A Quick Overview of Contract Closeout
The process of contract closeout is the act of completing all necessary contract requirements and obtaining the necessary sign-offs from all parties involved. While technically this closes the deal in a formal sense, it also signifies the moment when both parties to the contract can be assured that the contract will not return to haunt them in any way. It means doing all the things in a contract that require action from the other party or parties, such as: In project management, contract closeout is one of the five basic project management processes . It seeks to ensure that all obligations have been fulfilled following the signing of the huge document, which may often be 50 or more pages long. Most contract closeouts include three main components: While it can take months for some contract closeouts to proceed, firms are increasingly recognizing that a gradual completion of obligations is better than a big push to finish during the final stages. Many use contract closeout checklists as a constant reminder of what should be done before the contract can be considered complete.
The Essential Parts of a Contract Closeout Checklist
A contract closeout checklist should include a number of key components. These include a review of the deliverables to ensure that they have all been received, and a review to determine whether all contractual terms and conditions have been satisfied. It may be necessary to request information or financial reconciliation from the contractor.
Based upon our experience, the following components should be included in any contract closeout checklist:
Verify receipt of all deliverables. Begin with verifying whether all required deliverables have actually been received. If not, you are not ready to proceed with the closeout.
Are the deliverables satisfactory? Every properly constructed contract should have criteria for the Government’s evaluation and acceptance of the work. Have all contractual terms and conditions, specifications, and requirements been satisfied? The threshold for "satisfactory" performance cannot be set too low. The Contracting Officer and the Contracting Officer’s Representative must be able to state, based upon personal knowledge and experience with the contract, the permit terms and conditions, specifications, and requirements, that the work meets the contract standard. If anyone involved in the contract management system has concerns that the deliverables do not fully satisfy the contract requirements, communicate the concerns with the Contracting Officer and/or the Contracting Officers Representative.
Does the contract require a final invoice? All contract actions do not require a final invoice, but those that do require a final invoice must have a complete final invoice.
Obligation of funds. Has the amount incurred by the contractor under the contract been paid and reconciled with the funds obligated by the Government?
Payment with interest. All payments from the government under a contract, including progress payments and final payment, are subject to interest payments under the Prompt Payment Act and FAR 52.232-25, Prompt Payment. Sometimes the government is required to make a prompt payment of interest for late payments of invoices or progress payments. That may also include interest due on an invoice, progress payment, or final payment requiring prompt payment of interest. Do you have a system for identifying invoices which will generate prompt interest payments? Does the system work?
If a progress payment was made, verify the date the contract was completed. Progress payments are generally paid under a Cost Plus Fixed Fee contract. In its simplest terms, the progress payment is a partial payment of the total cost and fee to date.
How to Successfully Fulfill a Contract Closeout
The first step in completing a contract closeout is to process any final authorization to pay for work already performed. After the payment has been processed, a final inspection of the work should be performed to make sure that the contractor has satisfactorily completed all of the contract requirements. After successful completion of the final inspection, a review of the contract records should be performed to confirm the completeness of the files and any other documents necessary to close out the contract. Once the review is complete and it is confirmed all contract requirements have been satisfied, the next step is to obtain a final release of claims and a signed general release from the contractor.
In addition to the final release of claims and general release, the contractor may also be required to submit a final patent and copyright report. Finally, once all of the above steps have been completed, the contract should undergo final review by the Contracting Officer Representative and once again the contract record should be reviewed to make sure that it is complete. The final action before the contract is formally closed out is to release all remaining obligations from the contract.
Typical Issues that Arise in a Contract Closeout
Even with the most meticulous contract management systems in place, you may encounter some common roadblocks when completing a contract closeout. Below are some of the more frequently seen issues and suggestions on how to avoid or at least mitigate these problems:
Delayed submissions: A large percentage of contract closeouts are delayed due to late or incomplete submissions. In addition to making sure that the contractor is aware of the requirements, it is a good idea to have them sign and date an acknowledgement of the final contract closeout checklist. Ask them to provide a reason for any delays on their part when notifying you of a delay in the submission of the final payment request. Occasionally, it is necessary to send a reminder letter or notice of default, which can be helpful when you need to elevate the issue to a higher level with the contractor.
Communication gaps: It is important for all parties to be aware of their responsibilities in the final contract close out. This information should be communicated in the beginning phases of the project, during the inception of the tasks and statuses to be implemented . If there are any issues that occur, clients and contractors should notify each other for information and assistance. Managing the expectations of everyone involved in the contract is extremely important so that tasks can be completed in a timely manner.
