Advance agreements
Advance agreements provide written clarity on the treatment of special or unusual costs, reducing the risk of disputes and disallowances, but must always comply with FAR cost principles.
Overview
FAR 31.109 addresses the use of advance agreements between contractors and the government to clarify the treatment of special or unusual costs under government contracts. Advance agreements are written arrangements negotiated before or during a contract to avoid later disputes over cost allowability, reasonableness, or allocability, especially for complex or ambiguous cost items. While not mandatory, these agreements help both parties by providing certainty and reducing the risk of disallowance. Advance agreements must be consistent with FAR cost principles and cannot authorize costs that are otherwise unallowable. The section outlines who is authorized to negotiate these agreements, the process for coordination among agencies, and the need for proper documentation and distribution of the executed agreement. It also lists examples of cost areas where advance agreements are particularly useful, such as compensation, use charges, deferred maintenance, precontract costs, and statistical sampling methods.
Key Rules
- Advance Agreements Purpose and Scope
- Used to clarify the treatment of special or unusual costs and statistical sampling methodologies to prevent future disputes.
- Timing and Documentation
- Should be negotiated before costs are incurred, must be in writing, signed by both parties, and incorporated into relevant contracts.
- Consistency with FAR
- Agreements cannot allow costs that are unallowable under FAR cost principles.
- Negotiation Authority
- Specifies which contracting officers can negotiate and execute advance agreements and the need for coordination when authority is delegated.
- Interagency Coordination
- Requires notification and possible involvement of other agencies with significant contract balances with the same contractor.
- Distribution and Recordkeeping
- Executed agreements and supporting memoranda must be distributed to relevant agencies and audit offices.
- Examples of Applicable Costs
- Lists specific cost categories where advance agreements are especially important.
Responsibilities
- Contracting Officers: Initiate, negotiate, and document advance agreements; ensure consistency with FAR; coordinate with other agencies as required.
- Contractors: Propose and comply with advance agreements; ensure costs are treated as agreed; maintain documentation.
- Agencies: Oversee negotiation process, ensure proper coordination and distribution of agreements, and involve audit agencies as needed.
Practical Implications
- Advance agreements provide clarity and reduce risk of cost disallowance for complex or ambiguous costs.
- They are especially useful for recurring or high-value cost categories prone to interpretation disputes.
- Failure to secure an advance agreement does not automatically make a cost unallowable, but lack of clarity can lead to disputes or disallowances during audits.