FAR Part 31 Flashcards
Part 31
Contract Cost Principles and Procedures
This part contains cost principles and procedures for-
(a)Thepricingofcontracts, subcontracts, and modifications to contracts and subcontracts whenever cost analysis is performed (see 15.404-1(c)); and
(b)Thedetermination, negotiation, or allowance of costs when required by a contract clause.
The applicable subparts of part 31 shall be used in the pricing of fixed-price contracts, subcontracts, and modifications to contracts and subcontracts whenever
(a) cost analysis is performed, or
(b)a fixed-price contract clause requires the determination or negotiation of costs.
* However, application of cost principles to fixed-price contracts and subcontracts shall not be construed as a requirement to negotiate agreements on individual elements of cost in arriving at agreement on the total price.
* The final price accepted by the parties reflects agreement only on the total price. Further, notwithstanding the mandatory use of cost principles, the objective will continue to be to negotiate prices that are fair and reasonable, cost and other factors considered.
Subpart 31.2 - Contracts with Commercial Organizations
31.201General.
31.201-1 Composition of total cost.
(a) The total cost, including standard costs properly adjusted for applicable variances, of a contract is the sum of the direct and indirect costs allocable to the contract, incurred or to be incurred, plus any allocable cost of money pursuant to 31.205-10, less any allocable credits. In ascertaining what constitutes a cost, any generally accepted method of determining or estimating costs that is equitable and is consistently applied may be used.
(b) While the total cost of a contract includes all costs properly allocable to the contract, the allowable costs to the Government are limited to those allocable costs which are allowablepursuanttopart 31andapplicableagencysupplements.
31.201-2 Determining allowability
(a)A cost is allowable only when the cost complies with all of the following requirements:
(1) Reasonableness.
(2) Allocability.
(3) Standards promulgated by the CAS Board, if applicable, otherwise, generally accepted accounting principles and practices appropriate to the circumstances.
(4) Terms of the contract.
(5) Any limitations set forth in this subpart.
31.201-3 Determining reasonableness
(a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer’s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.
(b) What is reasonable depends upon a variety of considerations and circumstances, including-
* (1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor’s business or the contract performance;
* (2) Generally accepted sound business practices, arm’s-length bargaining, and Federal and State laws and regulations;
* (3) The contractor’s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and
* (4) Any significant deviations from the contractor’s established practices.
31.201-4 Determining allocability.
A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. Subject to the foregoing, a cost is allocable to a Government contract if it-
(a) Is incurred specifically for the contract;
(b) Benefits both the contract and other work, and can be distributed to them in
reasonable proportion to the benefits received; or
(c) Is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown.
*(b) Agencies are not expected to place additional restrictions on individual items of cost. However, under 10 U.S.C. 3744, 41 U.S.C.4304, 31 U.S.C. 3730, and 41 U.S.C. 4310, the following costs are unallowable:
(1) Costs of entertainment, including amusement, diversion, and social activities, and any costs directly associated with such costs (such as tickets to shows or sports events, meals, lodging, rentals, transportation, and gratuities).
(2) Costs incurred to influence (directly or indirectly) legislative action on any matter pending before Congress, a State legislature, or a legislative body of a political subdivision of a State.
(3) Costs incurred in defense of any civil or criminal fraud proceeding or similar proceeding (including filing of any false certification) brought by the United States where the contractor is found liable or has pleaded nolo contendere to a charge of fraud or similar proceeding (including filing of a false certification).
(4) Payments of fines and penalties resulting from violations of, or failure to comply with, Federal, state, local, or foreign laws and regulations, except when incurred as a result of compliance with specific terms and conditions of the contract or specific written instructions from the contracting officer authorizing in advance such payments in accordance with applicable regulations in the FAR or an executive agency supplement to the FAR.
(5) Costs of any membership in any social, dining, or country club or organization.
(6) Costs of alcoholic beverages.
(7) Contributions or donations, regardless of the recipient.
(8) Costs of advertising designed to promote the contractor or its products.
9) Costs of promotional items and memorabilia, including models, gifts, and souvenirs.
(10) Costs for travel by commercial aircraft which exceed the amount of the standard commercial fare.
(11) Costs incurred in making any payment (commonly known as a “golden parachute payment”) which is-
* (i) In an amount in excess of the normal severance pay paid by the contractor to an employee upon termination of employment; and
* (ii) Is paid to the employee contingent upon, and following, a change in management control over, or ownership of, the contractor or a substantial
(12) Costs of commercial insurance that protects against the costs of the contractor for correction of the contractor’s own defects in materials or workmanship.
(13) Costs of severance pay paid by the contractor to foreign nationals employed by the contractor under a service contract performed outside the United States, to the extent that the amount of the severance pay paid in any case exceeds the amount paid in the industry involved under the customary or prevailing practice for firms in that industry providing similar services in the United States, as determined by regulations in the FAR or in an executive agency supplement to the FAR.
(14) Costs of severance pay paid by the contractor to a foreign national employed by the contractor under a service contract performed in a foreign country if the termination of the employment of the foreign national is the result of the closing of, or curtailment of activities at, a United States facility in that country at the request of the government of that country.
(15) Unless any of the exceptions at 31.205-47(c) or (d) apply, costs incurred by a contractor or subcontractor in connection with any criminal, civil, or administrative proceedings that result in dispositions described at 31.205-47(b)(1) through (5) commenced by: a Federal, State, local, or foreign government, for a violation of, or failure to comply with, law or regulation by the contractor or subcontractor (including its agents or employees); a contractor or subcontractor employee submitting a whistleblower complaint of reprisal in accordance with 41 U.S.C. 4712 or 10 U.S.C. 4701; or a third party in the name of the United States under the False Claims Act, 31 U.S.C. 3730. For any such proceeding that does not result in a disposition described at 31.205-47(b)(1) through (5), or to which 31.205-47(c) exceptions apply, the cost of that proceeding shall be subject to the limitations in 31.205-47(e).
(16) Costs incurred in connection with a Congressional investigation or inquiry into an issue that is the subject matter of a proceeding resulting in a disposition as described at 31.205-47(b)(1) through (5).
FAR Part 31 contains
cost principles and procedures for:
Determination,
Negotiation, or
Allowance of costs,
When required by a contract clause.
Part 31 (Fixed Price Contracts) shall be used in the pricing of fixed-
price contracts, subcontracts, and modifications whenever:
Cost analysis is performed, or
A fixed-price contract clause requires the determination or negotiation of costs.
Application of cost principles to fixed-price contracts and subcontracts shall not
be
construed a s a requirement to negotiate agreements on individual elements of cost in arriving at agreement on the total price.
Advance agreement
An agreement between the seller and the buyer regarding the treatment of specified costs negotiated either before or during contract performance, but preferably before the cost to be covered by the government is incurred
Advance agreements may be negotiated before or during a contract but should be negotiated before the incurrence
of costs.
An advance agreement must be
in writing,
executed
by both parties, and
incorporated into applicable current and future contracts.
Contracts with Commercial Organizations
Total Cost
Allocable direct costs
Allocable indirect costs
Allocable cost of money
Minus any
applicable credits
Reasonable cost
At cost that
in its nature and amount, does not exceed that which would be incurred by a prudent person in the conduct of competitive business
Is the cost of atype generally recognized as ordinary and necessary for the conduct of the contractor’s business
What are the generally accepted sound business practices?
What responsibilities does the contractor have?
Are there
deviations
from the contractor’s normal practices
Determining Reasonableness
The burden of proof is on the contractor to establish that a
specific cost is reasonable.
