FAR defines "contingencies" as a possible future event or condition arising from presently known or unknown causes, the outcome of which is indeterminable at the present time.
For historical costing purposes, costs for contingencies are generally unallowable because such costing deals with costs incurred and recorded in the contractor's books and records. However, in some cases (e.g. contract terminations) a contingency factor may be recognized when it is applicable to a past period to give recognition to minor unsettled factors in the interest of expediting settlement.
Contingencies included in estimates of future costs, on the other hand, are allowable under limited conditions. To be allowable, the contingency must meet both of the following criteria
- based on current conditions and
- the impact is foreseeable within reasonable limits
An example of an allowable contingency in pricing would be scrap and rework factors.
If the contingency is based on known or unknown conditions and the impact cannot be measured accurately enough to provide equitable results to the contractor and to the Government, the costs are unallowable. An example of this kind of contingency might be pending litigation.
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