a deep breath, the contract administrator interrupted. “What may have
been, Dr. Volker, is now all past tense. We’ve got a situation staring us in the face that
requires a decision of some kind, and you guys are perhaps the most important piece of
the decision-making process.”
“How’s that?” interjected Volker. “Aside from wishing that we had been tougher along
the way with Haverford, what can we do now? What I’d like to do is shut the whole thing
down, take what we’ve gotten thus far, and then finish the work in-house.” He seemed to
swallow hard with that, but then added, “We’ve got a timetable to meet, Eric, with what
Haverford contracted to do for us. In about three months, the agency’s Administrator
has got to face a congressional committee and the first question will probably be, ‘What
can you tell us about the report on environmental pollution controls you promised to
11-11
LIMITATION OF COSTS
deliver the last time you appeared before the committee?’ If the Administrator’s not
ready for that one, I’ll be landed on unmercifully.”
While sympathetic to the project leader’s state of mind, the contract administrator tried
to move their conversation in a more productive direction. “We can dump all over
Haverford, Dr. Volker, but let’s consider the facts. We’re not in a fixed-price situation
here, and the contractor has incurred more costs than either of us anticipated. Assuming
that those costs have been expended for legitimate, allowable purposes under the con-
tract, there’s not a whole lot we can do about that. And if we were to terminate the con-
tractor, it would be foolish even to consider anything other than a termination for
convenience. And if we do that, we’re faced with a set of termination procedures, the
costs therefor—including settlement expenses—and the time it will take to get through it
all. Those things alone will chew up the remaining dollars in the contract.”
Listening intently, Dr. Volker posed a question. “So what do you suggest, Eric?” From
the tone of his voice, the contract administrator could tell that the project leader had
simmered down somewhat. “And if we’re as important at this point as you indicate, what
do you require of us to set things straight?”
Things were looking up just a bit. “I need to know the following from you,” Eric began.
“Where is Haverford at in terms of the overall study? What do you guys require to meet
the Administrator’s need for an appearance on Capitol Hill? Could we cut off
Haverford’s effort at this point, yet get what you require, and then have you folks finish
it? If you don’t believe that bringing it in-house to finish it is really feasible, what about
having Haverford continue but under a reduced scope of work which might have them get
the job done in a reasonable time?”
“Nothing’s easy, is it?” Volker responded. “Hey look, let me get with our folks and get
back to you.” To which Eric added a final note, “No problem with that Dr. Volker, but
do it within the next 24 hours, because I’ve got to brief my contracting officer before the
close of business tomorrow.”
With that, the phones clicked at both ends.
11.4 Deobligate After a contract is completed and you find provided funds exceeded the
Excess Funds amount needed:
Informally notify the contractor of the Government’s intent to re-

move excess funds from the contract.
Obtain feedback from the contractor regarding this action.
Consult the requiring activity or program office and prepare a re-

vised cost estimate:
Ê To complete the work, and

Ê To record the amount of excess funds remaining.
11-12
CHAPTER 11
Issue a unilateral modification to the contract deobligating and re-

moving the excess funds.
11-13
CHAPTER 12
ASSIGNMENT OF CLAIMS
THE ASSIGNMENT OF … WHAT?
At the end of a long day, Joanne had called Eric into her office to discuss one of the agency’s
contracts with the Fairlington Company. Fairlington was a midsized firm and had performed
well over the years in providing various types of building supplies and related hardware items.
The firm was competitive in its pricing, and given the emphasis on FAR Part 12 (Acquisition of
Commercial Items) over the past few years, it had expanded its distribution capability to service
a wider geographic area.
Currently, Fairlington had four contracts with the agency, and Joanne was the contracting offic-
er for three of them. One of them was a one-year requirements contract for the delivery of heat-
ing and plumbing supplies to the agency’s five facilities located in the Mid-Atlantic region.
About six months had expired under the contract, and issued firm-fixed-price delivery orders had
amounted to approximately $750,000. Each delivery order had exceeded $10,000. But all, or so
it seemed, was not well with the contractor, and this was the reason for Joanne’s discussion with
her contract administrator.
“Your remember the Fairlington Company, don’t you, Eric?” she began. His response was im-
mediate. “Sure. One of our better suppliers, Joanne. They’ve got a good requirements contract
with us. I rarely hear much about them, which as things go in this business probably means
they’re doing a good job.”
“That’s what we all think, Eric,” his boss said with a grimace. “But as is so many times the
case, it’s what we don’t know that hurts us.” The contract administrator looked perplexed.
“Have we a problem with Fairlington, Joanne?”
“It just may … or may not be,” she replied quickly. “This morning I received a Notice of As-
signment from Fairlington that assigns any further payments under its requirements contract to
the United Bank and Trust Company. I had no idea they were in some sort of trouble or facing
financial difficulties. Did you?” Eric responded unhesitatingly. “Absolutely not, Joanne! If
it’s true, it comes as a total surprise to me.”
“Well,” Joanne continued, “I want you to look into this for me, and let’s see what gives.” Lean-
ing forward, she gave Eric the Notice of Assignment from Fairlington. “I want you to gather
whatever the facts might be,” she told him, “so that if the assignment of payments is to be made
we can properly document the contract file.” With that, the contracting officer asked him to re-
port back over the next day or so, and Eric returned to his office.
Sitting at his desk and having read the company’s Notice of Assignment, Eric mumbled to him-
self, “What is there in the strange and unexpected world of contract administration that doesn’t
12-1
cross my desk every time I turn around?” His answer was to sigh a bit, read the notice again,
and call for Fairlington’s contract file.
In examining the contract file, Eric found that FAR Part 12 had been used as the basis for the
buy, and the requirements contract had been negotiated under FAR Part 15 (Contracting By Ne-
gotiation). In looking for any coverage concerning the assignment of claims, he noticed that the
contract contained the terms and conditions set forth under FAR 52.212-4 (Commercial Terms
and Conditions—Commercial Items). Therein, he noticed item (b), which set forth the following:
“Assignment. The Contractor or its assignee’s rights to be paid amounts due as a result
of performance of this contract, may be assigned to a bank, trust company, or other fi-
nancing institution, including any Federal lending agency in accordance with the As-
signment of Claims Act (31 U.S.C 3727).”
“Well,” Eric said out loud, “there it is. Plain as the nose on Fairlington’s face. They have the
right of assignment, we have a Notice of Assignment from the contractor, and now we have to
get after what’s involved to protect the Government’s interests.” As was his style, the contract
administrator committed himself to a series of questions, the answers to which he would use in
getting back to his boss sometime over the next day or so.
If this were a non-FAR Part 12 deal, it would contain the clause at FAR 52.232-23, As-
signment of Claims. That says a lot more than the current contract about assignment.
The Assignment of Claims Act seems an important driver here. Must check out FAR Sub-
part 32.8, Assignment of Claims, to see what it says. Must determine if the Notice of As-
signment is properly executed.
Whoa! We have a commercial items deal here under FAR Part 12. Wonder what com-
mercial practice is in the matter of the assignment of claims?
Note that the contract’s payment clause is a standard one (“Payment shall be made for
items accepted by the Government that have been delivered to the delivery destinations
set forth in the contract.”) Okay ... so we’re not involved with advance or installment
payments. I guess that helps keep it cleaner for any assignment of claims.
Yet again, the contract administrator had his work cut out for him.
12-2
CHAPTER 12

