Material costs
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.