31.201-3 Determining reasonableness
Source: FAR 31.201-3 on acquisition.gov
Contractors must be able to justify that all costs charged to the government are reasonable, especially if challenged by the contracting officer.
Overview
FAR 31.201-3 outlines the standard for determining whether a cost is reasonable and therefore allowable under government contracts. A cost is considered reasonable if it does not exceed what a prudent business person would pay in a competitive environment. The regulation emphasizes that contractors bear the burden of proving the reasonableness of any challenged cost, especially when competitive pressures are absent. Several factors must be considered, including whether the cost is ordinary and necessary, aligns with sound business practices, complies with laws and regulations, reflects the contractor’s responsibilities, and is consistent with the contractor’s established practices. No cost is presumed reasonable simply because it was incurred; each must be justified if questioned by the contracting officer.
Key Rules
- Standard of Reasonableness
- Costs must not exceed what a prudent person would pay in a competitive business context.
- Burden of Proof
- Contractors must justify the reasonableness of costs if challenged by the contracting officer.
- Factors for Reasonableness
- Considerations include business norms, legal compliance, contractor responsibilities, and consistency with established practices.
Responsibilities
- Contracting Officers: Review and, if necessary, challenge costs; require contractors to justify costs.
- Contractors: Demonstrate and document the reasonableness of all costs, especially if challenged.
- Agencies: Ensure oversight and adherence to cost principles during contract administration.
Practical Implications
- This section exists to prevent the government from reimbursing excessive or unjustified costs.
- Contractors must be prepared to support the reasonableness of their costs with documentation and rationale.
- Common pitfalls include assuming costs are reasonable without evidence or failing to consider all relevant factors.
(a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer’s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.
(b) What is reasonable depends upon a variety of considerations and circumstances, including-
(1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor’s business or the contract performance;
(2) Generally accepted sound business practices, arm’s-length bargaining, and Federal and State laws and regulations;
(3) The contractor’s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and
(4) Any significant deviations from the contractor’s established practices.