31.205-36 Rental costs
Source: FAR 31.205-36 on acquisition.gov
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.
(a) This subsection is applicable to the cost of renting or leasing real or personal property acquired under "operating leases" as defined in Financial Accounting Standards Board’s Accounting Standards Codification (FASB ASC) 840, Leases. (See 31.205-11 for Capital Leases.)
(b) The following costs are allowable:
(1) Rental costs under operating leases, to the extent that the rates are reasonable at the time of the lease decision, after consideration of-
(i) Rental costs of comparable property, if any;
(ii) Market conditions in the area;
(iii) The type, life expectancy, condition, and value of the property leased;
(iv) Alternatives available; and
(v) Other provisions of the agreement.
(2) Rental costs under a sale and leaseback arrangement only up to the amount the contractor would be allowed if the contractor retained title, computed based on the net book value of the asset on the date the contractor becomes a lessee of the property adjusted for any gain or loss recognized in accordance with 31.205-16(b).
(3) Charges in the nature of rent for property between any divisions, subsidiaries, or organizations under common control, to the extent that they do not exceed the normal costs of ownership, such as depreciation, taxes, insurance, facilities capital cost of money, and maintenance (excluding interest or other unallowable costs pursuant to part 31), provided that no part of such costs shall duplicate any other allowed cost. Rental cost of personal property leased from any division, subsidiary, or affiliate of the contractor under common control, that has an established practice of leasing the same or similar property to unaffiliated lessees shall be allowed in accordance with paragraph (b)(1) of this subsection.
(c) The allowability of rental costs under unexpired leases in connection with terminations is treated in 31.205-42(e).