Overall: Review and approve a contractor’s request for the assignment of contract pay-
ments.
Individual:
12.1 Determine if the assignment is permitted by a contract.
12.2 Determine if the assignment request is proper.
12.3 Determine if an assignment already exists.
12.4 Execute and return an assignment.
12.5 Approve the release of an assignment.
12-3
INTRODUCTION TO ASSIGNMENT OF
CLAIMS
Assignment of Claims Assignment of claims means the transfer or making over by the contractor
to a bank, trust company, or other financing institution, as security for a
FAR 32.801 loan to the contractor, of its right to be paid by the Government for con-
tract performance.
Conditions for As- A contractor may assign moneys due or to become due under a contract if:
signment of Claims
The contract specifies payments aggregating $1,000 or more;
FAR 32.802(a) - (d)
The assignment is made to a bank, trust company, or other financ-
ing institution, including any federal lending agency;
The contract does not prohibit the assignment; and
Unless otherwise expressly permitted in the contract, the assign-

ment:
Ê Covers all unpaid amounts payable under the contract,
Ê Is made to one party, except that any assignment may be made

to one party as agent or trustee for two or more parties partici-
pating in the financing of the contract, and
Ê Is not subject to further assignment.
Policy on Assignment Any assignment of claims made under the Assignment of Claims Act of
of Claims 1940, as amended, to any type of financing institution (i.e., a bank, trust
company, or other financing institution, including any federal lending
FAR 32.803 agency) may thereafter be further assigned and reassigned to any such sit-
uation if the conditions in FAR 32.803 (d) and (e) continue to be met.
DFARS 232.803(b)
A contract may prohibit the assignment of claims if determined to be in
the Government’s interest. Only contracts for personal services may pro-
hibit the assignment of claims.
Under a requirements or indefinite-quantity contract that authorizes order-

ing and payment by multiple Government activities, amounts due for indi-
vidual orders for $1,000 or more may be assigned.
When an assigned contract does not include a no-setoff commitment, the

Government may apply against payments to the assignee any liability of
12-4
CHAPTER 12
the contractor to the Government arising independently of the assigned

contract if the liability existed at the time notice of the assignment was
received, even though the liability had not yet matured so as to be due and
payable.
Extent of Assignee’s No payments made by the Government to the assignee under any contract
Protection assigned in accordance with the Assignment of Claims Act of 1940, as
amended, may be recovered on account of any liability of the contractor to
FAR 32.804 the Government. The assignee’s immunity is effective whether the con-
tractor’s liability arises from or independently of the assigned contract.
Use of No-Setoff No set-off commitment means a contractual undertaking that, to the extent
Commitment permitted by the Assignment of Claims Act of 1940, as amended, pay-
ments by the designated agency (any department or agency of the execu-
FAR 32.801 tive branch of the U.S. Government) to the assignee under an assignment
of claims will not be reduced to liquidate the indebtedness of the contrac-
DFARS 232.803(d) tor to the Government. The Director of Defense Procurement issued a de-
termination on May 10, 1996 that DoD would not reduce or set-off any
money due or to become due under a contract the proceeds of which had
been validly assigned. The head of an agency or a contracting officer
may, however, exclude this no set-off commitment in the case of a signifi-
cantly indebted contractor.
Conditions for No- Any contract of a designated agency, except a contract under which full
Setoff Commitment payment has been made, may include a no-setoff commitment unless a
determination of need is made by the head of the agency in accordance
FAR 32.803(d) with the Presidential delegation of authority of October 3, 1995, and after
such determination has been published in the Federal Register.
Use of a no-setoff provision may be appropriate:
To facilitate the national defense,
In the event of a national emergency or natural disaster, or
When its use may facilitate private financing of contract perfor-

mance.
When an offeror is significantly indebted to the U.S., a contracting officer

should consider whether the inclusion of a no-setoff commitment is in the
best interests of the Government.
12-5
Initiating Assignment An assignment of claims can be initiated by a contractor or by a federal

of Claims court. This chapter concentrates only on those assignments initiated by a
contractor’s request. When a federal court orders an assignment, an agen-
DFARS 232.806(a) cy does not have the discretion to act against the court’s direction, and un-
der a court order the agency would be required to lift any contractual
prohibition on payment assignments. When contract performance will be
in a foreign country, the prior written approval of the Contracting Officer
is required for an assignment.
Steps in Performance The steps in assigning payments on a Government contract are charted on
the next page. Following the flowchart, each step is discussed in detail.
12-6
CHAPTER 12
STEPS IN ASSIGNING PAYMENTS
1. Determine if assign-
ment is permitted by the
contract.
2. Determine if the assign-

ment request is proper.
Documents No
Do not process until corrected.
proper?
Yes
3. Determine if assign-
ment already exists.
Assignment Yes Is there a No

already writtten notice Do not process.
made? of release?
No Yes
4. Execute and return

the assignment.
12-7
12.1 Determine Con- Before processing any requests for assigning payments, determine whether
tract Permits Assign- the contract addresses this issue. One of three clauses would apply:
ment
FAR 52.212-4, Commercial Terms and Conditions - Commercial
Items.
FAR 52.232-23, Assignment of Claims.
FAR 52.232-24, Prohibition of Assignment of Claims.
DFARS 252.232-7008, Assignment of Claims (Overseas)
You may process a request even if the contract is silent on the issue but
only when:
The contractor provides an appropriate consideration for modify-
ing the contract to include the right to assign claims, and
There is no reason to prohibit an assignment of claims.
12.2 Determine Prop- The contractor must submit a “true” copy of the assignment instrument. A
er Request “true” copy is either a certified duplicate or a photostat (a facsimile) of the
assignment instrument.
FAR 32.805
Exhibit 12-1 provides a summary of conditions required to permit an as-
Conditions Permitting Payment Assignment

♦ The assignment must be properly executed based on the character of the contractor.
♦ The assignment was made to only one party, either:
¾ A recognized financial institution,

