Subpart 42.7
Indirect Cost Rates
FAR Subpart 42.7 provides the framework for establishing, negotiating, and settling indirect cost rates, ensuring contractors recover only allowable indirect costs and comply with federal requirements.
Overview
FAR Subpart 42.7 establishes the policies and procedures for determining, negotiating, and applying indirect cost rates in government contracts. Indirect costs are those not directly attributable to a specific contract but necessary for overall business operations, such as overhead and general administrative expenses. This subpart covers definitions, the purpose of indirect cost rates, general rules, billing and final rates, document distribution, cost-sharing limitations, quick-closeout procedures, and penalties for unallowable costs. It provides a framework for both contractors and contracting officers to ensure that indirect costs are properly estimated, billed, and settled in accordance with federal regulations.
Key Rules
- Scope and Definitions
- Clarifies what constitutes indirect costs and the applicability of the subpart.
- Purpose and General Rules
- Outlines why indirect cost rates are necessary and the general principles for their use.
- Billing and Final Rates
- Establishes procedures for setting provisional billing rates and negotiating final indirect cost rates after contract completion.
- Distribution and Cost-Sharing
- Details how rate agreements and related documents are distributed and sets limitations for cost-sharing arrangements.
- Quick-Closeout and Penalties
- Provides for expedited closeout of contracts with minimal outstanding indirect costs and imposes penalties for claiming unallowable costs.
Responsibilities
- Contracting Officers: Must negotiate, approve, and document indirect cost rates; ensure compliance with cost principles; and enforce penalties for unallowable costs.
- Contractors: Must submit accurate indirect cost rate proposals, support claimed costs with documentation, and comply with billing and final rate procedures.
- Agencies: Oversee the process, provide guidance, and ensure proper distribution of rate agreements and related documents.
Practical Implications
- Ensures transparency and fairness in allocating indirect costs to government contracts.
- Impacts how contractors estimate, bill, and settle indirect costs, affecting cash flow and compliance risk.
- Common pitfalls include late or inaccurate submissions, unsupported costs, and failure to comply with quick-closeout or penalty provisions.