FAR 32.706-2—Clauses for limitation of cost or funds.
Plain-English Summary
FAR 32.706-2 tells contracting officers which funding-limitation clause to include when using cost-reimbursement contracts. It covers two related but distinct situations: fully funded cost-reimbursement contracts, which require the Limitation of Cost clause at 52.232-20, and incrementally funded cost-reimbursement contracts, which require the Limitation of Funds clause at 52.232-22. The section applies both to solicitations and to contracts, so the clause must be planned for up front and carried into the award document. Its purpose is to protect the Government and the contractor by clearly stating how much funding is available, when the contractor must stop work or notify the Government, and how overruns are handled. In practice, this section is a clause-selection rule: the funding structure of the cost-reimbursement contract determines which clause must be used, and the contracting officer must make that choice correctly regardless of whether the contract includes a fee.
Key Rules
Use Limitation of Cost
If the contemplated cost-reimbursement contract is fully funded, the contracting officer must insert FAR 52.232-20, Limitation of Cost. This applies whether the contract includes a fee or not.
Use Limitation of Funds
If the contemplated cost-reimbursement contract is incrementally funded, the contracting officer must insert FAR 52.232-22, Limitation of Funds. This clause is the proper clause when the Government is funding the contract in increments rather than providing full funding at award.
Applies to Solicitations and Contracts
The required clause must be included not only in the final contract but also in the solicitation when the contract is contemplated. This ensures offerors know the funding structure and related obligations before award.
Funding Structure Controls Clause Choice
The deciding factor is whether the contract is fully funded or incrementally funded, not the presence of a fee or other pricing features. The contracting officer must match the clause to the funding arrangement.
Responsibilities
Contracting Officer
Determine whether the contemplated cost-reimbursement contract will be fully funded or incrementally funded, and insert the correct clause in both the solicitation and the contract: 52.232-20 for fully funded contracts or 52.232-22 for incrementally funded contracts.
Agency
Ensure acquisition planning and funding decisions support the intended funding approach so the correct limitation clause is used consistently with the contract’s funding status.
Contractor
Review the solicitation and contract to understand which limitation clause applies, monitor incurred costs against available funding, and comply with the notice and work-stoppage obligations that flow from the inserted clause.
Practical Implications
This section is mainly a clause-selection checkpoint: using the wrong clause can create funding, performance, and administration problems later.
Contracting officers should confirm whether the contract is fully funded or incrementally funded before award; the fee arrangement does not change the clause choice.
Contractors should pay close attention to the clause because it affects when they must notify the Government that costs are approaching the funding limit.
A common pitfall is assuming all cost-reimbursement contracts use the same limitation clause; FAR 32.706-2 draws a clear line between full funding and incremental funding.
Because the rule applies to solicitations as well as contracts, funding assumptions should be clear early to avoid confusion during proposal preparation and award.
Official Regulatory Text
(a) The contracting officer shall insert the clause at 52.232-20 , Limitation of Cost, in solicitations and contracts if a fully funded cost-reimbursement contract is contemplated, whether or not the contract provides for payment of a fee. (b) The contracting officer shall insert the clause at 52.232-22 , Limitation of Funds, in solicitations and contracts if an incrementally funded cost-reimbursement contract is contemplated.