¾ A trustee, or
¾ An agent.
♦ The assignment covers only the remaining unpaid amounts due under the contract.
♦ Remaining unpaid amounts exceed $1,000.
♦ Classified information that would be disclosed is authorized by the Contracting Officer.
♦ The assignment is not inconsistent with any other terms and conditions of the contract.
signment of claims.
12-8
CHAPTER 12
Exhibit 12-1
If the contractor is
organized as a: Then the assignment must (or may, if the case):
Corporation. ♦ Be executed by an authorized representative,
♦ Be attested by the secretary or assistant secretary of the corporation,
♦ Be impressed with the corporate seal, or
♦ Be accompanied by a certified copy of the resolution of the corpora-

tion’s board of directors authorizing the signing representative to ex-
ecute the assignment.
Partnership. ♦ May be signed by one partner if it is accompanied by an acknowl-

edged certification that the signer is a general partner of the partner-
ship, and
♦ Contain the signatures of all partners unless there is a certification for

the signature of a general partner.
Single Proprietorship. ♦ Be signed by the owner, and
♦ Contain a signature acknowledged before a notary public or other per-

son authorized to administer oaths.
Written Notification. The contractor should transmit an assignment by written notice. The
Government must acknowledge receipt after examining the notice. The
notice of assignment should contain language similar to the sample format
in Exhibit 12-2.
12-9
Suggested Format for Notice of Assignment

To: Contracting Officer
Disbursement Officer
Surety Official
This has reference to Contract No._____________ dated _________, entered into be-
tween [contractor’s name and address] and [Government
agency, name of office, and address], for [describe nature of the contract] .
Moneys due or to become due under the contract described above have been assigned
to the undersigned under the provisions of the Assignment of Claims Act of 1940, as a-
mended, 31 U.S.C. 3727, 41 U.S.C. 15.
A true copy of the instrument of assignment executed by the Contractor on

[date] , is attached to the original notice.
Payments due or to become due under this contract should be made to the under-
signed assignee.
Please return to the undersigned the three enclosed copies of this notice with appro-
priate notations showing the date and hour of receipt and signed by the person acknowledg-
ing receipt on behalf of the addressee.
Very truly yours, [Name of assignee]
By [Signature of signing officer]
Title [Title of assignee]
[Title of signing officer]
[Address of assignee]
ACKNOWLEDGEMENT
Receipt is acknowledged of the above notice and of a copy of the instrument of as-
signment. They were received at (a.m.) (p.m.) on , 19 .
[Signature]
[Title]
On behalf of [Name of addressee of this notice]
Exhibit 12-2
12-10
CHAPTER 12
Number of Submissions The contractor must submit an original and three copies of the written no-
tice with the true copy of the assignment to each of the following:
FAR 32.805(b)
The contracting officer or agency head,
FAR 32.802(e)
The surety of any bond issued for the contract, and
The disbursing officer designated to make payment.
12.3 Determine As- Once an assignment of claims has been made, the financial institution,
signment Exists trustee, or agent may further assign (or reassign) its rights to another qual-
ified source. Reassignment is permitted under FAR 32.232-23, Assign-
ment of Claims.
Verify Before Before processing any request for reassignment, you must verify that:
Processing Request for
Reassignment The contract permits reassignment,
The conditions of the reassignment are satisfactory, and
The documents executing the reassignment are proper.
The documentation to support reassignment requires the new assignee to

Documentation to Sup-
submit:
port Reassignment
A written notice releasing the contractor from the assignment and
FAR 32.805 restoring its rights to payment under the contract;
A copy of the release instrument itself;
A written notice that the rights to payment under the contract have
been further assigned or reassigned, but only if the contract allows
further assignment or reassignment; and
A copy of the actual document that further assigns or reassigns the

rights to payment under the contract, if appropriate.
The assignee must provide these documents to the same officials as the
original assignment:
12-11
12.4 Execute and Re- The assignment of claims is considered approved when the Government
turn Assignment acknowledges receipt. It is very important the assignment not be ac-
knowledged unless it is determined to be:
Complete, and
Properly executed.
After completing your review of a request for assignment, dispose of the

request by returning three copies of the notification and:
Indicate acceptance by signing the acknowledgement block, or
Provide the requestor with the reason an acknowledgement was not

made because of:
Ê Improper or incomplete documentation, or
Ê An assignment is not permissible.
12.5 Approve Release Sometimes an assignee will release the contractor from the assignment
of Assignment prior to full payment under a contract. The contractor can only reestablish
its rights to contract payment by filing:
A written notice of release by the assigning financial institution,

and
A true copy of the release of assignment.
Separate sets of this documentation must be filed with:
Advise the contractor of any problems with the documentation and of cor-
rective steps it must take to reestablish its rights to payment.
Upon receipt of all appropriate documentation, ensure that the payment

