Limitation of Expenditure

A limitation of expenditure is the maximum amount of money a contractor may be paid for the prescribed work. It is normally used where the level of effort cannot be estimated accurately at the outset, particularly in cost-reimbursable contracts and fixed time/unit-rate contracts. The definition comes from the federal practitioner's guide for procurement pricing.

In Canadian federal contracting, the limitation also restricts Canada's total liability under the contract. It creates notification and reporting obligations for the contractor. The principal federal clause is SACC Manual clause C6001C, Limitation of Expenditure.

How a limitation of expenditure differs from a ceiling price

The two terms are related but not interchangeable. A limitation of expenditure sets the maximum amount that may be paid for prescribed work, generally where the final level of effort or cost is uncertain. A ceiling price is used where the contract establishes a maximum price for the work under the applicable basis of payment.

The pricing guide shows that the two can sit in the same basis of payment. SACC clause C8001C, Fixed Time/Unit Rate Basis of Payment, can incorporate either a ceiling price or a limitation of expenditure. Which one applies depends on how the contract is structured, as set out in the pricing guide.

Where SACC clause C6001C is required

The CanadaBuys buyer's guide requires a limitation-of-expenditure clause for cost-reimbursable contracts in these situations:

• a target cost or incentive fee with no maximum price;
• a fee based on actual costs;
• no fee; or
• no ceiling price.

The CanadaBuys guidance on cost-reimbursable bases of payment also says these contracts must include suitable clauses on cost limits and audit.

Where a time/unit-rate basis of payment is used without a ceiling price, the pricing guide identifies SACC clause C6001C as the required clause. For cost-reimbursable contracts with a target cost or incentive fee, it states that a limitation of expenditure must be included where there is no maximum price.

Limitation of expenditure in standing offers and solicitations

Standing offers are treated differently. The historical federal Supply Manual states that including a limitation of expenditure in a standing offer is optional. The contracting officer decides whether a limit is needed based on the type of standing offer.

Solicitation documents state the limit in plain terms. A CanadaBuys request for proposals provides that Canada's total liability to the contractor under the contract must not exceed the amount inserted at contract award.

What it means for a supplier bidding on Canadian public contracts

Treat the stated limitation as the maximum amount payable for the prescribed work. Track cumulative billings, reimbursable costs, hours and applicable taxes against it throughout the contract.

• Notify the contracting officer when the remaining amount may be insufficient, following the contract's notification requirements.
• Do not assume that extra work increases Canada's liability. At the client's request, the contracting officer may amend the contract to increase the limitation, or may direct the contractor to complete the work only to the extent the existing limitation allows.
• Comply with the audit and cost-verification clauses that apply to cost-reimbursable contracts.

When pricing a bid, read the basis of payment closely to see whether the contract uses a ceiling price or a limitation of expenditure. The answer determines how much cost risk the supplier carries and what reporting the contract will require. The details are in the federal pricing guide.