CHAPTER
20
CLOSEOUTS
The closeout of a contract is a critical point in the contracting process. From a legal standpoint, once final payment has been made and the contract has been closed out, no additional claims can be made under the contract. From an administrative standpoint, the contract is over.
How soon after the contract is over should the contracting officer close out a contract?
A contracting officer (CO) generally closes out a contract six months after completion. The specific time periods are addressed in the FAR. The FAR also deals with when each specific time period begins—something called “physical completion.”
The time periods for fixed-price contracts and simplified acquisitions are addressed in FAR 4.804-1. Except for contracts that are being litigated or terminated, the general rules are that
1. Files for contracts using simplified acquisition procedures should be considered closed when the CO receives evidence of receipt of property and final payment, unless otherwise specified by agency regulations.
2. Files for firm-fixed-price contracts, other than those using simplified acquisition procedures, should be closed within six months after the date on which the CO receives evidence of physical completion.
The FAR also gives detailed descriptions of when a contract is physically completed:
… a contract is considered to be physically completed when
(1) (i) The contractor has completed the required deliveries and the Government has inspected and accepted the supplies;
(ii) The contractor has performed all services and the Government has accepted these services; and
(iii) All option provisions, if any, have expired; or
(2) The Government has given the contractor a notice of complete contract termination.
The end product of a contract closeout is a contract completion statement with basic information such as the contract administration office name and address, contracting office name and address, name and signature of the CO, contract number, last modification number, contractor name and address, and voucher number and date, if final payment has been made. Another important part of the contract completion statement is a statement that all required contract administration actions have been fully and satisfactorily accomplished.
The last step in the process is putting the statement in the contract file.
How long must the files be kept?
For most construction contracts, it’s six years and three months after final payment. It’s the same for all other types of contracts over the simplified acquisition threshold (currently $150,000). Below that threshold, it’s three years after final payment.
Is there some way the government can take money from a contractor to pay a debt the contractor owes?
The government can take money away from a contractor to pay debts owed by the contractor. There are numerous ways contractors can owe the government money: damages or excess costs related to defaults in performance; breach of contract obligations concerning progress payments, advance payments, or government-furnished property or material; government expense of correcting defects; overpayments related to errors in quantity or billing; or deficiencies in quality. These debts are referred to as “contract debts.” Specific FAR provisions deal with contract debts.
Why use the phrase “contract debts”? Because it’s important to distinguish contract debts from other debts someone might owe the government. For example, someone might owe the government for an educational loan or for tax liens. The FAR provisions discussed here don’t deal with these types of noncontract debts. They deal only with debts the contractor as a contractor owes the government.
The point person for contract debts is the CO. For most kinds of contract debts, the CO has the primary responsibility for determining the amounts of, and then collecting, contract debt.
The CO must quickly go after contract debts. The FAR urges the CO to collect contract debts quickly because delay hurts: funds unavailable for the work for which they were initially provided, increased difficulty in collecting the debt, and actual monetary loss to the government.
In determining the amount of any contract debt, the CO “shall fairly consider both the Government’s claim and any contract claims by the contractor against the Government. This determination does not constitute a settlement of such claims, nor is it a contracting officer’s final determination under the Contract Disputes Act of 1978.” FAR 32.606(b).
If the contractor does not sign a deferment agreement or go into bankruptcy, the contractor must pay the debt in a lump sum cash payment on demand or as a credit against existing unpaid bills due the contractor.
While a CO should try to negotiate contract debts bilaterally, a CO can unilaterally determine that a debt is owed if a contractor is delinquent in any of the following: furnishing pertinent information, negotiating expeditiously, entering into an agreement on a fair and reasonable price revision, signing an interim memorandum evidencing a negotiated pricing agreement involving a refund, or executing an appropriate contract modification reflecting the result of negotiations.
These unilateral debt determinations must be done with the disputes clause as a government claim. The decision must include a demand for payment. Significantly, no demand for payment can be issued prior to a CO’s final decision.
The demand itself must notify the contractor that any amounts not paid within 30 days from the date of the demand will bear interest from the date of the demand, or from any earlier date specified in the contract. The interest rate is the rate the government itself pays on contractor claims.
Also, the demand must tell the contractor that the contractor can submit a proposal for deferment of collection if immediate payment is not practicable or if the amount is disputed.
The FAR allows the CO to show some mercy. It allows the CO to consider whether deferring the debt collection is advisable to avoid possible disputes over collection.
Deferments pending disposition of an appeal may also be granted to small business concerns and financially weak contractors, with a reasonable balance of the need for government security against loss and undue hardship on the contractor. Installment payments, the mainstay of the modern economy, are allowed.
Claims under the disputes clause won’t suspend or delay collection. Until the action is decided, deferments will be granted only if, within 30 days after the filing of such action, the contractor gives the CO a bond, or other collateral, in the amount of the claim.
Smaller debts give the CO more options. For debts less than $100,000, excluding interest, if further collection is not practicable or would cost more than the amount of recovery, the agency may compromise the debt or terminate or suspend further collection action.
When a contractor signs a release for a modification, does that prevent the contractor from getting additional costs at the end of the contract?
It depends on the wording of the release. A release that excludes impact costs allows a contractor to recover at the end of contract performance additional costs unknown at the time a modification was agreed to.
