FAR 16.301-1—Description.
Plain-English Summary
FAR 16.301-1 explains what a cost-reimbursement contract is and how it works in practice. It covers two core ideas: first, the Government pays the contractor for allowable incurred costs, but only to the extent the contract says those costs are payable; second, the contract includes an estimated total cost that is used to obligate funds and to set a ceiling on the contractor’s spending authority. The section is important because it distinguishes cost-reimbursement contracting from fixed-price contracting: the Government accepts more cost risk, but it also requires tighter oversight of cost allowability, funding, and cost growth. In practice, this means the contractor can recover qualifying costs as they are incurred, but cannot treat the estimate as a guaranteed target or exceed the funded ceiling without approval from the contracting officer. The section therefore sets the basic financial framework for managing cost-reimbursement performance, funding control, and contractor notification when costs are likely to rise.
Key Rules
Payment of allowable costs
The contractor is paid for allowable incurred costs, but only to the extent the contract prescribes. This means cost reimbursement is limited by the contract’s terms and by the rules governing cost allowability.
Estimated total cost
The contract must state an estimated total cost. That estimate is used for planning and for obligating Government funds, but it is not a promise that the Government will pay more than the contract allows.
Ceiling on contractor spending
The estimated total cost functions as a ceiling on the contractor’s authority to incur reimbursable costs. The contractor may not exceed that ceiling without approval from the contracting officer, except at its own risk.
Contractor risk beyond ceiling
If the contractor continues performance after reaching the ceiling without approval, it does so at its own risk. Costs above the ceiling are not automatically reimbursable just because they were incurred in performance.
Contracting officer approval required
Any increase above the established ceiling requires contracting officer approval. This preserves Government control over funding, scope, and exposure to additional cost.
Responsibilities
Contracting Officer
Establish the estimated total cost, obligate funds accordingly, and control any increase above the ceiling by approving or denying additional cost authority.
Contractor
Incur only allowable costs, monitor performance against the estimated total cost, and seek contracting officer approval before exceeding the ceiling if it wants reimbursement for additional costs.
Agency
Provide and manage funding for the estimated total cost and ensure cost-reimbursement contracting is administered with appropriate oversight of cost growth and allowability.
Practical Implications
Contractors must track burn rate closely because the estimated total cost is a hard management threshold, not just a planning number.
A cost-reimbursement contract does not guarantee full recovery of every incurred cost; only allowable costs covered by the contract are reimbursable.
If costs are trending above the ceiling, the contractor should notify the contracting officer early and request additional funding or a contract modification before continuing work.
Contracting officers should monitor cost performance and funding status to avoid unauthorized overruns and disputes about reimbursement.
A common pitfall is assuming that continued performance automatically creates a right to payment above the ceiling; under this rule, it does not.
Official Regulatory Text
Cost-reimbursement types of contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract. These contracts establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed (except at its own risk) without the approval of the contracting officer.