When materials are issued from inventory, any generally recognized method of pricing such material is acceptable. It could be FIFO, LIFO, Weighted-Average, or something else. Whatever method is chosen however, must be applied consistently across the company. A contractor cannot use one method for Government contracting and another for commercial work. Additionally, the method must achieve equitable results. We've never encountered a situation where a selected methodology would not result in equitable results but we suppose it could happen. Suppose a contractor using the LIFO (last-in, first-out) method has three units in inventory at $100 each and buys a fourth for $1,000. The contract calls for one unit so under the LIFO method, the contractor charges the contract $1,000. The Government could look at that and think that there is some inequity in the practice. The ultimate decision will come down to the contracting officer's determination.
Allowance for all materials, supplies and services that are sold or transferred between any divisions, subdivisions, subsidiaries, or affiliates of the contractor under a common control shall be on the basis of cost incurred by that affiliate. In other words, the affiliate should not be charging a profit on the cost of the transfers.
There are exceptions however. Allowances may be at price (as opposed to cost) when three conditions are met:
- It is the established practice of the transferring organization to price inter-organizational transfers at other than cost for commercial work of the contractor or any division, subsidiary or affiliate of the contractor under common control and
- The item being transferred qualifies for an exception under FAR 15.403-1(b) and
- The contracting officer has not determined the price to be unreasonable.
Those exceptions listed under FAR 15.403-1(b) include:
- When the contracting officer determines that the prices agreed upon are based on adequate price competition
- When the contracting officer determines that prices agreed upon are based on prices set by law or regulation
- When a commercial item is being acquired
- When a waiver has been granted
- When modifying a contract for commercial items.
When commercial items are transferred at a price based on a catalog or market price, the contractor should adjust the price to reflect the quantities being acquired (e.g. provide for quantity discounts) and may also adjust the price to reflect the actual cost of any modifications necessary because of contract requirements.
Practically speaking, there is not too much that can go wrong when purchasing materials for a contract. Purchases are very straight-forward transactions. Contractor's need to ensure that they maintain an adequate paper trail that includes:
- Purchase request
- Purchase order
- Receiving documentation
- Vendor invoice
- Payment records