Tuesday, April 17, 2012

Special Tooling and Test Equipment

Disagreements between contractors and the Government arise from time to time over whether tooling and test equipment is "special" or "general". The distinction makes a big difference on the amount of tooling and test equipment costs that can be charged to one or more Government contracts. Generally, the costs of special tooling and special test equipment used in performing one or more Government contracts is allowable and shall be allocated to the specific Government contract or contracts for which acquired (see FAR 31.205-40). If tooling and test equipment does not meet the definition of "special", then the costs are normally dumped into an indirect expense pool and allocated across a broad allocation base that represents the contractors entire business.

FAR 2.202 definitions of special tooling and special test equipment

Special tooling means jigs, dies, fixtures, molds, patterns, taps, gauges, and all components of these items including foundations and similar improvements necessary for installing special tooling, and which are of such a specialized nature that without substantial modification or alteration their use is limited to the development or production of particular supplies or parts thereof or to the performance of particular services. Special tooling does not include material, special test equipment, real property, equipment, machine tools, or similar capital items.
Special test equipment means either single or multipurpose integrated test units engineered, designed, fabricated, or modified to accomplish special purpose testing in performing a contract. It consists of items or assemblies of equipment including foundations and similar improvements necessary for installing special test equipment, and standard or general purpose items or components that are interconnected and interdependent so as to become a new functional entity for special testing purposes. Special test equipment does not include material, special tooling, real property and equipment items used for general testing purposes or property that with relatively minor expenses can be made suitable for general purpose use.
Government challenges to the cost of special tooling and test equipment typically come from two angles. First, the Government will check to see whether the proposed or incurred tooling and test equipment costs meet the definitions above. If not, the costs may still be allowable indirect costs but moving costs from direct to indirect shifts some of the costs from Governmental to non-Governmental work. Secondly, the Government will assess whether the cost of the special tooling and test equipment is commensurate with the benefits. The purpose for spending money on specialized equipment is to reduce the requirements for production/manufacturing labor hours and costs, to speed up production, or to improve techniques, tolerances, and finished parts. If there is no cost benefit or contractors cannot otherwise build a business case for incurring the costs of special tooling or special test equipment, the Government will challenge the costs.

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