Contingencies
Contingency costs are generally unallowable for historical costs but must be carefully evaluated, included, or disclosed in future cost estimates based on their foreseeability and measurability.
Overview
FAR 31.205-7 defines and regulates the treatment of contingencies in government contract cost accounting. A contingency is a possible future event or condition with an indeterminable outcome at the present time. The regulation distinguishes between contingencies for historical costing and those for estimating future costs, providing guidance on when such costs are allowable, includable, or must be disclosed separately. Generally, contingency costs are unallowable for historical costs, except in limited cases such as contract terminations where minor unsettled factors may be recognized. For future cost estimates, contingencies are split into two categories: those arising from known conditions with reasonably foreseeable effects (which should be included in estimates), and those with effects that cannot be measured precisely (which must be excluded from estimates but disclosed separately to aid negotiations).