FedSubK Feature: The Acquisition Lifecycle of Service Contracts - Phase 3 Contract Administration & Closeout

Updated: May 4, 2024

This month we end our three-part series on the acquisition lifecycle of service contracts with an overview of the third and last phase, Contract Administration and Closeout (or “Post Award” Phase). (NOTE: Find Part 1 here and Part 2 here.)

As before, we will talk about each subactivity in this phase but first, let’s review the lifecycle of a typical Federal services contract valued over the Simplified Acquisition Threshold (or “SAT,” presently $250,000).

Figure 1 – Acquisition Lifecycle

You’ve been selected as the awardee of a Federal contract! Congratulations! All that hard work paid off. But the fun isn’t over yet.

To see that pay out, you’ve got to perform. Yes, now you must back up that proposal by providing stellar performance of the requirements. That means providing the personnel promised in the proposal (i.e., Key Personnel), the deliverables necessary to begin performance, and continue building the relationship with your Federal client.

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Contract Administration & Closeout (Post Award)

The Contract Administration and Closeout (Post Award) phase is where performance begins with the successful offeror now a Federal Prime Contractor (or “Prime”). The Government and Prime work together to ensure the performance, compliance, and reporting requirements are met and the end user receives the products and/or services required. Tasks are primarily performed by the Prime with Government oversight, acceptance, and performance evaluation.

Tasks in this phase are:

Figure 2 – Steps in the Contract Administration & Closeout (Post Award) Phase

Legend: I = Integrated Project Team, P = Project Management Office / Requestor, and A = Acquisition Office

These tasks will culminate in a completed contract and closeout under which the Government and Prime agree that all deliverables (products or services) have been received, are acceptable, meet inspection criteria, and no further monies are due to the Prime or Government.

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Key tasks in this phase and their impacts on the Prime are:

‍Kick Off Meeting (or “Post Award Conference”) (FAR Subpart 42.503)

The Kick Off Meeting is where contract administration planning and performance planning take place and a post award orientation meeting is conducted between the Prime and the Government. The CO/KO typically determines if and when a Kick Off Meeting is needed. The CO/KO will arrange the time and place, create the agenda, act as the meeting chair (or designate one), brief Government personnel before the meeting, and prepare a summary report of the meeting.

It is not the purpose of the meeting to change the contract. However, the Contracting Officer (CO/KO) may make commitments or give directions within the scope the CO’s/KO’s authority and the contract. The CO/KO must execute a formal written modification before the Prime takes action on such changes. If the chair is not the CO/KO, the chair is not authorized to commit the Government to any changes that impact scope, schedule, or price.

Often on large extraordinarily complex contracts, partnership agreements are developed and partnership meetings between the parties are held. Schedules and processes are agreed to for assurances that a positive relationship continues between the Government and Prime and to lay out how performance issues will be handled and escalated for resolution between the parties. For smaller contracts, a post award letter may be sufficient to outline requirements for communications and submission of deliverables if not already called out in the contract scope, terms, and/or conditions.

Subcontractors do not typically attend the Kick Off Meeting (Post Award Conference) between the Prime and the Government since the Government has no privity of contract with Subcontractors and vice versa. This is also when the Prime’s agreements with their subcontractor should be solidified if not done so already (NOTE: Primes can determine the clauses that flow down to their subcontractors from the solicitation document; little if anything will change in terms of clauses short of a new law or national initiative like a telecommunications ban, TikTok prohibition, or minimum wage increase (as we’ve seen in recent years).

The Prime may ask Government representatives attend the Prime/Subcontractor Kick Off Meeting and Government personnel may attend provided they: (1) remember the limitations in privity of contract, (2) take no action that alters a subcontract, and (3) ensure any changes that may impact the Prime contract with the Government are documented and reported to the CO/KO for further discussions with the Prime and resolution.

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Quality Assurance (FAR Part 46)

The Government performs quality assurance through inspection/acceptance, documentation of past performance, monitoring the Prime’s subcontracting plan (if applicable), and coordinates on performance issues and set procedures to remedy any less than satisfactory performance.

Contract clauses for inspection and acceptance of services will be found in Part I, Section E of the solicitation under UCF. For fixed-priced contracts, FAR clause 52.246-4 Inspection of Services - Fixed-Price, requires that the contractor provide and maintain an inspection system acceptable to the Government covering the services under the contract. Other inspection and acceptance clauses exist for other types of contracts (see FAR Subpart 46.3). The Government has the right to always inspect and test all services and places during contract performance. FAR clause 52.246-4 specifically reserves the Government’s right to require reperformance by the Prime for nonconforming services at no cost or reduce the contract price if reduced services result in reduced value. It also puts the Prime on notice that if it fails to promptly perform the services again or to take the necessary action to ensure future performance is in conformance with the contract, the Government may have the serviced performed by others and charge the Prime for any costs incurred related to performance or terminate the contract for default.