office will make payments directly to the contractor.
12-12
CHAPTER 13
PROPERTY ADMINISTRATION
THERE COMES A TIME FOR ACTION
During the past couple of months, Eric had become concerned over a few phone calls between
himself and Kathy Meyers of Excel Aircraft Engines. For almost a year, Excel had been the
source for 100 aircraft engines for the agency’s fleet of helicopters used for travel and air sur-
veys across an eight-state region in the western United States.
The engines were being acquired as commercial items under FAR Part 12 (Acquisition of Com-
mercial Items), using FAR Part 15 (Contracting By Negotiation) as the method of contracting.
Under the precepts of acquisition reform, the agency’s acquisition team had targeted the engines
as a commercial item. For years, Excel had manufactured a similar type of helicopter engine
and distributed it worldwide. The current contract called for engine production, testing, flight
trials, and preventive and corrective maintenance based on specified cycles.
The agency’s customer organizations seemed satisfied, and Excel had been delivering on time
and performing all required maintenance. All these were plus factors as Kathy never failed to
remind Eric. But as he reminded her, he had received several reports from the agency’s Gov-
ernment property administrator about Excel’s administration of Government property for the
procurement.
Even though bought under FAR Part 12, the agency determined it would be in the Government’s
interest to provide certain manufacturing tools, equipment, and a few items of special test
equipment. Given some specified modifications to the engines—for reasons of safety, reliability,
and operability over long stretches of time—the agency determined that furnishing the property,
which it knew was available from examining appropriate Governmentwide screening informa-
tion, would cost less than requiring a contractor to modify or buy such property on its own.
Since the required property was available for use, the agency saw no need for it to be bought by
a successful offeror and become contractor-acquired property under the contract. Certainly
there was no need for a second set of what the agency was willing to provide.
The Standard Form (SF) 1447 (Solicitation/Contract/Order for Commercial Items) used for the
engine procurement had included an addendum concerning Government property. This spoke to
the relevance of the property for the evaluation of offerors, as well as referencing the inclusion
of the clause under FAR 52.245-2 (Government Property—Fixed Price Contracts). A few terms
and conditions concerning special test equipment were taken from FAR 52.245-18 (Special Test
Equipment). It was the requirements of Government property terms and conditions that had oc-
casioned the calls between Eric and Kathy. She was Excel’s property manager and her office
was located at the front of a large facility, one covering several acres, that served as the compa-
ny’s property area.
13-1
Their conversations always began with Eric’s repeating what he had said the previous time.
“Kathy, Eric Schmidt here. Yet again, I’ve received a report from our property administrator
about the failure of Excel’s property administration system to measure up to its contractual re-
sponsibilities. This the fourth call I’ve made about this, and my contracting officer wants some
action taken to correct Excel’s deficiencies.”
“Well, yet again, Eric, I’m telling you that we’re trying to measure up in getting after what your
property administrator doesn’t like. But I’m working here with myself and a staff of four admin
types trying to stay even with everything we’ve got to do. And your Government property is not
the only property we have to deal with.”
The contract administrator had little patience with Kathy’s being overworked or understaffed.
All that was Excel’s problem, and he knew that she had received a copy of the Government
property administrator’s periodic reports. He was determined to make a clear case this time,
lest she be left to infer that the Government’s failure to do something might be interpreted as ac-
quiescence to Excel’s practices. “Whatever managerial and staffing problems you may have,
Kathy, are not mine to solve, and I suggest you bring them to someone’s attention within Excel.
My concerns are contractual. I urge you meet shortly with our property administrator and pro-
vide a written plan for the correction of cited deficiencies. If any of them are of our making,
we’ll work to correct them equitably.”
She sensed the seriousness in his voice. “Look, Eric, if we have erred in some way ... Okay, I’ll
look over the property administrator’s reports and get after it.”
No wanting to end the phone call with things left up in the air, the contract administrator
pressed on. “Having ‘erred,’ as you put it, is not what I’m referring to.” And then he unloaded.
“I’m referring to existing deficiencies like ... unlabeled property ... improper storage of tools
and equipment ... a computer database of Government property that doesn’t square with what
Excel has been furnished ... apparent commingling of our property and yours ... and then there is
the matter of what may be the unauthorized use of special test equipment for some of your com-
mercial work. It’s not a pretty picture.”
At the other end of the line, Excel’s property administrator was feverishly attempting to uncover
the most recent Government property administrator’s report she had received about a week ago.
It was buried someplace on her desk, and she simply couldn’t uncover it. “Look, Eric, we’re
going to get after these things. You betcha. I’ll call your property administrator as soon as
we’re finished and schedule an appointment for next week.”
“The ball’s in your court, Kathy, and I suggest that it may be in Excel’s best interest to take
some immediate action for the correction of its property administration deficiencies.” With that,
the phone call ended. Taking a gulp of cold coffee Eric thought to himself, “I better make one
more phone call before I get on to other things.” Picking up the phone, he tapped in the number
of the Government property administrator at Excel. He wanted to convey what had transpired.
13-2
CHAPTER 13

Overall: Determine contractor liability for Government property and assess appropriate
amounts for losses or damage to Government property.
Individual:
13.1 Establish reporting requirements to keep a contracting officer abreast of property

administration.
13.2 Monitor the delivery of Government property as stipulated in a contract.
13.3 Monitor a contractor’s property control system and use of Government property.
13.4 Determine whether to decrease property to be provided or substitute other proper-

ty and the amount of any related equitable adjustment.
13.5 Evaluate and document evidence indicating that Government property has been
lost, damaged, destroyed, or misused.
13.6 Identify the extent to which a contractor is liable for damage to Government
property under a contract.
13.7 Prepare written conclusions on the extent and value of damages.
13.8 Issue a contractor a written demand for payment or make any equitable adjust-
ment for the repair of property when the Government has assumed the risk.
13.9 Recover or dispose of Government property at the end of contract performance.
13-3
INTRODUCTION TO PROPERTY
ADMINISTRATION
Property Administra- Property administration means those policies and procedures:

tion
Required for use when providing Government property to contrac-
tors,
Contractors must follow in using and managing Government prop-

erty, and
The Government and the contractor must follow in reporting, redi-

stributing, and disposing of Government property.
Classifications of Gov- Definitions of key classifications of Government property are essential to

ernment Property understand how policies and procedures are applied.
FAR 45.101 Government property means all property owned by or leased to the
Government or acquired by the Government under the terms of a
DFARS 245.301 contract. It includes both Government-furnished property (GFP)
and contractor-acquired property (CAP).
Government-furnished property (GFP) means property in the pos-

session of, or directly acquired by, the Government and subse-
quently made available to a contractor.
Contractor-acquired property means property acquired or other-

wise provided by a contractor for performing a contract and to
which the Government has legal title.
Agency-peculiar property means military property that is not readi-

ly available as a commercial item.
Facilities project means a Government project to provide, upgrade

or replace facilities for use by a contractor or subcontractor.
Industrial plant equipment (IPE) means plant equipment with an

acquisition cost of $15,000 or more that is used in manufacturing,
maintenance, supply, processing, assembly or research and devel-
opment operations.
Mapping, charting and geodesy (MC&G) property means specia-

lized data presented in maps and graphics, or charts and publica-
tions that is in simulated, photographic, digital or computerized
formats.
13-4
CHAPTER 13
Other plant equipment (OPE) means equipment, regardless of dol-

lar value, other than that categorized as IPE.
Policy on Property Contractors are ordinarily required to furnish all property necessary to per-
Administration form Government contracts. If, however, contractors possess Government
property, then agencies must to the maximum practicable extent:
FAR 45.102
Eliminate any competitive advantage that might arise from it,
Require contractors to use it in performing Government contracts,
Permit its use only when authorized,
Charge appropriate rentals for it when authorized for use on other

than a rent-free basis,
Ordinarily require contractors to be responsible and accountable

for it, including keeping the Government’s official records of it,
Require contractors to review and provide justification for retain-

ing it when not in use, and
Ensure maximum practical reutilization of contractor inventory

within the Government.
Steps in Performance The steps in supplying and controlling Government property provided to
contractors under the terms of a Government contract are charted on the
next page. Following the flowchart, each step is discussed in detail.
13-5
STEPS IN PROPERTY ADMINISTRATION
1. Establish property
reporting requirements.
2. Monitor the delivery of

property to the contractor.
3. Monitor use of the

property.
decrease or substitute
property.
5-8. Determine and

demand consideration
for loss, damage, or
misuse of property.
9. Recover or dispose
of property.
13-6
CHAPTER 13
13.1 Establish Report- Request a report from a contractor only when a contract contains a re-
ing Requirements quirement for submitting it. Standard reports that have a bearing on prop-
erty administration include:
Reports on a contractor’s overall property control system,
Contractor notification that property is damaged or in need of re-

pair,
Reports of any shortages, losses, damage, destruction, or misuse,
and
Periodic property audits.
13.2 Monitor Delivery Ensure that Government property is made available according to the sche-
of Government Prop- dule. Make certain the exact property described in the contract is pro-
erty vided in the quantities stated in the contract.
The Government is responsible for providing GFP in serviceable condi-

