Penalties on Unallowable Costs - Part I

Now that the Government is starting to audit and clear out its backlog of old contractor incurred cost submissions, some contractors are finding out first-hand, some for the first time, the FAR provisions regarding penalties on specifically unallowable costs included in their submissions.

FAR 42.709 covers the assessment of penalties against contractors who include unallowable indirect costs in final indirect cost rate proposals or the final statement of costs incurred or estimated to be incurred under a fixed-price incentive contract. It applies to flexibly priced contracts greater than $700 thousand.

The penalties are pretty stiff. If the indirect cost is "expressly unallowable" under a cost principle (e.g. advertising, alcoholic beverages), the penalty is equal to the amount of the disallowed costs allocated to contracts subject to this provision plus interest on the paid portion. The penalty is applicable and assessed whether the Government actually paid the costs.

It gets worse. If the indirect cost was determined to be unallowable for that contractor before proposal submission, the penalty is double. So, for example, if a contractor persists in claiming a cost that was determined to be unallowable as a result of an earlier audit, the penalty is two times whatever was claimed.

In the next few days, we look further at this issue, who's responsible for calculating and assessing the penalty and whether or not their are any waivers available to contractors who inadvertently or not, has included unallowable costs in their incurred cost submissions.

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Read our complete series on penalties for unallowable costs by following these links.
Part I - Regulatory Authority
Part II - Levels I and II Penalties, and interest
Part III - Waivers
Part IV - Calculating
Part V - Audit Guidance