FAR 52.232-20—Limitation of Cost.
Plain-English Summary
FAR 52.232-20, Limitation of Cost, is the core cost-control clause for cost-reimbursement contracts that are not fully funded at award. It addresses the estimated cost ceiling, the contractor’s duty to use best efforts within that estimate, the contractor’s duty to monitor costs and give timely written notice when costs are approaching the limit or when the total estimate changes materially, the requirement to submit a revised total cost estimate, the government’s reimbursement limit, the contractor’s right to stop work when the estimate is reached unless the government increases funding, the effect of notices and communications from persons other than the contracting officer, the treatment of costs incurred before a funding increase, the rule for change orders, and the parties’ obligation to negotiate equitable distribution of property if the contract ends or funding is not increased. In practice, this clause is designed to prevent surprise overruns, force early warning, and give the contracting officer time to decide whether to add funds, modify the work, or terminate the effort. It is especially important on research, development, and other cost-type work where actual costs are uncertain and can move quickly. For contractors, the clause creates a hard administrative trigger for notice and a practical stop-work protection once the estimated cost is exhausted. For contracting officers, it is a funding-control and risk-management tool that requires active monitoring and clear written action when additional funds are authorized.
Key Rules
Estimated cost is the ceiling
The contract establishes an estimated cost that the Government will not exceed unless it formally increases that amount. In a cost-sharing contract, the limit is the Government’s share of the estimated cost, not necessarily the total project cost.
Best efforts within estimate
The contractor must use its best efforts to perform the work and all contract obligations within the estimated cost. This is not a guarantee of completion at the estimate, but it does require active cost management and good-faith performance.
Early warning notice required
The contractor must notify the contracting officer in writing when it has reason to believe that next-60-day costs, plus costs already incurred, will exceed 75 percent of the estimated cost, or when the total expected cost will be materially higher or lower than previously estimated. The clause allows the 60-day and 75 percent thresholds to be varied within the stated ranges if the contract so provides.
Revised estimate must be provided
The contractor’s notice must include a revised estimate of the total cost to perform the contract. This gives the Government a current forecast so it can decide whether to add funds, change scope, or take other action.
Government reimbursement is limited
Absent a formal increase, the Government is not obligated to reimburse costs above the estimated cost, or above the Government’s share in a cost-sharing contract. This applies even if the excess costs arise during performance or after termination, unless another contract clause specifically creates an exception.
No duty to continue past funding
The contractor is not required to continue performance or incur additional costs beyond the estimated cost until the contracting officer gives written notice increasing the estimate and provides a revised estimated total cost. This is the clause’s key protection against unfunded work.
Only the contracting officer can increase funding
No other notice, statement, or representation changes the estimated cost to the Government. Only written notice from the contracting officer under paragraph (d)(2) is effective, so informal assurances from program staff or technical personnel do not bind the Government.
Pre-increase excess costs may be allowable
If the estimated cost is later increased, costs incurred before the increase that exceeded the prior estimate can be allowable to the same extent as if they had been incurred after the increase, unless the contracting officer limits the increase to termination or other specified expenses.
Change orders do not imply funding
A change order does not authorize the contractor to exceed the estimated cost unless it expressly increases the estimated cost to the Government. Scope changes and funding changes are separate actions under this clause.
Property distribution after stop or termination
If the contract is terminated or funding is not increased, the Government and contractor must negotiate an equitable distribution of property produced or purchased under the contract, based on each party’s share of costs incurred.
Responsibilities
Contracting Officer
Set and administer the estimated cost, monitor funding status, and issue the only effective written notice increasing the estimated cost. The contracting officer must also provide a revised estimated total cost when funding is increased and handle any limitation, termination, or property-distribution actions that follow.
Contractor
Use best efforts to perform within the estimated cost, track actual and projected costs, give timely written notice when the 75 percent/next-60-day trigger is reached or when the total estimate materially changes, and submit a revised total cost estimate with the notice. The contractor must stop incurring costs beyond the estimate unless and until the contracting officer increases funding in writing.
Government/Agency
Fund the contract only to the extent authorized, ensure the contract includes the correct estimated cost and any applicable cost-sharing formula, and coordinate internally so that only the contracting officer communicates binding funding changes. The agency must also address property and closeout issues if the contract ends without additional funding.