Suitability
tion. In effect, the Government warrants that GFP will be suitable for its
intended purpose except when the property is furnished “as is.” The con-
FAR 45.308 tractor is put on notice that if it decides to use the property, it does so at its
own risk. This does not mean, however, that the Government is complete-
FAR 52.245-19
ly protected from contractor claims. Unless disclaimers are very clear, the
courts and boards of contract appeals have usually found them ineffective.
Suitability Standard It is not necessary that material be defective in order to be unsuitable. The
standard for suitability is the industry norm. If a solicitation puts a con-
tractor on notice that the property does not meet the industry norm and
specifies the degree to which it does not, courts and boards will generally
not provide relief for its substandard condition.
Repair or Replacement The contractor is required to provide written notification of any GFP defi-
ciencies. When the property is deficient, you must direct the contractor to:
FAR 52.245-2(e)
Repair it,
FAR 52.245-5(e)
Modify it,
Return it, or
Dispose of it.
13-7
Equitable Adjustment A deficiency in as well as late delivery of GFP can result in delay for a
con-
tractor. The contractor may be due additional time or money as a result.
13.3 Monitor Con- A contractor is required to maintain a property control system for all GFP
tractor Property Con- provided to itself and subcontractors. Monitor that system and a contrac-
trol System tor’s use of GFP to ensure that the contractor fulfills its responsibilities.
Contractor obligations are summarized in Exhibit 13-1.
FAR 45.104
FAR Subpart 45.5
DFARS 245.505-6
DFARS 245.505-74
DFARS 252.245-7001
Contractor GFP Responsibilities

♦ Upon delivery of the property:
¾ Files a statement of any overages, shortages, or damages.

¾ Identifies, marks, and records property actually received.
¾ Furnishes a receipt, if necessary.
¾ Prepares a DoD Property Record for IPE (DD Form 1342)
♦ During the contractor performance period:
¾ Maintains a property control system.

¾ Obtains all required approvals for property use.
¾ Uses the property for authorized purposes.
¾ Segregates Government property from contractor property.
¾ Maintains, repairs, protects, and preserves the property.
¾ Periodically inventories the property.
¾ Keeps required property records.
¾ Files all required reports.
♦ When the property is no longer needed:
¾ Prepares inventory schedules.

¾ Corrects inaccurate or incomplete inventory schedules.
¾ Executes the inventory schedule certificate.
¾ Prepares a DoD Property Record for IPE (DD Form 1342)
13-8
CHAPTER 13
Exhibit 13-1
Property Records A contractor’s property records must provide a complete, current, and au-
ditable record of all transactions that have occurred. These records must
FAR 45.105 be:
FAR 45.505 Readily accessible to authorized Government personnel, and
FAR 45.505-1 Safeguarded from tampering or destruction.

DFARS 245.5
Some contracts may specify that the Government maintains property con-
trol records rather than the contractor.
Basic Record Information for Each GFP Item
♦ Name and description, including National Stock Number, if known or applicable.
♦ Quantity received (or fabricated), issued, and on hand.
♦ Unit price and unit of measure.
♦ Contract number or equivalent code designation.
♦ Exact location of the GFP.
♦ Disposition after use.
♦ Posting reference and date of transaction.
Exhibit 13-2 lists the basic information required for GFP records.
Exhibit 13-2
13-9
Records of Material Some specific categories of GFP require additional or more specific in-
formation. For example:
FAR 45.301
Material. Government-furnished material (GFM) means property
that may be incorporated into or attached to a deliverable end item
or that may be consumed during contract performance. It includes
assemblies, component parts, raw and processed materials, and
small tools and supplies.
Material Control Subs- A contractor is required to maintain custodial records for items issued to
titute Systems individuals for use in work under a contract. Because material is more
cumbersome to control, the Government sometimes allows substitution of
a record-keeping system that is more suited for material control.
Cross-referenced system in lieu of stock records. This system evi-

Cross-Referenced Sys-
dences the receipt, issue, and use of Government-provided material issued
tem
for immediate consumption, and is, therefore, not entered in inventory
records. The cross-referenced system may be authorized for the following
FAR 45.505-3(d) material categories:
Material charged through overhead,
Material under research and development contracts,
Subcontracted material or outside production items,
Nonstock or special items,
Material produced for direct charge to a contract, or acquired for

installation upon receipt, and not subject to spoilage, or
Items issued from contractor-owned inventory direct to production

or maintenance.
Multicontract cost and material control system in lieu of the require-

Multicontract Cost and
ment for a physical identification system. This system depends on fi-
Material Control Sys-
nancial accounting rather than a physical accounting and allows:
tem
Commingling of GFM with other material from other contracts
FAR 45.505-3(f) (but exceptions may exclude specific material, for example, on the
basis of high-dollar value or short supply); and
DFARS 245.505-3
Usage analysis to determine the reasonableness of consumption
and expenditure of GFM.
13-10
CHAPTER 13
Prerequisites for authorizing such a system are listed in Exhibit 13-3.
Criteria for Authorizing a Multicontract Cost and Material Control System
Contracting officers may authorize a multicontract cost and material control system if:
♦ It will result in:
¾ A cost savings,
¾ Improved operations, or
¾ Other benefits to the Government.
♦ It is applied to existing Government contracts only.
♦ The contractor’s accounting system is adequate to:
¾ Provide a clear audit trail,

¾ Reflect separate inventory balances for GFM and contractor-acquired material,
¾ Determine material cost for each material item,
¾ Calculate amounts for cost reimbursements and progress payments by applying or
allocating unit costs to specific contract line-items, and
¾ Track GFM for one contract to another follow-on contract for which the same GFM is
authorized, assuring credit for the initial contract.
♦ The contractor’s material management and accounting system (MAS) must have been
reviewed and found adequate by the ACO. (See DFARS 242.7205 and DFARS 252.242-
7004. )
Exhibit 13-3
Records of Special Test Special test equipment and special tooling are other categories of GFP re-
Equipment and Special quiring additional or more specific information, like the requirement for
Tooling referencing the identification number and the item to which it applies.
They may also be identified and reported by a specific retention category,
such as assembly tooling or critical tooling for spares.
Special test equipment and tooling. Special test equipment

means either single or multipurpose integrated test units engi-
FAR 45.101 neered, designed, fabricated, or modified to accomplish special
FAR 45.505-4 purpose testing in performing a contract. Special tooling means
specialized items, excluding special test equipment, that are so
DFARS 245.505-6 specialized that without modification or alteration their use is li-
13-11
mited to the development or production of specific items or to the

performance of a specific service. Common examples of special
tooling include:
Ê Jigs,
Ê Dies,
Ê Fixtures,
Ê Molds,
Ê Patterns, and
Ê Gauges.
Plant equipment is another category of GFP that requires additional in-

