Wednesday, February 15, 2012

Economic Planning Costs

Economic planning costs are the costs of general long range management planning that is concerned with the future overall development of the contractor's business and that may take into account the eventual possibility of economic dislocations or fundamental alterations in those markets in which the contractor currently does business.

According to FAR 31.205-12, economic planning costs are allowable under Government contracts. However, FAR cautions that allowable economic planning costs do not include organization or reorganization costs which are generally unallowable under FAR 31.205-38. Often times, the distinction between allowable economic planning costs and unallowable planning for the organization or reorganization of the corporate structure of a business (including mergers and acquisitions) is not very clear making this area a frequent source of dispute between contractors and Government auditors.

There are a couple of things contractors can do to minimize disputes. Contractors anticipating to incur significant economic planning costs can pursue an advance agreement with the contracting officer prior to incurring the costs. Whether the contracting officer is amenable to an advance agreement or not, documentation is very important to the process. The activities covered by this cost principle should be tied back to the definition of economic planning costs thereby leaving little room for "interpretation".

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