FAR 52.216-26—Payments of Allowable Costs Before Definitization.
Plain-English Summary
FAR 52.216-26 governs interim payments under a letter contract before the contract is definitized. It addresses the reimbursement rate for different categories of costs, the ceiling on total reimbursement, invoicing frequency and format, what counts as allowable costs for this purpose, special treatment for small business concerns, and the Government’s audit and adjustment rights before final payment. In practice, the clause lets the contractor recover certain costs while the parties finalize the definitive contract, but it does so under tight controls to protect the Government from overpayment. The clause also ties payment eligibility to FAR Part 31 cost principles, so only costs that are allowable, allocable, and properly supported can be reimbursed. For contractors, this means careful cost tracking, timely invoicing, and close attention to subcontractor payment terms; for contracting officers, it means reviewing invoices, enforcing percentage limits, and reconciling any overpayments or disallowed costs before final settlement.
Key Rules
Interim reimbursement rates
Before definitization, the Government reimburses allowable costs at different rates depending on the cost type: 100 percent of approved financing payments to fixed-price subcontractors, 100 percent of approved costs for cost-reimbursement subcontracts, and 85 percent of all other approved costs. These rates are subject to the specific caps stated in the clause for subcontractor-related payments.
Subcontractor payment caps
Even where the clause allows 100 percent reimbursement of certain subcontractor-related costs, the Government’s payments to the prime contractor may not exceed 80 percent of allowable costs for fixed-price subcontractors and 85 percent for cost-reimbursement subcontractors. The contractor must manage cash flow and subcontractor financing within those limits.
Allowability under FAR Part 31
The contracting officer must determine allowable costs using the cost principles in FAR Part 31. Only costs that are allowable under those principles, and supported by the contractor’s records, may be reimbursed under the letter contract.
Overall reimbursement ceiling
Total reimbursement under the clause may not exceed 85 percent of the Government’s maximum liability stated in the letter contract. This creates a hard ceiling on interim payments regardless of incurred costs.
Invoicing and payment timing
The contractor may submit invoices or vouchers as work progresses, but generally not more often than every two weeks unless the contractor is a small business concern. Requests must be in a form and level of detail acceptable to the contracting officer’s representative or other authorized official.
Definition of allowable costs for payment
For payment purposes, the clause recognizes certain recorded costs actually paid, plus certain incurred-but-not-yet-paid costs when the contractor is not delinquent in ordinary-course payments. It also includes direct materials, direct labor, direct travel, other direct in-house costs, properly allocable indirect costs, and financing payments actually made to subcontractors.
Small business flexibility
A small business concern may receive payments more frequently than every two weeks. This is an exception to the normal invoicing frequency limit and can improve cash flow for qualifying contractors.
Audit and adjustment authority
Before final payment, the contracting officer may audit invoices, vouchers, and cost statements. Any payment may be reduced for unallowable costs or adjusted to correct overpayments or underpayments on prior invoices.
Responsibilities
Contracting Officer
Set and enforce the reimbursement limits in the letter contract, determine allowable costs under FAR Part 31, approve or disapprove invoice amounts, ensure total payments do not exceed 85 percent of the Government’s maximum liability, and adjust payments for audit findings, overpayments, or underpayments before final payment.
Contractor
Track and support allowable costs, invoice only for approved amounts, comply with the payment frequency limits, maintain records showing actual payments and incurred costs, ensure subcontractor payments are made according to subcontract terms and within ordinary-course timing, and repay or account for any disallowed or excess amounts.
Subcontractors
Perform under their subcontracts and submit invoices or requests for payment in accordance with their subcontract terms; their costs may affect the prime contractor’s reimbursable amounts, especially for financing payments and cost-reimbursement subcontract costs.
Agency
Administer the letter contract framework, support contracting officer oversight and audit activity, and ensure interim payments are made only within the clause’s limits until the definitive contract is executed.
Authorized Representative of the Contracting Officer
Receive invoices or vouchers, review the supporting statement of claimed allowable costs, and provide the level of detail or approval needed for payment processing.