Discrepancies in deliverables: The goal of the final closeouts is to determine if the deliverables were satisfactory and confirm that all terms and conditions have been met. On occasion, the contractor or service provider may not fulfill the agreement properly. If this has occurred during a contract or service agreement, a modification may need to be prepared to reflect what was not completely satisfied and state the cost of these items. Make sure the explanation for the modification is very clear; a detailed list of any deficiencies must be included to agree on the necessary corrective action. Add any appropriate adjustments to the cost in order to reflect a quality contract closeout.
The advancement of technology has greatly contributed to the effectiveness of contract solutions. Online contract management systems can be an invaluable tool for you and your organization in the entire contract process.
How to Make a Winning Contract Closeout Checklist
The creation of a contract closeout checklist may appear to be nothing more than a cursory formality, but there are dozens of moving parts to the contract closeout process, and your closeout checklist is ostensibly the only assurance that none of the components will slip through the cracks. A well-designed contract closeout checklist is one of the most useful tools to ensure the completeness and accuracy of any contract closeout process.
There are several best practices to keep in mind when drafting and maintaining an effective contract closeout checklist:
1. Tailor the Checklist to Suit Different Types of Contracts
It should go without saying that every contract closeout process will have unique elements, depending on the type of contract being closed out. For example, the checklist for a fixed-price contract closeout checklist differs significantly from a cost-reimbursable closeout checklist. Similarly, if the contract involves non-disclosure agreements with vendors, the checklist should capture obligations and provisions related to data security and information sharing that don’t appear on an otherwise-ordinary checklist for a commercial contract. For this reason, it is always advisable to have separate checklists designed for each risk level of the contract in question, and for each type of contract placed in the market.
2. Involve Key Stakeholders
As with any process involving multiple business units, get input from any stakeholders that will be involved in the closeout process before you finalize the contract closeout checklist. Key stakeholders can include: Your checklist doesn’t need to contain every single document or process needed for your specific closeout. Involving your internal resources in drafting the checklist creates a process where everyone agrees what the checks and balances will be and who will be responsible for each one.
3. Ensure Consistency Across Projects
For organizations that will be doing contract closeouts on a frequent basis, consistency matters. You have completed the diligence work upfront, so avoid reinventing the wheel by creating a checklist that differs from your previous checklists – even slightly. While minor contractual differences should be accounted for, the same checklist should be used as a foundation on every deal of the same type, with variation in the off-limits provisions. Maintain a record of all of your contract closeout checklists in a centralized location for easy reference and comparison across contracts.
An effectively written contract closeout checklist serves as an efficient supplementary tool to the contract closeout process, ensuring that you don’t leave loose ends on your contracts once the closeout process is fully implemented. Keep in mind the tips above to ensure you have a complete contract closeout checklist for your next closed deal.
Legal and Financial Risks of Contract Closeout
Unlike the closeout of a retail purchase (e.g., your new car or that gadget you ordered on Amazon), the closeout of a federal contract requires you to satisfy not only all of the administrative closeout obligations, but also be aware of the fiscal and legal implications of contract closeout. In other words, if you don’t properly closeout the contract, there can be legal and financial ramifications.
One of the key factors in determining which provisions will govern in the event of a dispute is when the contract was awarded. The applicable version of the Federal Acquisition Regulation (FAR) may be critical. In general, the version that was in effect at the time the parties entered into the agreement will apply, unless supplied otherwise in the contract (such as citing a specific clause). As a result, it may be prudent for a contractor to prepare a closeout checklist based on the version of the FAR in effect at the time it performed the contract. Of course, the governing version will vary based on the date of initial contract award. Further, documentation in the closeout file may not be indexed by the effective version of the FAR. Thus, a comprehensive closeout checklist will assist in complying with the appropriate version of the FAR.
If the federal agency finds contract deficiencies during the contract closeout process that do not rise to the level to be considered fraud, the agency may decide to waive the requirement given the overall facts and circumstances . Terminations for convenience require specific consideration based on the circumstances leading to the termination. For example, if a termination for convenience occurs because of unanticipated economic and market conditions affecting the contractor, there may be no delinquent contract performance to be remedied. A contractor’s ability to defend its interests in these situations is critical. Proper documentation and review of the record volume may be the basis for making agency authorities aware of the circumstances before the contract is closed. The facts and circumstances surrounding the termination and documentation are critical. The better the documentation, the more likely an agency will provide a satisfactory settlement.
The same consideration of eliminating contract deficiencies does not apply to fraud, e.g., when there is a material breach or fraud has been discovered. The government is unlikely to waive the prohibition on a contractor recovering costs related to fraud or criminal conduct. When fraud is at issue, the agency may settle the matter with civil authorities. However, the agency is not obligated to do so unless a settlement agreement has been reached. If you find yourself in a situation where you need to determine whether you qualify under the FAR for a recovery of material costs, your best defense is documentation. Again, a well-prepared closeout checklist will help streamline the process, but having good records is critical.