Records of Plant
formation.
Equipment
Plant equipment. Plant equipment means personal property of a
FAR 45.101
capital nature used to manufacture supplies, to perform services, or
FAR 45.505-5 to achieve any administrative or general plant purpose. It excludes
special test equipment and special tooling, but includes general
DFARS 245.505-5 purpose test equipment and most machine tools. It can include
DFARS 245.505-6 such things as overhead cranes, compressors, generators, desks,
chairs, and so forth. All contractor records of GFP classified as
DFARS 252.245-7000 plant equipment, must also include:
Ê Federal Supply Code for the manufacturer,
Ê Federal Supply Classification, and
Ê Original manufacturer’s model or part number.
For plant equipment that exceeds a unit cost of $5,000 or more, contractor
records must also include:
Serial number and year built, if available,
Government identification/tag number, and
References to acquisition and disposition documents and dates.
The use of summary stock records may be authorized for plant equipment
of less than $5,000, or additional record-keeping requirements may be ap-
plied to plant equipment of $5,000 or more or to specific equipment below
that threshold. Make an individual determination based on what is needed
for effective control, calibration, or maintenance.
13-12
CHAPTER 13
Contractors are encouraged to use DD Form 1342, DoD Property Record,

to record transactions involving IPE and OPE. Special handling and con-
trol of MC&G is required.
Records of Real Proper- Real property is another category of GFP that requires additional informa-
ty tion.
Real property. Real property means land, buildings, or other

FAR 45.101
things permanently attached to or growing upon the land and
FAR 45.505-7 buildings. Real property includes the area below the surface of the
land as well as the area above the land. The latter is commonly re-
ferred to as “air rights” to real property. In addition to basic
record-keeping information, contractors must include a record of
all alterations and construction work, including sites connected
with such alteration and construction. These additional records
would include such things as:
Maps,
Plans,
Drawings, and
Specifications.
FAR 45.505-7 contains guidelines for when the contractor must capitalize
costs associated with real property.
Scrap and salvage are other categories of GFP that require additional in-
Records of Scrap or
formation.
Salvage
Scrap and salvage items. Scrap means personal property that has
FAR 45.501 no value except for its basic material content. Salvage means
property that, because of its worn, damaged, deteriorated, or in-
FAR 45.505-8 complete condition or specialized nature, has no reasonable pros-
DFARS 245.601(2) pect of sale or use as serviceable property without major repairs,
but has some value in excess of its scrap value. Record-keeping
requirements for scrap or salvage items are listed in Exhibit 13-4.
The contractor may be required to perform or arrange for the per-
formance of “demilitarization” of equipment or material to prevent
further military or lethal uses.
13-13
Record Requirements for Scrap or Salvage Items
♦ Contract number, if practical, or equivalent code designation from which the scrap or sal-
vage is derived.
♦ Nomenclature or description of salvable items or classification (material content) of

scrap.
♦ Quantity on hand.
♦ Posting reference and date of transaction.
♦ Disposition.
Exhibit 13-4
Noncompliant Property When the contractor’s property control system is not in compliance, notify
Systems the contractor in writing. Requirements for this notification are contained
FAR 45.104(c)
Requirements for Property Control Deficiency Notices
Property control deficiency notices must:
♦ Be in writing,
♦ Establish a schedule for the completion of actions to correct deficiencies,
♦ Caution that a failure to correct deficiencies may result in withholding or withdrawing of

system approval, and
♦ Advise the contractor that its liability for loss or damage to Government property may
increase if approval is withheld or withdrawn.
in Exhibit 13-5.
Exhibit 13-5
13-14
CHAPTER 13
Commingling with Generally, Government property must be physically separated from a con-
Other Property tractor’s own property and the property of its commercial customers. If
the contractor has an approved material management and accounting sys-
FAR 45.507 tem (MMAS), some degree of physical and financial co-mingling may be
permitted. There are exceptions. For example, commingling of scrap or
DFARS 245.505-3 salvage items is authorized when:
Scrap of a uniform nature is produced from both Government-

owned and contractor-owned material, making physical separation
impracticable,
Scrap produced from Government-owned material is insignificant

when compared to the cost of segregation and control,
Government contracts involved are fixed-price and provide for the

retention of scrap by the contractor, or
Otherwise approved by the property administrator.
Non-Government Use Any non-Government use of active plant equipment requires the contract-
of Plant Equipment ing officer’s advance written approval. Before the contracting officer can
authorize non-Government use exceeding 25 percent of total use for any
FAR 45.407 piece of equipment, special approvals are required. The Government may
require a contractor to insure such property against loss or damage. Ap-
DFARS 245.407 proval of non-government use of IPE exceeding 25% is vested at the As-
sistant Secretary levels of the services and the Director of DLA. These
individuals may delegate approval authority to the heads of contracting
activities.
Preventive Maintenance Rather than monitoring individual preventive maintenance tasks, you
Program monitor a contractor’s program that manages and schedules those tasks.
Preventive maintenance is maintenance performed on a regularly sche-
FAR 45.509 duled basis to prevent the occurrence of defects and to detect and correct
minor deficiencies before they result in serious consequences. The con-
tractor is responsible for the proper care, maintenance, and use of Gov-
ernment property in its possession. This obligation remains even when the
property is in storage or is earmarked for transfer. Refer to Exhibit 13-6
for guidelines to assess the adequacy of a contractor’s preventive mainten-
ance program.
13-15
Preventive Maintenance Program Requirements
♦ Inspection of buildings at periodic intervals to assure detection of deterioration and the

need for repairs.
♦ Inspection of plant equipment at periodic intervals to assure detection of maladjustment,

wear, or impending breakdown.
♦ Regular lubrication of bearings and moving parts in accordance with a lubrication plan.
♦ Adjustments for war, repair, or replacement of worn or damaged parts and the elimina-
tion of causes of deterioration.
♦ Removal of sludge, chips, and cutting oils from equipment that will not be used for a pe-
riod of time.
♦ Exercise of necessary precautions to prevent deterioration caused by contamination, cor-

rosion, and other substances.
♦ Proper storage and preservation of accessories and special tools furnished with an item of
plant equipment but not regularly used with it.
Exhibit 13-6
With the approval of the property administrator, a contractor establishes