Contracts for Commercial Products and Commercial Services

When acquiring commercial products under FAR Part 12, the Government relies on the Contractors' existing quality assurance systems as a substitute for Government inspection and testing before tender for acceptance, unless customary market practices for the commercial product being acquired include in-process inspection. Any in-process inspection by the Government is conducted in a manner consistent with commercial practice.

The Government relies on the Contractor to accomplish all inspection and testing needed to ensure that commercial services acquired conform to contract requirements before they are tendered to the Government.

Contracts aren’t without their share of “administrivia” type tasks. One of those tasks that is most important to the Prime is getting payments.

Payments and Accounting

Invoices must be submitted using the formats required by the Government, if applicable, and may sometimes be submitted electronically via an agency’s/organization’s financial system (i.e., Wide Area Work Flow (WAWF) for DoD, Corps of Engineers Financial Management System (CEFMS), or Vendor Inquiry Payment Electronic Reporting System (VIPERS) to name a few).

This step is CRUCIAL during performance; it is where you want to know your game plan and have your “A-Team” on the job. Why? Because delays in payment mean delays in getting capital to continue performance, pay subcontractors, order supplies, etc.

How often do you invoice? As often as the contract allows. They could be monthly for recurring monthly services, but most often is upon completion of task or deliverable as outlined in the deliverables and/or payment schedule. Other than Firm Fixed Price services may require that you also track costs and bill (and/or provided supporting documentation) in the form of hourly rates, hours expended, or agreed upon work breakdown structures (WBS) down to a specific level, depending on the type of contract (i.e., cost reimbursement, time-and-materials, or labor-hour).

The Government can turn away any invoice that is not considered a “proper” invoice (see FAR Subpart 32.905), meaning accurate, current, and complete with all information required by the agency to be submitted using the format they require (when indicated). Any delay pushes your payment back in the billing / accounts payable process. And when the delay in payment is because of the Prime’s error, there is no prompt payment interest involved (watch for a future FedSubK Feature on Prompt Payment coming in the May edition of FedSubK NOW!).

As mentioned, on complex type service contracts (i.e., cost, time-and-material, or labor-hour) you may have to track, segregate, and report hours, hourly rates, and total costs by line item and accounting string in your invoices or in attachments to support your invoice.

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Modifications

Modifications ( sometimes referred to as "change orders") are issued when changes are needed as part of performance due to unforeseen circumstances, changes in conditions or assumptions, and mandatory statutory requirements come into effect. Contracting modifications are issued formally in writing by the Contracting Officer and are typically bilateral in nature, meaning the Prime must first sign the modification before the Contracting Officer signs. However, administrative modifications and modifications based on terms and conditions of the contract may be issued unilaterally, or with only the Contracting Officer’s signature.  

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Exercising Options

Options exercise the Government’s right to purchase more products or services at a pre-agreed pricing, extend services, or term the term of the contract. In the case of options, the Contracting Officer must supply written notice to the Prime of the Government’s intent to exercise an option within the period specified in the contract.

Options may only be exercised after a determination that all the following apply:

• Funds are available.
• The requirement covered by the option fulfills an existing Government need.
• The exercise of the option is the most advantageous method of fulfilling the
• government’s need, price and other factors considered.
• The option was synopsized per FAR Part 5 unless otherwise exempted.
• The contractor does not have an active exclusion record in SAM.gov (see FAR 9.405-1).
• The contractor’s past performance evaluations on other contract actions have been considered.
• The contractor’s performance on this contract has been acceptable, e.g., received satisfactory ratings.

After considering price and other factors, the Government must make a written determination that exercise of the option is in its best interest based on one of the following:

• A new solicitation would fail to produce a better price or a more advantageous offer than that offered by the option.
• An informal analysis of prices or an examination of the market shows that the option price is better than prices available in the market.
• The time between the award of the contract containing the option and the exercise of the option is so short that it indicates the option price is the lowest price obtainable or the more advantageous offer, considering market stability and comparison of the time since award with the usual duration of contracts for such supplies or services.

Other factors to be considered include the Government’s need for continuity of operations and potential costs of disrupting operations and the effect on small business.