Practical Implications
This clause is mainly about cash flow during the gap between award of a letter contract and definitization, so contractors should not treat it like open-ended reimbursement. The percentage limits and the 85 percent ceiling mean the Government is intentionally holding back a reserve until the final contract terms are settled.
Contractors need strong cost accounting and documentation because the contracting officer can audit invoices at any time before final payment. Weak support for labor, materials, indirect costs, or subcontractor financing payments is a common reason for reductions.
The clause distinguishes between costs that have actually been paid and costs that have merely been incurred, and it only allows incurred-but-not-paid costs in specific categories and only when the contractor is current on ordinary-course payments. Delinquent payables can jeopardize reimbursement.
Subcontractor financing is a frequent pitfall: the clause allows reimbursement for certain financing payments, but the prime must still stay within the stated caps and follow subcontract terms. Poor subcontract administration can create unreimbursable exposure for the prime.
Small businesses have more invoicing flexibility, but they still must submit supportable, allowable costs. More frequent billing does not relax the allowability, documentation, or ceiling requirements.
Official Regulatory Text
As prescribed in 16.603-4 (c) , insert the following clause: Payments of Allowable Costs Before Definitization (Dec 2002) (a) Reimbursement rate . Pending the placing of the definitive contract referred to in this letter contract, the Government will promptly reimburse the Contractor for all allowable costs under this contract at the following rates: (1) One hundredpercent of approved costs representing financing payments to subcontractors under fixed-price subcontracts, provided that the Government’s payments to the Contractor will not exceed 80 percent of the allowable costs of those subcontractors. (2) One hundredpercent of approved costs representing cost-reimbursement subcontracts; provided , that the Government’s payments to the Contractor shall not exceed 85 percent of the allowable costs of those subcontractors. (3) Eighty-fivepercent of all other approved costs. (b) Limitation of reimbursement . To determine the amounts payable to the Contractor under this letter contract, the Contracting Officer shall determine allowable costs in accordance with the applicable cost principles in part 31 of the Federal Acquisition Regulation (FAR). The total reimbursement made under this paragraph shall not exceed 85 percent of the maximum amount of the Government’s liability, as stated in this contract. (c) Invoicing . Payments shall be made promptly to the Contractor when requested as work progresses, but (except for small business concerns) not more often than every 2 weeks, in amounts approved by the Contracting Officer. The Contractor may submit to an authorized representative of the Contracting Officer, in such form and reasonable detail as the representative may require, an invoice or voucher supported by a statement of the claimed allowable cost incurred by the Contractor in the performance of this contract. (d) Allowable costs . For the purpose of determining allowable costs, the term "costs" includes- (1) Those recorded costs that result, at the time of the request for reimbursement, from payment by cash, check, or other form of actual payment for items or services purchased directly for the contract; (2) When the Contractor is not delinquent in payment of costs of contract performance in the ordinary course of business, costs incurred, but not necessarily paid, for- (i) Supplies and services purchased directly for the contract and associated financing payments to subcontractors, provided payments determined due will be made- (A) In accordance with the terms and conditions of a subcontract or invoice; and (B) Ordinarily within 30 days of the submission of the Contractor’s payment request to the Government; (ii) Materials issued from the Contractor’s stores inventory and placed in the production process for use on the contract; (iii) Direct labor; (iv) Direct travel; (v) Other direct in-house costs; and (vi) Properly allocable and allowable indirect costs as shown on the records maintained by the Contractor for purposes of obtaining reimbursement under Government contracts; and (3) The amount of financing payments that the Contractor has paid by cash, check, or other forms of payment to subcontractors. (e) Small business concerns . A small business concern may receive more frequent payments than every 2 weeks. (f) Audit . At any time before final payment, the Contracting Officer may have the Contractor’s invoices or vouchers and statements of costs audited. Any payment may be- (1) Reduced by any amounts found by the Contracting Officer not to constitute allowable costs; or (2) Adjusted for overpayments or underpayments made on preceding invoices or vouchers. (End of clause)