Contractor Inventory the type, frequency, and procedures for performing physical inventories of
Practices Government property under its control. The type and frequency of inven-
tory procedures should be based on:
FAR 45.508
DFARS 245.505-14 The contractor’s established practices,
DFARS 252.245-7001 The type and use of the Government property involved or the
quantity and dollar value of Government property involved, and
The reliability of the contractor’s property control system.
Unless a contractor’s organization is extremely small, personnel who per-

form the physical inventory should not be the same individuals who main-
tain the property records or who have physical custody of the property.
Contractors are required to file a report of all Government property ac-
countable to a contract on an annual basis during the life the contract and
at the end of the period of performance.
13-16
CHAPTER 13
Contractor’s Final In- At the completion or termination of a contract, accept the contractor’s in-
ventory Schedule ventory schedules only when you or a Government contract administration
team member has verified that the:
FAR 45.606
Property is present at the indicated location,
DFARS 245.603-70
Property is allocable to the contract,
DFARS 252.245-7000
Quantity and condition of the property are correctly stated, and
Contractor has tried to direct inventory items to other Government

FAR 45.605-2
work, or return contractor-acquired property to the original suppli-
er for appropriate credit at the close of the contract or when it is no
longer needed.
Contractors may be authorized to perform certain plant clearance

functions by the contract administration office. In the case of
MC&G property, the alternatives available are limited to destruc-
tion or return of such items at the completion of the contract.
Completion or Termi- The requirement for an end-of-contract physical inventory can be waived
nation Inventory when the property is authorized for use on a follow-on contract, but only
if:
FAR 45.508-1
The Government has established the adequacy of the contractor’s
property control system, with an acceptable degree of variance,
through past experience with that system; and
The contractor provides a statement indicating that:
Ê Record balances have been transferred in lieu of preparing a

formal inventory list, and
Ê The contractor accepts responsibility and accountability for in-

ventory balances under the terms of the follow-on contract.
The contracting officer is allowed to unilaterally decrease or substitute

13.4 Determine to De- GFP, but must bilaterally modify the contract to increase the amount of
crease or Provide GFP. You may want to decrease GFP when the estimated need for it was
Substitute GFP overstated. This is more common with material than with other types of
property. You may also need to substitute GFP when it is deficient or oth-
FAR 52.245-2(b) erwise not suited for contract purposes.
FAR 52.245-5(b)
13-17
13.5 Evaluate and Evaluate and document any evidence indicating that Government property
Document Evidence of furnished under the contract has been lost, damaged, stolen, destroyed, or
Loss, Damage, or De- misused. Establish a complete record of such information for the official
struction contract file.
13.6 Identify Contrac- Unless otherwise provided by a contract, a contractor is responsible and
tor Liability liable for Government property in its possession. There are several stan-
dard FAR clauses that relate to the contractor’s loss liability for Govern-
FAR 45.103(a) ment property.
Government Property (Fixed-Price Contracts) This is the basic fixed-

GFP (Fixed Price) price clause that places liability for all risk on the contractor except for
reasonable wear and tear or consumption of the property in the normal
FAR 52.245-2 performance of a contract. Due to a shorter standard clause, this clause is
sometimes referred to as the “long-form” clause. Alternative I of this
clause further limits the contractor’s risk to losses:
Caused by contractor negligence,
Expressly required to be insured under the terms of the contract,
Covered in fact by the contractor’s insurance, or
For which the contractor is otherwise reimbursed.
Alternate I is generally used for negotiated contracts that are not based on
adequate price competition and for service contracts on a Government in-
stallation when Government personnel also have potential access to the
property.
Alternate II to this basic clause is used for basic or applied research at

nonprofit institutions of higher education and has a limited risk of loss sti-
pulation essentially the same as Alternate I.
Government-Furnished Property (Short Form). The risk of loss is the

GFP (Short Form)
same as the basic fixed-price clause without any of its alternates. The
FAR 52.245-4 contractor assumes the risk of loss, except for reasonable wear and tear to
the extent that property is consumed in the performance of the contract.
This clause is used for fixed-price, time-and-material, and labor-hour con-
tracts involving property that is $100,000 or less.
GFP (Other Types) Government-Furnished Property (Cost-Reimbursement, Time-and-

Material, or Labor-Hour Contracts). This basic cost-reimbursement
FAR 52.245-5 type clause assigns liability to the contractor only for negligence and for
risks covered under its ordinary business insurance.
13-18
CHAPTER 13
A prime contractor providing Government property to a subcontractor is

Overall Responsibility not relieved of any of its responsibility to the Government under the terms
of its prime contract.
FAR 45.103(f)
DFARS 252.245-7001
WHO’S TO BLAME AND WHAT TO DO?
Government property administration at Excel Aircraft Engines had been improved

considerably since Eric’s last phone call to Kathy Meyers. The Government property
administrator had met with Excel’s property administration team, a plan had been put in
place to correct cited deficiencies, and both the contracting officer and contract
administrator had closely followed the progress made by Excel. There remained things
to be done, especially in the proper storage of Government property, but the company
had set aside a large area for this property and devised a special bar-coding system that
would ease its use and require its return.
Excel had a number of subcontractors that manufactured minor components for its
engines, including those being made for the Government. One of its subcontractors,
Kemo Supplies and Parts, had noticed a Government-furnished milling machine at
Excel’s production facility, and asked if it could use the machine for doing tight-
tolerance work on agency engine housings. The subcontractor said it would lead to less
time for the work and produce a better end product. Excel’s production manager raised
the point with Kathy Meyers, saying that the machine had met its purpose for the recent
lot of engines. The property administrator agreed and made arrangements to ship the
property to Kemo’s nearby facility.
About three weeks later, Kathy received a call from Kemo’s production floor manager.
“Ms. Meyers, this is Lefty Jones at Kemo. We’ve got a problem with that milling
machine you folks sent us some time ago. Thought it best to call you about it. Seems that
we can’t get it to work quite right most of the time. I don’t know whether there was
damage from shipment that dislocated some internal mechanism or what, but I do know
we’ve treated it like a baby. Right now, it’s a useless piece of expensive property, and if
we don’t do something, it’s gonna hold us up in delivering engine housings. What do you
think about this, Ms. Meyers?”
Kathy took a deep breath and responded. “At the moment, Lefty, I don’t know what to
think about it. But I appreciate your calling. I’ll have to get back to you.” And with that
she indicated she would try to call before the end of the day.
“What next?” she thought to herself. Sitting back and sifting things through her mind,
she decided to call the Government property administrator at Excel. That seemed like a
good first move. And a good move or not, it got some results. The Government property
administrator advised her to think about a number of things. Among them: reviewing the
liability provisions of the shipping document used to transport the machine to Kemo ...
13-19
Kemo’s written property administration procedures ... Excel’s subcontract provisions

