Warn Before the Money Runs Out: The Limitation of Cost and Funds Clauses

Published 2026 | TIKC NewsWire

If you hold a cost-reimbursement contract, there is a clause that quietly carries real teeth, and a lot of owners miss it. It is the Limitation of Cost clause, and its cousin the Limitation of Funds clause. In plain terms, they say you cannot just keep spending and billing past the money in the contract and expect to be paid. You have an affirmative duty to warn the government in advance when you are getting close to running out. Miss that notice and two bad things can happen: you may end up working for free, or you may look like you hid the overrun until it was too late.

What the clauses require

On a cost-type contract, the government commits a certain amount, and these clauses govern what happens as you approach it. They require you to notify the contracting officer, usually in writing and by a set point, such as when you expect that your costs will reach a defined percentage of the estimated total within the next stretch of work. The point is to give the government time to decide whether to add money, change the scope, or stop the work. The government is not obligated to pay you above the limit, so the notice protects both sides.

Why silence is so costly

Owners get into trouble by staying quiet and pushing forward, hoping the government will cover it later. But if you blow past the limit without the required notice, you are generally not entitled to be reimbursed for the overrun. You can literally perform work you never get paid for. Worse, quietly continuing to bill while you know the money is about to run out can look like you concealed the problem, which drags an honest budgeting miss toward the territory of a false statement about the state of your billing.

This is really a cost-tracking problem

The notice is only as good as your ability to see the overrun coming, which is why this is at heart a cost-system discipline. If your cost tracking is accurate and current, you will see that you are heading toward the limit in time to send the warning. If your books lag, you find out you are over only after you already are, when it is too late to give proper notice. Watching your burn rate against the funded amount is not just good management. On a cost contract, it is a compliance obligation.

What to do now

• Know your clause. Find the Limitation of Cost or Funds clause in each cost-type contract and its notice trigger.
• Track burn against funding. Watch your incurred cost against the funded and estimated amounts continuously.
• Send notice early. Warn the contracting officer in writing before you hit the threshold, not after.
• Do not work past the limit on hope. Get more funding or direction before spending above the committed amount.
• Keep the notice on record. Document that you warned on time, so a budget issue never looks like concealment.

Running low on a cost contract is not a scandal. It happens on real projects. What matters is that you see it coming and say so in time. Keep your cost tracking current, send the warning early, and a tight budget stays a conversation with your contracting officer instead of unpaid work or a cloud over your honesty. Brick by brick.

FAQ

What do the Limitation of Cost and Funds clauses require?

On cost-type contracts, they require you to notify the contracting officer in advance as your costs approach the funded or estimated amount, so the government can decide whether to add money or change the work.

What happens if I do not give notice?

You generally cannot be reimbursed for costs above the limit, so you may perform work you are never paid for, and silence can look like concealment.

Why is this a cost-system issue?

You can only warn in time if your cost tracking is current. Lagging books mean you discover the overrun only after it happens, too late for proper notice.

How do I stay compliant?

Know the clause and its trigger, track burn against funding continuously, send written notice early, do not work past the limit on hope, and keep the notice on record.

Sources

Federal Acquisition Regulation. (2026). FAR 52.232-20, Limitation of Cost, and 52.232-22, Limitation of Funds.

Defense Contract Audit Agency. (2026). Contract Audit Manual, cost monitoring on cost-reimbursement contracts.

This article is general information, not legal advice.