Precontract Costs

Contractors need to be very careful about incurring costs prior to the contract award date. FAR provides a very limited set of circumstances under which precontract costs are allowable. Failure to heed those requirements could render the costs unallowable under Government contracts.

Precontract costs are those incurred before the effective date of the contract,

1. directly pursuant to the negotiation and
2. in anticipation of the contract award when such incurrence is necessary to comply with the proposed contract delivery schedule.

If the costs meet these two criteria, they are allowable to the extent that they would have been allowable if incurred after the date of the contract (see FAR 31.205-32).

Contractors contemplating the expenditure of precontract costs are strongly advised (by FAR 31.109) to negotiate an advance agreement with the contracting officer in order to avoid possible subsequent disallowance or dispute based on unreasonableness, unallocability, or unallowability.

Advance agreements may be negotiated either before or during a contract but should be negotiated before incurrence of the costs involved. The agreements must be in writing, executed by both contracting parties, and incorporated into applicable current and future contracts.

Examples for which advance agreements may be particularly important specifically include precontract costs (see FAR 31.109(h)(4)).