There are two types of options that can extend the life of a contract. They are:

Option to Extend Services

As prescribed in FAR clause 52.217-8 of the same name, the Government may require continued performance of any services within the limits and at the rates specified in the contract (unless revisions are required to meet Department of Labor prevailing rates). This option may be exercised more than once, but the total extension of performance cannot exceed 6 months. The Prime must receive written notice of the Government’s intent to exercise an option to extend services within a period indicated in the fill-in found in the clause, most often 60 calendar days prior to the end of the current contract term.

Option to Extend the Term of the Contract

As prescribed in FAR clause 52.217-9 of the same name, the Government may exercise the option to extend the term of the contract with written notice to the Prime within a time period indicated in the fill-in found in the clause (most often 30 calendar days prior to the end of the current contract term). The Government must give a preliminary written notice of its intent to extend at least 60 days before the contract expires, unless a different number of days is inserted in the clause, though this notice does not commit the Government exercise the extension.

The clause also says that if the option is exercised that the extended contract is considered to include this same option clause and indicate the total duration of the contract, including the exercise of any options periods. Per FAR 17.204(e), unless otherwise approved in accordance with agency procedures and/or statute, the total of the basic period and all option periods cannot exceed 5 years in the case of services.

Performance is chugging along and you’ve come to the anniversary date of the contract. The Government exercises an option to continue performance. But the Government must also now rate the Prime’s performance at certain intervals.

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Contractor Performance Assessment Rating System (CPARS)

CPARS is the Government’s official source for past performance information. Agencies must monitor compliance with the past performance evaluation requirements found under FAR Subpart 42.1502, and use the CPARS metric tools to measure the quality and timely reporting of past performance information for each contract that exceeds the SAT, or at such time a modification causes the dollar amount to exceed the SAT. For construction contracts, performance evaluations are required for contracts exceeding $750,000. For architect-engineer contracts, performance evaluations are required for contracts exceeding $35,000.

Past performance evaluations are prepared at least annually for multi-year contracts, and at the time the work under a contract or order is completed. Evaluations are generally for the entity, division, or unit that performed the contract or order. Past performance information shall be entered into CPARS by the Government and addresses, at a minimum, the following factors:

• Technical (quality of product or service).
• Cost control (not applicable for firm-fixed-price or fixed-price with economic price adjustment arrangements).
• Schedule/timeliness.
• Management or business relation
• Small business subcontracting, including reduced or untimely payments to small business subcontractors when a subcontracting plan is required.
• Other factors, as applicable, such as trafficking violations, tax delinquency, failure to report per contract terms and conditions, defective cost or pricing data, terminations, suspension and debarments, and failure to follow limitations on subcontracting.

Factors are evaluated and a supporting narrative is provided by the Government. Factors are rated with a five-scale rating system (i.e., exceptional, very good, satisfactory, marginal, and unsatisfactory). Ratings and narratives must reflect the definitions in the tables found at FAR Subpart 42.1503, Table 42-1 and Table 42-2 (when applicable).

Once entered by the Government, the Contractor will receive notification of a rating and can supply information for the record on any Government rating, comment, or feedback. If the Contractor does not agree with the CPARs rating, the rating still becomes available in the CPARS system for source selection officials to view not later than 14 days after the date on which the Contractor is notified of the evaluation’s availability for comment. The CPARS record is updated with any Contractor comments provided after 14 days as well as any subsequent agency of review of Contractor comments received. CPARS ratings are not subject to FAR protest procedures.

Agencies must use past performance information in CPARS. that is within three years (six years for construction and architect-engineer contracts) of the completion of performance of the evaluated contract or order, and information contained in the Federal Awardee Performance and Integrity Information System (FAPIIS), related to terminations for default or cause.

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Contract Closeout or Termination

Contract closeout will occur once the Government makes its final inspection/acceptance and final payment has been made. Contract termination may also prompt an end to contract performance either for the convenience of the Government or due to the deficient performance of the contractor (“default”). Closeout of contract files can be a time-consuming process but is necessary to fully remove completed projects from the Government’s books. Termination, on the other hand, can be a quick process because it is most often reactionary in nature. Both require Government resources and Contractor cooperation to achieve results in a reasonable period.

Closeout

The closeout process is the process most all contracts will go through at the end of the performance cycle. Closeout is triggered by the physical completion of performance under a Federal contract. A contract is “physically completed” when the Contractor has completed the required deliverable and the Government has inspected and accepted supplies, the contractor has performed all services and the Government has accepted those services, and all option provisions, if any, have expired.

