Negotiating Advance Agreements on Specific Items of Cost

Would you like to forestall the Government from taking exception to certain items of costs?  If so, consider an advance agreement.

The extent of allowability of costs covered by the cost principles in FAR Part 31 applies broadly to many accounting systems in varying contract situations. Thus, the reasonableness, the allocability and the allowability under specific cost principles of certain costs may be difficult to determine. To avoid possible subsequent disallowance or dispute based on unreasonableness, unallocability or unallowability, FAR 31.109 encourages contractors and contracting officers to seek advance agreement on the treatment of special or unusual costs.

There are several cost principles that specifically call out the advisability of advance agreements. For example:

• FAR 31.105, Construction Contracts
• FAR 31.201-6(c)(4), Use of Statistical Sampling
• FAR 31.205-6(j), Pension Costs
• FAR 31.205-6(o), Post Retirement Benefits
• FAR 31.205-37, Royalties
• FAR 31.205-46(a)(5), Per Diem in Excess of Government Ceilings
• FAR 31.205-46(c)(3), Use of Contractor Owned Aircraft

Other examples listed in FAR 31.109 where advance agreements may be particularly important are

• Allowances for off-site pay, incentive pay, location allowances, hardship pay, cost of living differentials, and termination of defined benefit pension plans,
• Use charges for full depreciated assets
• Deferred maintenance costs
• Precontract costs
• Selling and distribution costs
• Idle facilities/idle capacity
• Severance pay
• Plant reconversion
• Professional services
• Corporate allocations

Advance agreements are not limited to these items. One Government contract has more than a hundred advance agreements with the Government and that contractor may not be unique.

Advance agreements should be negotiated before incurrence of the costs involved. Agreements must be in writing and include a statement of its applicability and duration. Usually the Government will insist on wording that gives either party the right to terminate it at any time.

Contracting officers are not authorized to agree to a treatment of costs inconsistent with FAR cost principles. For example, an advance agreement may not provide that, notwithstanding 31.205-51, the cost of alcoholic beverages are allowable.

Advance agreements may be negotiated with a particular contractor for a single contract, a group of contracts, or all the contracts of a contracting office, an agency, or several agencies.

See also Advance Agreement on Costs

Ask Before You Spend - Avoid Subsequent Disputes

Government contractors, like most businesses and individuals are asked to participate in community service projects. Some projects are regular and recurring while others are one-time events. Generally speaking, the cost of these projects  are allowable under FAR 31.205-1 which states that "allowable public relations costs include  cost of participation in community service activities (e.g. blood bank drives, charity drives, savings bond drives, disaster assistance).

Sometimes however, there is a fine line between allowable public relations activities and activities that are more closely aligned with advertising. Most kinds of advertising is unallowable under Government contracts.

There was a recent case involving a Government contractor who was asked to provide two employees to participate in a local Meals on Wheels program. The employees were to deliver meals for two to three hours every other week for one year. The contractor would pay their regular salaries and also reimburse them for their mileage. Before agreeing to take this project on, the contractor asked the contracting officer for advice on whether the costs would be allowable.

Requesting guidance on matters that could be controversial, or better yet, entering into an advance agreement with the Government on the allowability of such costs is a wise move. It precludes disputes later on. In this case, the contracting officer ruled that the cost of the Meals on Wheels project would be allowable as long as the costs were reasonable. The contracting officer also specified that the costs be charged indirect such as to a General and Administrative (G&A) account.