Service and Warranty Costs

Service and warranty costs include those arising from fulfillment of any contractual obligation of a contractor to provide services such as installation, training, correcting defects in the products, replacing defective parts, and making refunds in the case of inadequate performance. When not inconsistent with the terms of the contract, service and warranty costs are allowable. However, care should be exercised to avoid duplication of the allowance as an element of both estimated product cost and risk.

There are several accounting methods used to account for warranty costs. Some contractors charge such costs direct to a contract or other final cost objective. Others charge warranty costs to one or more of their indirect cost pools. Still others, set up balance sheet reserve accounts and amortize the liability. With the reserve account methodology, contractors must make periodic comparisons to actual cost and adjust the accruals or book the variance.

DCAA has written fairly extensive guidance for reviewing warranty costs. Most of it cautions auditors to make sure that contractors do not "double dip" meaning that they cannot charge costs direct in some cases and indirect in others. Contractors who incur warranty costs or price warranty effort in their proposals would do well to study the guidance found in the DCAA Contract Audit Manual , Section 7-1600.