Monday, June 14, 2010

Advance Agreements on Costs

FAR contains a nice little provision tucked away in 31.109 - Advance Agreements. FAR provides for the use of advance agreements to address the reasonableness, allocability, and allowability of costs. It acknowledges that the propriety of some costs may be difficult to determine under certain circumstances and to avoid possible subsequent disallowance or dispute based on unreasonableness, unallocability or unallowability, contracting officers and contractors should seek advance agrement on the treatment of special or unusual costs. If you have special or unusual circumstances surrounding the costs you intend to allocate to Government contracts, you should pursue an advance agreement with your contracting officer. It is important for contractors to take the initiative here.

Advance agreements may be negotiated either before or during a contract but should be negotiated before incurring the costs. Agreements must be in writing and signed off by both parties. The agreement must include a statement of its applicability and duration.

An advance agreement cannot make costs that are otherwise unallowable, to become allowable. The contracting officer is not authorized to agree to a treatment of costs inconsistent with FAR Part 31. For example, an advance agreement may not provide that interest expense suddenly becomes allowable.

FAR provides several examples for which advance agreements may be particularly important:
  • Compensation for personal services including allowances for off site pay, incentive pay, location allowances, hardship pay, and cost of living differential
  • Use charges for fully depreciated assets
  • Deferred maintenance costs
  • Precontract costs
  • Royalties and other costs for use of patents
  • Selling and distribution costs
  • Travel and relocation costs as related to special or mass personnel movements
  • Costs of idle facilities and idle capacity
  • Plant reconversion
  • Professional services
  • Public relations and advertising
  • Training and education

It is somewhat rare to find advance agreements at smaller contractors. However, more and more contractors are discovering that by availing themselves of the provision, they can preclude disputes over costs later on. We know of one contractor that has more than 100 advance agreements in place.

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