31.205-26 Material costs
Source: FAR 31.205-26 on acquisition.gov
FAR 31.205-26 requires contractors to accurately account for material costs, apply all applicable credits, and use consistent, equitable pricing methods to ensure fair and reasonable charges to government contracts.
Overview
FAR 31.205-26 defines what constitutes allowable material costs in government contracts, including raw materials, parts, subassemblies, components, and manufacturing supplies, whether purchased or manufactured by the contractor. It outlines how contractors must account for material costs, including adjustments for credits (such as discounts, refunds, and salvage), and specifies acceptable methods for pricing materials issued from inventory. The regulation also addresses the treatment of interorganizational transfers and the pricing of commercial products or services transferred within affiliated entities. The section ensures that material costs charged to government contracts are fair, reasonable, and consistently applied, preventing overcharging and ensuring transparency.
Key Rules
- Definition of Material Costs
- Includes raw materials, parts, subassemblies, components, manufacturing supplies, and related inbound costs.
- Adjustments for Credits
- Contractors must adjust material costs for trade discounts, refunds, rebates, allowances, and credits for scrap or salvage.
- Inventory Adjustments
- Reasonable adjustments from differences between physical and book inventories may be included if related to contract performance.
- Charging Material Costs
- Materials purchased specifically for a contract must be charged at actual purchase cost; inventory issues must use a consistent, equitable pricing method.
- Interorganizational Transfers
- Transfers between affiliated entities are generally at cost, but may be at price under certain conditions, such as established commercial practice and qualifying exceptions.
- Commercial Product/Service Transfers
- Prices should be adjusted for quantity and may be adjusted for contract-specific modifications.
Responsibilities
- Contracting Officers: Ensure contractors comply with material cost accounting and pricing requirements, review interorganizational transfer pricing, and verify proper crediting of discounts and refunds.
- Contractors: Properly account for all material costs, apply credits, use consistent inventory pricing methods, and follow rules for interorganizational transfers and commercial item pricing.
- Agencies: Oversee contractor compliance and audit material cost practices as needed.
Practical Implications
- This section exists to prevent inflated material costs and ensure fair pricing in government contracts.
- Contractors must maintain robust accounting systems and documentation for material costs and credits.
- Common pitfalls include failing to credit discounts, inconsistent inventory pricing, or improper interorganizational transfer pricing.
(a) Material costs include the costs of such items as raw materials, parts, subassemblies, components, and manufacturing supplies, whether purchased or manufactured by the contractor, and may include such collateral items as inbound transportation and in-transit insurance. In computing material costs, the contractor shall consider reasonable overruns, spoilage, or defective work (unless otherwise provided in any contract provision relating to inspecting and correcting defective work).
(b) The contractor shall-
(1) Adjust the costs of material for income and other credits, including available trade discounts, refunds, rebates, allowances, and cash discounts, and credits for scrap, salvage, and material returned to vendors; and
(2) Credit such income and other credits either directly to the cost of the material or allocate such income and other credits as a credit to indirect costs. When the contractor can demonstrate that failure to take cash discounts was reasonable, the contractor does not need to credit lost discounts.
(c) Reasonable adjustments arising from differences between periodic physical inventories and book inventories may be included in arriving at costs; provided such adjustments relate to the period of contract performance.
(d) When materials are purchased specifically for and are identifiable solely with performance under a contract, the actual purchase cost of those materials should be charged to the contract. If material is issued from stores, any generally recognized method of pricing such material is acceptable if that method is consistently applied and the results are equitable.
(e) Allowance for all materials, supplies and services that are sold or transferred between any divisions, subdivisions, subsidiaries, or affiliates of the contractor under a common control shall be on the basis of cost incurred in accordance with this subpart. However, allowance may be at price when-
(1) It is the established practice of the transferring organization to price interorganizational transfers at other than cost for commercial work of the contractor or any division, subsidiary or affiliate of the contractor under a common control; and
(2) The item being transferred qualifies for an exception under 15.403-1(b) and the contracting officer has not determined the price to be unreasonable.
(f) When a commercial product or commercial service under paragraph (e) of this section is sold or transferred at a price based on a catalog or market price, the contractor—
(1) Should adjust the price to reflect the quantities being acquired; and
(2) May adjust the price to reflect the actual cost of any modifications necessary because of contract requirements.