FAR 32.704—Limitation of cost or funds.
Plain-English Summary
FAR 32.704 explains what happens when a cost-reimbursement contract is running up against its funding or cost ceiling and the contract includes either the Limitation of Cost clause at 52.232-20 or the Limitation of Funds clause at 52.232-22. It tells the contracting officer what to do when the contractor is approaching the estimated cost or the amount of funds allotted, including promptly gathering funding and programming information and giving written notice of one of several outcomes: additional funds or a higher estimated cost will be provided, the contract will not be further funded and the contractor should seek a fee adjustment if applicable, or the contract will be terminated. It also addresses the special case of a partially funded contract that will receive no more funds, requiring prompt written notice of that decision. In addition, it clarifies that under a cost-reimbursement contract the contracting officer may issue certain directives—such as a change order, a direction to replace or repair defective items or work, or a termination notice—without immediately increasing available funds, but must still ensure funds are available for the directed action. Finally, it warns that government personnel who encourage continued work without available funds risk violating the Anti-Deficiency Act (31 U.S.C. 1341), with possible civil or criminal penalties. In practice, this section is about preventing unauthorized commitments, managing funding ceilings, and making sure both the Government and contractor understand when work must stop, continue, or be redirected.
Key Rules
Monitor funding limits closely
When a contract uses the Limitation of Cost or Limitation of Funds clause, the contracting officer must act once the contractor is approaching the estimated cost or funding limit. The officer must promptly gather the funding and programming information needed to decide whether the contract will continue, be increased, or be stopped.
Give written notice of the decision
The contracting officer must notify the contractor in writing of the Government’s decision: additional funds or a higher estimated cost will be provided, the contract will not be further funded, or the contract will be terminated. If the contract will not be further funded, the notice must also tell the contractor to submit a proposal for any fee adjustment based on work completed, if the contract allows a fee.
Tell contractor when work must stop
If the Government is still deciding whether to add funds or increase the estimated cost, the written notice must state that the contractor is entitled under the contract to stop work when the funding or cost limit is reached. It must also make clear that any work performed beyond the limit is at the contractor’s risk.
No further funds for partially funded contracts
If a partially funded contract with one of these clauses will receive no additional funds, the contracting officer must promptly give written notice of that decision. This is a separate obligation and is meant to avoid uncertainty about whether the contractor should continue performance.
Directed actions may precede funding increase
Under a cost-reimbursement contract, the contracting officer may issue a change order, direct replacement or repair of defective items or work, or issue a termination notice without immediately increasing the funds available. However, the contracting officer must ensure that funds are available for the directed action before requiring the contractor to incur the related costs.
Funding increases may be limited to specific purposes
The contracting officer may direct that any increase in estimated cost or allotted funds be used only for termination costs or other specified expenses. This allows the Government to control how added funds are applied when the contract is being wound down or otherwise managed.
Do not encourage unfunded work
Government personnel must not encourage a contractor to keep working when funds are unavailable. Doing so can violate the Anti-Deficiency Act, which may expose the violator to civil or criminal penalties.
Responsibilities
Contracting Officer
Track when the contractor is nearing the estimated cost or funding limit; promptly obtain funding and programming information; provide written notice of whether more funds will be added, the contract will not be further funded, or the contract will be terminated; notify the contractor when no further funds will be provided on a partially funded contract; ensure funds are available before directing cost-reimbursement work; and avoid any action that could encourage unfunded performance.
Contractor
Monitor incurred costs and funded amounts; stop work when the contract’s funding or cost limit is reached if the contract terms allow or require it; submit a proposal for fee adjustment when the Government decides not to provide further funds and the contract permits such an adjustment; and treat work beyond the funding or cost limit as performed at its own risk unless properly authorized and funded.
Government Personnel
Refrain from urging or directing continued performance when funds are not available; route funding concerns to the contracting officer; and avoid statements or conduct that could create an Anti-Deficiency Act violation.
Agency/Program Office
Provide timely funding and programming information to support the contracting officer’s decision on whether to continue, increase, or terminate the contract; and coordinate internal budget actions so the contracting officer can notify the contractor promptly.
Practical Implications
This section is a funding-control rule, not just a notice requirement. In day-to-day contract administration, it forces early warning and quick decisions so work does not continue past the funded ceiling without authority.
Contractors should not assume silence means more money is coming. If the contractor is nearing the limit and has not received written notice, it should raise the issue immediately and document communications.
A common pitfall is informal encouragement from program staff or technical personnel to keep working after funds are exhausted. That can create serious legal exposure for the Government and payment risk for the contractor.
For cost-reimbursement contracts, the contracting officer can direct certain actions before increasing funds, but only if funds are actually available for those actions. The officer cannot use this flexibility to bypass appropriations limits.
When the Government decides not to add funds to a partially funded contract, prompt written notice is essential because it affects whether the contractor must stop work and whether any fee adjustment may be due.
Official Regulatory Text
(a) (1) When a contract contains the clause at 52.232-20 , Limitation of Cost; or 52.232-22 , Limitation of Funds, the contracting officer, upon learning that the contractor is approaching the estimated cost of the contract or the limit of the funds allotted, shall promptly obtain funding and programming information pertinent to the contract’s continuation and notify the contractor in writing that- (i) Additional funds have been allotted, or the estimated cost has been increased, in a specified amount; (ii) The contract is not to be further funded and that the contractor should submit a proposal for an adjustment of fee, if any, based on the percentage of work completed in relation to the total work called for under the contract; (iii) The contract is to be terminated; or (A) The Government is considering whether to allot additional funds or increase the estimated cost- (B) The contractor is entitled by the contract terms to stop work when the funding or cost limit is reached; and (C) Any work beyond the funding or cost limit will be at the contractor’s risk. (2) Upon learning that a partially funded contract containing any of the clauses referenced in paragraph (a)(1) of this section will receive no further funds, the contracting officer shall promptly give the contractor written notice of the decision not to provide funds. (b) Under a cost-reimbursement contract, the contracting officer may issue a change order, a direction to replace or repair defective items or work, or a termination notice without immediately increasing the funds available. Since a contractor is not obligated to incur costs in excess of the estimated cost in the contract, the contracting officer shall ensure availability of funds for directed actions. The contracting officer may direct that any increase in the estimated cost or amount allotted to a contract be used for the sole purpose of funding termination or other specified expenses. (c) Government personnel encouraging a contractor to continue work in the absence of funds will incur a violation of Revised Statutes section 3679 ( 31 U.S.C. 1341 ) that may subject the violator to civil or criminal penalties.