When the parties to a contract sign a modification for changed work, they usually also sign a release or accord and satisfaction. Typically, a release says that the money and/or time provided with the modification is all the contractor will get for the modification. This procedure is designed to eliminate any future fights over additional costs or time for the modification. But, if a contractor inserts into a release specific language that allows recovery in the future for “impact” costs associated with the change, the accord and satisfaction that went with the modification will not have settled everything.
For example, a contractor put the following language in releases that went along with a modification: “modification covers all direct and indirect costs, but the contractor expressly reserves the right to seek additional time and compensation at a later date for impact or suspension work.” When the contract was over, the contractor filed a claim for impact costs for a subcontractor. A board concluded that costs that the contractor could know and quantify at the time the modification was signed were included in the modification’s release. Significant was the fact that the modifications were signed well after the work was completed, leaving the contractor in a good position to know what the actual costs of the change were. Unknown costs, however, would still be allowed at the end of the contract.
Is a release with a broad exceptions clause really effective for keeping the contractor’s options open for future claims?
The so-called “blunderbuss exception” in releases actually closes the U.S. Treasury door on a too-clever contractor. If a contractor wants to keep possible claims alive and still sign a release, the exceptions the contractor states must be specific.
This is based on the following theory. After the contract is finished, the contractor must sign a release that says that the contractor has no claims against the government. Releases put an end to the contract. If a contractor is not sure whether it wants to file any claims in the future, it will identify in the release any claims that are to be excepted from the release.
In the past, some contractors have used blunderbuss exceptions. This kind of exception claims to release the government from any future claims except any future claims that may arise in the future. In other words, it is really not an exception because the exception is so broad as to be meaningless.
A tricky issue is “how specific must an exception be?” It should be very specific or a contractor might be better off not signing a release until it knows the nature and value of any possible claim.
For example, a contractor signed a government-drafted release reading as follows:
NOW THEREFORE, in consideration of the above premises and payment by the United States to the contractor of the amount now due under the contract, to wit, the sum of Six Thousand Thirteen Dollars and Sixty-eight cents ($6,013.68), the contractor hereby remises, releases, and forever discharges the United States, its officers, agents and employees, of and from all manner of debts, dues, liabilities, obligations, accounts, claims and demands whatsoever, in law and equity, under or by virtue of the said contract except …
At this point, the contractor wrote in the following attempted exception: “We reserve the right to submit a claim on the above-referenced contract. And to submit for any taxes due.” Later, the contractor wanted to file claims against the government.
The CO refused to allow the claim and so did a board of contract appeals. A clause in the contract said that an exception in a release had “to be specifically excepted and in stated amounts.” The contractor did not do that:
Exceptions to releases are strictly construed against the Contractor, because the purpose of a release is to put an end to the matter in controversy. The exception noted by Appellant in its release, even if it had specifically referred to its prior letters, is likewise a blunderbuss exception, which does nothing to inform the Government about the source, scope or substance of [the contractor’s] contentions. Vague, broad exceptions … are insufficient as a matter of law to constitute ‘claims’ sufficient to be excluded from the required release…. To allow Appellant’s exception to govern would not only permit it to resurrect a submission that did not constitute a claim either prior to the release, or in the release itself, but which would enable it to assert no more than a naked intention to file an indeterminate future claim in an undetermined amount as a precursor to subsequent development of arguable and previously unknown claims (Eagle Asphalt & Oil, IBCA 4173-1999, December 28, 2000).
Will the FAR release language for modifications work to prevent claims at the end of the contract?
Perhaps not, because the FAR language has some ambiguous words in it that can cost the government more money at the end of the contract. The current FAR modification release language at FAR 43.204(c) encourages vague language. It purports to be a release from additional equitable adjustments “attributable to such facts or circumstances giving rise to” the proposal for adjustment or modification. What exactly does that mean? What does the release deal with?
Vague government-drafted language in modification releases does not protect the government from additional claims. For example, a modification gave more money and different tasks to a contractor under an option. The release stated that the release covered any claims “arising out of Modification P00013. This document contains the complete agreement of the parties. There are no other collateral agreements, either written or oral.” A board of contract appeals held that the release covered only the work to occur during the next option year, not the increased costs for the work the year before, even though it might appear that the modification did affect the previous year. Important to the Board was the fact that “the terms of the modification do not plainly bar the present claim….”
When is it too late to file claims?
A contractor cannot file claims after receiving final payment. But final payment is not as simple as it seems. The government needs a final payment date to ensure that claims are filed while the contract is still alive and to protect the government against stale claims. But sometimes, deciding when final payment has occurred is difficult. Courts and boards look to the totality of facts and circumstances of a particular case. If the payment in question is labeled “final” and if such payment comes at a sequence in time and events consistent with finality, then it would seem that final payment has been made.
The problem with final payment is that often several payments are made on a contract and the contract ends up being terminated. Should the last payment the government made be considered the final payment? Probably not, because the last payment was made not with the intent that it be the last one. It simply turned out to be the last one.
To see if final payment has been made, courts and boards look for indicators such as any notation or indication of finality on the invoice or last check, execution of a modification after issuance of the “last” check, still-pending equitable adjustments, failure to request a release, and the government’s in-house treatment of the contract as being open.
As one court stated, “final payment should not be found as a matter of surprise. Rather, it is the payment which can reasonably and logically be considered the ‘final payment’ under the contract that marks [the] cut-off point for the contractor” (Historical Services, Inc., DOTCAB Nos. 72-8, 72-8a, and 72-2BCA¶9592 at 44,839).