Program/Technical Personnel
Provide accurate technical direction and cost-impact information, but avoid making statements that could be mistaken for funding authorization. They should route any need for additional funds or scope changes to the contracting officer promptly.
Practical Implications
Contractors should treat the 75 percent/next-60-day trigger as an internal alarm, not a paperwork formality. Waiting too long can leave the contractor performing at its own risk and create unrecoverable excess costs.
The clause separates scope changes from funding increases. A change order may expand or alter the work, but unless it expressly raises the estimated cost, it does not authorize spending beyond the current ceiling.
Informal emails, verbal assurances, or direction from technical staff do not protect the contractor. Only a written notice from the contracting officer increasing the estimated cost changes the reimbursement limit.
Cost tracking must be current and forecast-driven. Contractors need systems that can project near-term burn rate and total cost, especially on labor-intensive or research contracts where overruns can develop quickly.
If funding is not increased, the contractor may have a right to stop work, but it should coordinate carefully with the contracting officer to avoid disputes over allowable costs, termination actions, and property allocation.
Official Regulatory Text
As prescribed in 32.706-2 (a) , insert the following clause. The 60-day period may be varied from 30 to 90 days and the 75 percent from 75 to 85 percent. "Task Order" or other appropriate designation may be substituted for "Schedule" wherever that word appears in the clause: Limitation of Cost (Apr 1984) (a) The parties estimate that performance of this contract, exclusive of any fee, will not cost the Government more than (1) the estimated cost specified in the Schedule or, (2)if this is a cost-sharing contract, the Government’s share of the estimated cost specified in the Schedule. The Contractor agrees to use its best efforts to perform the work specified in the Schedule and all obligations under this contract within the estimated cost, which, if this is a cost-sharing contract, includes both the Government’s and the Contractor’s share of the cost. (b) The Contractor shall notify the Contracting Officer in writing whenever it has reason to believe that- (1) The costs the Contractor expects to incur under this contract in the next 60 days, when added to all costs previously incurred, will exceed 75 percent of the estimated cost specified in the Schedule; or (2) The total cost for the performance of this contract, exclusive of any fee, will be either greater or substantially less than had been previously estimated. (c) As part of the notification, the Contractor shall provide the Contracting Officer a revised estimate of the total cost of performing this contract. (d) Except as required by other provisions of this contract, specifically citing and stated to be an exception to this clause- (1) The Government is not obligated to reimburse the Contractor for costs incurred in excess of (i) the estimated cost specified in the Schedule or, (ii)if this is a cost-sharing contract, the estimated cost to the Government specified in the Schedule; and (2) The Contractor is not obligated to continue performance under this contract (including actions under the Termination clause of this contract) or otherwise incur costs in excess of the estimated cost specified in the Schedule, until the Contracting Officer (i) notifies the Contractor in writing that the estimated cost has been increased and (ii) provides a revised estimated total cost of performing this contract. If this is a cost-sharing contract, the increase shall be allocated in accordance with the formula specified in the Schedule. (e) No notice, communication, or representation in any form other than that specified in paragraph (d)(2) of this clause, or from any person other than the Contracting Officer, shall affect this contract’s estimated cost to the Government. In the absence of the specified notice, the Government is not obligated to reimburse the Contractor for any costs in excess of the estimated cost or, if this is a cost-sharing contract, for any costs in excess of the estimated cost to the Government specified in the Schedule, whether those excess costs were incurred during the course of the contract or as a result of termination. (f) If the estimated cost specified in the Schedule is increased, any costs the Contractor incurs before the increase that are in excess of the previously estimated cost shall be allowable to the same extent as if incurred afterward, unless the Contracting Officer issues a termination or other notice directing that the increase is solely to cover termination or other specified expenses. (g) Change orders shall not be considered an authorization to exceed the estimated cost to the Government specified in the Schedule, unless they contain a statement increasing the estimated cost. (h) If this contract is terminated or the estimated cost is not increased, the Government and the Contractor shall negotiate an equitable distribution of all property produced or purchased under the contract, based upon the share of costs incurred by each. (End of clause)