31.205-36
Rental costs
Rental costs under operating leases are allowable only if they are reasonable, properly documented, and comply with specific rules for related parties and sale/leaseback arrangements.
Overview
FAR 31.205-36 addresses the allowability of rental costs for real or personal property under operating leases in government contracts. It sets forth the criteria for determining when rental costs are allowable, including reasonableness of rates, market conditions, and the nature of the property. The regulation also covers special cases such as sale and leaseback arrangements and rental charges between related entities. It excludes costs associated with capital leases (see FAR 31.205-11) and provides guidance for handling rental costs under unexpired leases in the event of contract terminations (see FAR 31.205-42(e)).
Key Rules
- Allowable Rental Costs
- Rental costs under operating leases are allowable if the rates are reasonable, considering comparable properties, market conditions, property characteristics, available alternatives, and lease provisions.
- Sale and Leaseback Arrangements
- Allowable rental costs are limited to what would be allowed if the contractor retained title, based on the asset's net book value at the time of becoming a lessee, adjusted for recognized gains or losses.
- Related Party Transactions
- Rental charges between divisions, subsidiaries, or affiliates under common control are allowable only up to the normal costs of ownership and must not duplicate other allowed costs. If the affiliate regularly leases similar property to unaffiliated parties, standard allowability rules apply.
- Unexpired Leases on Termination
- Treatment of rental costs for unexpired leases after contract termination is governed by FAR 31.205-42(e).
Responsibilities
- Contracting Officers: Must evaluate the reasonableness of rental costs and ensure compliance with allowability criteria.
- Contractors: Must justify rental rates, avoid duplicative costs, and document compliance with related party and sale/leaseback rules.
- Agencies: Oversee adherence to cost principles and review supporting documentation.
Practical Implications
- Ensures rental costs charged to government contracts are fair and not excessive.
- Requires careful documentation and justification of lease terms and rates.
- Common pitfalls include failing to justify rates, duplicating costs, or misclassifying leases.