Tuesday, May 20, 2014

Losses on Other Contracts

It should really go without saying that contractors cannot charge off losses from other contracts onto a Government contract. Yet, the FAR Councils saw fit to keep such a prohibition into its library of cost principles. It doesn't take up much space. In fact, the entire cost principle reads as follows:
An excess of costs over income under any other contract (including the contractor's contributed portion under cost-sharing contracts) is unallowable (see FAR 31.205-23).
This cost principle has been around since 1940 and has remained essentially unchanged since that first publication.

The logic behind this cost principle is simple. Each contract action stands alone. The Government cannot use contractor profits from another contract on the current contract to reduce its costs. Similarly, the contractor cannot use losses experienced under another contract to justify a higher price.

The prohibition applies even if the Government were the cause of the losses under the other contract. Presumably, if the Government caused a loss, a contractor would have a basis for an equitable adjustment claim under the loss contract.

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