Overview
FAR Subpart 16.3 governs cost-reimbursement contracts, which provide for the payment of allowable incurred costs to the contractor up to a prescribed ceiling. These contracts are utilized primarily when requirements cannot be defined with enough precision or when performance uncertainties are too high to permit the use of any fixed-price contract type.
Key Rules
- Cost Ceilings: These contracts establish an estimate of total cost and a cost ceiling; contractors may not exceed this ceiling (except at their own risk) without the explicit approval of the Contracting Officer.
- Adequate Accounting System: A cost-reimbursement contract may only be awarded if the contractor’s accounting system is adequate for determining costs applicable to the contract.
- Commercial Prohibitions: The use of cost-reimbursement contracts is strictly prohibited for the acquisition of commercial products and commercial services.
- Government Surveillance: Prior to award, the government must ensure adequate resources are available to manage the contract, including surveillance to ensure the contractor uses efficient methods and effective cost controls.
- Allowable Costs: Only "allowable" costs—as defined by the contract and the FAR—are reimbursable; the government does not simply pay every invoice regardless of validity.
- Fee Limitations: While various types exist (Incentive, Award, Fixed), the subpart provides specific structures for how fees are negotiated and applied, including the preference for "Completion" forms over "Term" forms in Cost-Plus-Fixed-Fee (CPFF) arrangements.
Responsibilities
- Contracting Officer (CO):
- Responsible for documenting the rationale for selecting a cost-reimbursement contract in a written acquisition plan.
- Must ensure all limitations (such as accounting system adequacy and government surveillance resources) are met before award.
- Must select and insert the correct FAR clauses (e.g., 52.216-7 through 52.216-15) based on the specific contract type and the nature of the contractor (e.g., nonprofit vs. educational institution).
- Approving Authority (One Level Above CO): Must review, approve, and sign the written acquisition plan for any cost-reimbursement contract.
- Contractor: Must maintain an adequate accounting system and is responsible for managing the work within the estimated cost/ceiling.
- Government Surveillance Team: Responsible for performing oversight during contract performance to provide reasonable assurance of cost-effective contractor operations.
Practical Implications
- Risk Allocation: In these contracts, the government assumes the majority of the cost risk. If the project costs more than anticipated, the government (within the ceiling) pays the difference, whereas, in a fixed-price contract, the contractor would absorb the loss.
- Administrative Burden: These contracts carry a significantly higher administrative burden for both parties. Contractors must be prepared for DCAA (Defense Contract Audit Agency) or equivalent audits, and the government must dedicate more personnel to monitor performance and verify costs.
- Research & Development (R&D) Focus: Because R&D often involves "unknown unknowns," Subpart 16.3 is the standard for high-level research and preliminary exploration. It allows the government to fund efforts where a specific end-result cannot be guaranteed.
- Transition to Fixed-Price: Per FAR 16.306, once a program (like a major system) has moved past the exploration phase and performance objectives are firm, the government is encouraged to transition away from cost-reimbursement to more stable fixed-price arrangements.