The Administering Contracting Officer (ACO), if one has been assigned, handles initiating administrative closeout after receipt of evidence of physical completion. If one has not been assigned, the Contracting Officer will act as the ACO to conduct the closeout. The ACO reviews the contract funds status and notifies interested parties (i.e., contractor, finance, and funding office) of any excess funds that require deobligation (i.e., removal from the contract by modification). Administrative closeout requires that the ACO ensures (as applicable)—

• Disposition of classified material is completed.
• Final patent report is cleared.
• Final royalty report is cleared.
• There is no outstanding value engineering change proposal.
• Plant clearance report is received.
• Property clearance is received.
• All interim or disallowed costs are settled.
• Price revision is completed.
• Subcontracts are settled by the prime contractor.
• Prior year indirect cost rates are settled.
• Termination docket is completed.
• Contract audit is completed.
• Contractor closing statement is completed.
• Contractor final invoice has been submitted.
• Contract funds review is complete and excess funds are deobligated (i.e., taken off the contract by formal written modification).

Files for contracts using simplified acquisition procedures should be considered closed when the ACO receives evidence of receipt of property and final payment, unless otherwise specified by agency regulations.

Files for firm-fixed-price contracts, other than those using simplified acquisition procedures, should be closed within 6 months after the date on which the ACO receives evidence of physical completion.

Files for contracts requiring settlement of indirect cost rates should be closed within 36 months of the month in which the contracting officer receives evidence of physical completion. Files for all other contracts should be closed within 20 months of the month in which the Contracting Officer receives evidence of physical completion.

The ACO will complete a Contract Completion Statement when all tasks are completed and forward the statement to the paying office of record. The paying office will close the contract file upon issuance of the final payment to the Contractor. Note that a contract cannot be closed if it is under litigation or terminations actions have not been completed.

Termination

The termination clauses along with other contract clauses authorize Contracting Officers to terminate contracts for convenience, or for default, and to enter into settlement agreements.

Whether for default or convenience, the Contracting Officer should only terminate a contract when it is in the Government’s interest. A no-cost settlement should be used instead of a termination notice when-

• It is known that the Contractor will accept one,
• Government property was not furnished, and
• There are no outstanding payments, debts due to the Government, or other contractor obligations.

When the price of the undelivered balance of the contract is less than $5,000, the contract should not normally be terminated for convenience but should be permitted to run to completion.

Terminations should only occur after written notification to the Contractor, whether for convenience or default. The notice will say the contract affected, effective date, extent of termination (partial or total), special instructions, and steps the contractor should take to minimize impact on personnel if the termination will result in a significant reduction in the contractor’s workforce.

After the Contracting Officer issues a notice of termination, the Termination Contracting Officer (TCO) (if designated) handles negotiating any settlement with the Contractor. Auditors and TCO’s must promptly schedule and complete audit reviews and negotiations, giving particular attention to the need for prompt action on all settlements involving small business concerns. In the interim, per FAR Subpart 49.104, the Contractor must—

• Stop work immediately on the terminated portion of the contract and stop placing subcontracts thereunder.
• Terminate all subcontracts related to the terminated portion of the prime contract.
• Immediately advise the TCO of any extraordinary circumstances precluding the stoppage of work.
• Perform the continued portion of the contract and submit promptly any request for an equitable adjustment of price for the continued portion, supported by evidence of any increase in the cost, if the termination is partial.
• Take necessary or directed action to protect and preserve property in the contractor’s possession in which the Government has or may acquire an interest and as directed by the TCO, deliver the property to the Government.
• Promptly notify the TCO in writing of any legal proceedings growing out of any subcontract or other commitment related to the terminated portion of the contract.
• Settle outstanding liabilities and proposals arising out of termination of subcontracts, obtaining any approvals or ratifications required by the TCO.
• Promptly submit the Contractor’s own settlement proposal, supported by appropriate schedules.
• Dispose of termination inventory, as directed or authorized by the TCO.
• In the case of terminated construction contracts, ensure the cleanup of the site, protection of serviceable materials, removal of hazards, and other action necessary to leave a safe and healthful site.

A subcontractor has no contractual rights against the Government upon the termination of a prime contract. A subcontractor may have rights against the Prime Contractor or ia higher-tier subcontractor with whom it has contracted. Upon termination of a prime contract, the Prime Contractor and each subcontractor are responsible for the prompt settlement of the settlement proposals of their immediate subcontractors.

For additional details regarding settlement agreements, see FAR Subpart 49.109 for Prime Contractors and FAR 49.108 for settlement of subcontract settlement proposals.

That’s it! You’ve just successfully finished your first Government contract for services. Now you’ve got experience, a new (and hopefully happy) Federal agency as a client, and confidence to continue pursuing more contracts and grow your space in the Federal marketplace. And not just winning a contract but understanding the process will show your commitment to serving your target client agencies and helping them be successful in their mission to provide products and services to the warfighter and/or the public.