that flowed down responsibility for Government property, more specifically any relevant
risk-of-loss coverage ... and any idea she might have, or be able to gather, about the cost
of repairing or replacing the machine. She was asked to call back when she had com-
piled her information.
Thanking the property administrator, Kathy hung up and almost slumped over her desk.
“Oh boy,” she uttered softly, “when and where does it all end with this property stuff?”
Her first move was to call Excel’s purchasing department and speak with the person who
negotiated Kemo’s subcontract. But, having learned from the past, she decided to
construct a series of questions or things to ask of the purchasing agent, the answers to
which, she hoped, would permit her to get back to the Government property admin-
istrator.
“Let’s see,” she thought, “what do I want to ask the purchasing agent ... and why? I’ve
got to find out who’s to blame and what to do.”
13.7 Prepare Conclu- In writing, estimate the value of the loss or damage to Government proper-
sions on Extent and ty by:
Value of Loss or
Damage Obtaining proposals from the contractor to repair or replace the
damaged property, and
FAR 45.504
Obtaining Government estimates and/or audit reports.
The value of lost or damaged items usually includes depreciation. Prepare

the Government’s position on the loss amount and the most appropriate
Government remedy for the loss or damage. Provide the contractor an op-
portunity to present its position and the supporting data for it. If the Gov-
ernment’s position is that it must assume the risk of loss or damage, an
equitable adjustment to the contract for property repair may be appropri-
ate.
13.8 Issue Demand The method used for the demand for equitable compensation for loss or
for Payment, When damage when the contractor is liable depends on the contractual circums-
Appropriate tances, but a contract deduction is most commonly used. Any demand for
payment must be in writing.
13.9 Recover or Dis- At the end of contract performance, or when Government property is no
pose of Government longer required, obtain control of the property or properly dispose of it as
Property outlined in your agency’s procedures. Methods of recovery or disposal
are listed in Exhibit 13-7.
FAR 45.603
13-20
CHAPTER 13
Disposal or Recovery Methods for Government Property
(Contractor Inventory Only—In Order of Priority)
♦ Purchase or retention at cost by a prime contractor or subcontractor of contractor-

acquired property.
♦ Return of contractor-acquired property to suppliers.
♦ Utilization within the Government through the use of prescribed screening procedures.
♦ Donation to eligible donees (but the donation of surplus property to an authorized donee
is subordinate to any need for property by a federal agency).
♦ Sale (including purchase or retention at less than cost by a prime or subcontractor).
♦ Donation to public bodies in lieu of abandonment.
♦ Abandonment or destruction.
Exhibit 13-7
13-21

Basic Contract Administration

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Basic Contract Administration

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BASIC CONTRACT

Current Through FAC 90-46 and

Logistics Management Institute Federal Acquisition Institute

Vignette: Eric’s First Day ................................................................................................. 1-1

Contract Administration Planning ...................................................................................... 1-7

Chapter 2: Postaward Orientations

Vignette: Assessing the Need to Get Started ..................................................................... 2-1

Postaward Orientation Planning ......................................................................................... 2-6

Chapter 3: Basic Procedures for Successful Performance Monitoring

Vignette: Monitoring the Pallet Procurement ................................................................... 3-1

Successful Performance Monitoring ................................................................................... 3-8

Chapter 4: Problem Resolution in Contract Administration

Vignette: Yet Another Realm for Eric ................................................................................ 4-1

Problem Resolution in Contract Administration ................................................................ 4-6

Chapter 5: Contract Modifications and Options

Vignette: Another Challenging Frontier ........................................................................... 5-1

Steps in Exercising Options .............................................................................................. 5-39

Chapter 6: Contract Remedies

Vignette: Accountability When Things Go Wrong ............................................................ 6-1

Identifying Types of Remedies ........................................................................................... 6-7

Chapter 7: Contract Payment

Vignette: Quid Pro Quo … Payment for Performance...................................................... 7-1

Contract Payment ................................................................................................................ 7-9

Chapter 8: Contract Closeout

Contract Closeout ............................................................................................................... 8-7

Chapter 9: Disputes, Claims, and Terminations

Vignette: To Be Forewarned is to be Forearmed .............................................................. 9-1

Disputes and Claims ........................................................................................................... 9-7

Chapter 10: Consent to Subcontracts

Vignette: There’s More to It Than Meets the Eye ........................................................... 10-1

To Consent or Not to Consent .......................................................................................... 10-8

Chapter 11: Limitation of Costs

Vignette: Cost Plus Whatever … A Different World ....................................................... 11-1

Limitation of Costs ........................................................................................................... 11-7

Chapter 12: Assignment of Claims

Vignette: The Assignment of … What? ............................................................................ 12-1

Assignment of Claims ....................................................................................................... 12-8

Chapter 13: Property Administration

Vignette: There Comes a Time for Action ....................................................................... 13-1

Property Administration ................................................................................................... 13-7

CONTRACT ADMINISTRATION PLANNING

ERIC’S FIRST DAY

COURSE LEARNING OBJECTIVES

1.2 Assign a criticality designator to the contract.

1.7 Develop a contract administration plan.

1.8 Provide notices containing information and instructions to technical representa-

Contract Administra- Contract administration planning involves activity in setting up systems

Effective contract administration resides in tailoring its requirements to an

No one plan or planning device represents a panacea for contract adminis-

Remember: A contract is a written, mutually binding legal relationship

When contract administration monitoring or surveillance systems are

Objective of Contract The principal objective of contract administration planning is twofold: to

The result of contract administration planning is reflected in a contract

STEPS IN CONTRACT ADMINISTRATION

Input: Prospective contract.

1. Review the contract file.

2-5. Determine the extent of performance

6. Determine which contract administration

7. Develop a contract administration plan.

8. Provide notice and instructions to

9. Notify contractors of names, roles,

CONTRACT ADMINISTRATION PLANNING

How critical the requirement is to the Government, and

Type of contract. (What type of contract is this? If there was a

Type of requirement. (Does this type of requirement—service or

Previously applied remedies and the contractor’s reaction to them,

Reviewing files in your office covering the contractor’s perfor-

Reviewing an existing contract file itself.

Contracts awarded and dollar amounts,

Key personnel involved with the contract,

Delivery/performance results, and

Contractor-provided past performance information.

Missed delivery dates,

Shortfalls in technical performance capabilities,

Financial difficulties, and

Reporting requirements (progress reports, submission of subcon-

Other Government offices, and/or

A contractor’s commercial clients.

Identifying and ranking the requiring activity’s priorities regarding

The Government is working as a team.

Priorities or potential problem areas are understood by all.

Contract progress is measured by foresight, not hindsight.

FAR 52.246-2, Inspection Supplies—Fixed Price, which requires a

FAR 52.246-11, Higher-Level Contract Quality Requirement

Reliance on the contractor’s inspection system,

100 percent inspection,

Monitoring production or delivery schedules, and

Monitoring schedules devised by Government personnel to meas-

DFARS 242.1104(a) Designator A contracts,

Contracting officer directed on-site surveillance, and

Contracts where your telephone check indicates a problem, unless

Actual or potential default situations. Act promptly and careful-

The need for Government action. Although Government action

Administrative Contracting Officer (ACO): The official autho-