Limitation of Funds Clause

The Limitation of Funds clause, found at FAR 52.232-22, is a standard contract clause in incrementally funded cost-reimbursable contracts that prohibits the contractor from obligating the government for costs beyond the currently funded amount and requires advance notification when that ceiling is approached.

What is the Limitation of Funds Clause?

FAR 52.232-22 applies to cost-reimbursable contracts that are incrementally funded, meaning the total contract value is known but appropriations are added in stages over the period of performance. The clause has two primary functions. First, it establishes that the government is not obligated to reimburse costs incurred beyond the amount currently specified as the funded ceiling. Second, it requires the contractor to notify the contracting officer in writing when costs and fees are expected to reach a specified percentage, typically 75%, of the current funded amount.

The contractor must estimate the date on which funds will be exhausted and the amount of additional funds needed to continue performance. Upon receiving this notice, the government must either add funding through a contract modification, reduce scope to align with available funds, or notify the contractor to stop work. Failure to notify the government in time shifts financial risk to the contractor for any costs incurred without authorized funding.

The related Limitation of Cost clause (FAR 52.232-20) applies to fully funded cost-reimbursable contracts and similarly limits the government's obligation to the total estimated cost. Unlike the Limitation of Funds clause, which tracks incrementally obligated amounts, the Limitation of Cost clause tracks the total estimated contract cost.

Why the Limitation of Funds clause matters for government contractors

Violating this clause, continuing to incur costs past the funded ceiling without government notification, can make those excess costs unallowable and unrecoverable. It also exposes the contractor to claims of Anti-Deficiency Act violations, which the government takes seriously. Systematic monitoring of contract funding status against the 75% threshold is a basic GovCon financial management practice.

Example

A government IT contractor is on an incrementally funded cost-plus-fixed-fee task order with $5M currently obligated out of a $12M total estimated value. Monthly costs run at $400K. At month 9, cumulative costs reach $3.6M, 72% of the funded amount. The contractor sends a formal notification letter to the contracting officer projecting fund exhaustion in approximately one month and requesting an additional $3M obligation. The CO issues a modification within two weeks, maintaining uninterrupted performance.

Frequently Asked Questions

What is the difference between FAR 52.232-20 and FAR 52.232-22?

FAR 52.232-20 (Limitation of Cost) applies to fully funded cost-type contracts and limits contractor costs to the total estimated cost stated in the contract. FAR 52.232-22 (Limitation of Funds) applies to incrementally funded contracts and limits costs to each successive funded increment. Both clauses require advance notice when approaching the ceiling.

At what percentage must the contractor notify the government?

The standard threshold in FAR 52.232-22 is 75%, but the specific percentage is stated in the contract. Some contracts set the threshold at a different percentage, contractors should check the specific clause language in their individual contracts.

Can a contractor continue working if the government does not respond to a funding notification?

Technically no. If the government does not add funding within the timeframe stated in the clause, the contractor should seek written confirmation of how to proceed. Continuing to incur costs beyond the funded ceiling without authorization creates financial risk the contractor bears alone.

Does the Limitation of Funds clause apply to fixed-price contracts?

No. Fixed-price contracts are funded at award for the full contract price (or by milestone payment schedule), and the government is obligated to pay the fixed price upon performance. The Limitation of Funds clause is specific to incrementally funded cost-reimbursable contracts.