31.205-25 Manufacturing and production engineering costs
Source: FAR 31.205-25 on acquisition.gov
Only specific manufacturing and production engineering costs are allowable, while basic research and development for sale items must follow separate cost principles.
Overview
FAR 31.205-25 addresses the allowability of manufacturing and production engineering costs in government contracts. It specifies which types of engineering efforts are considered allowable costs, such as developing new materials, improving production processes, and analyzing manufacturing suitability. The section also clarifies exclusions, notably that basic and applied research, as well as development for items intended for sale, are not covered here but under FAR 31.205-18. Additionally, if such costs are capitalized per the contractor’s accounting policies, their allowability is determined by FAR 31.205-11 on depreciation.
Key Rules
- Allowable Manufacturing and Production Engineering Costs
- Costs for developing and deploying new or improved materials, systems, processes, pilot lines, and production improvements are allowable.
- Exclusions
- Basic and applied research, and development for items intended for sale, are not allowable under this section and must follow FAR 31.205-18.
- Capitalization of Costs
- If costs are capitalized, their allowability is governed by FAR 31.205-11 (Depreciation).
Responsibilities
- Contracting Officers: Ensure claimed costs meet the criteria for allowability and are not excluded by this section.
- Contractors: Properly classify and document manufacturing and production engineering costs, and apply correct cost principles for research or capitalized costs.
- Agencies: Oversee compliance and review cost submissions for adherence to these rules.
Practical Implications
- This section helps contractors determine which engineering costs can be charged to government contracts, reducing disputes over cost allowability.
- Misclassification of research or capitalized costs is a common pitfall, potentially leading to disallowed costs or audit findings.
- Clear documentation and adherence to accounting policies are essential for compliance.
(a) The costs of manufacturing and production engineering effort as described in (1) through (4) of this paragraph are all allowable:
(1) Developing and deploying new or improved materials, systems, processes, methods, equipment, tools and techniques that are or are expected to be used in producing products or services;
(2) Developing and deploying pilot production lines;
(3) Improving current production functions, such as plant layout, production scheduling and control, methods and job analysis, equipment capabilities and capacities, inspection techniques, and tooling analysis (including tooling design and application improvements); and
(4) Material and manufacturing producibility analysis for production suitability and to optimize manufacturing processes, methods, and techniques.
(b) This cost principle does not cover-
(1) Basic and applied research effort (as defined in 31.205-18(a)) related to new technology, materials, systems, processes, methods, equipment, tools and techniques. Such technical effort is governed by 31.205-18, Independent research and development and bid and proposal costs; and
(2) Development effort for manufacturing or production materials, systems, processes, methods, equipment, tools, and techniques that are intended for sale is also governed by 31.205-18.
(c) Where manufacturing or production development costs are capitalized or required to be capitalized under the contractor’s capitalization policies, allowable cost will be determined in accordance with the requirements of 31.205-11, Depreciation.