Tuesday, January 19, 2016

Applicability of FAR Cost Principles to Fixed-Priced Contracts

Every once in awhile we encounter someone proclaiming that the cost principles found in FAR 31.102 do not apply to fixed price contracts. Such assertions would be incorrect. The FAR cost principles are considerations when negotiating fixed-priced contracts. Once the contract is awarded however, no one in the Government should care about the allowability, allocability, or reasonableness of the costs charged to the contract.

The Federal Acquisition Regulations (FAR) 31.102 addresses the applicability of the FAR Part 31 Cost Principles to fixed-price contracts. It states that the "applicable subparts of Part 31 shall be used in the pricing of fixed-price contracts, subcontracts, and modifications to contracts and subcontracts whenever a cost analysis is performed or where a fixed-price contract clause requires the determination or negotiation of costs.

The Department of Energy (DOE) adds clarification to this regulation. In its DOE FAR Supplement (DEARS), the DOE included the following verbiage at DEAR 931.102:
The intent of FAR 31.102 is that applicable sub-parts of FAR Part 31 shall be used by the Government in pricing fixed-price contracts and modifications, evaluating the reasonableness of a prime contractor's proposed subcontract prices, and determining the allowability of contractor payments to subcontracts that are cost-reimbursable, fixed-price incentive, or price-redeterminable (paraphrased).
The key difference between the FAR and the DEAR on this matter is the absence of the phrase "whenever a cost-analysis is performed" in DEAR's coverage. This recognizes that fixed-priced contracts can be awarded without cost-analysis being performed.

The FAR provision also contains a "however". FAR 31.102 states:
"However, application of cost principles to fixed-price contracts and subcontracts shall not be construed as a requirement to negotiate agreements on individual elements of cost in arriving at agreement on the total price. The final price accepted by the parties reflects agreement only on the total price. Further, notwithstanding the mandatory use of cost principles, the objective will continue to be to negotiate prices that are fair and reasonable, cost and other factors considered.
The Government has a lot of tools at its disposal for determining whether prices are fair and reasonable and sometimes cost is only one factor to consider. So, there could be a situation where a contractor proposes indirect rates that have not been scrubbed for unallowables but if the Government can assure itself that the bottom line is fair and reasonable, it shouldn't matter.

Contractors are also expected to apply the FAR cost principles when negotiating fixed-price subcontracts.

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