42.705-1 Contracting officer determination procedure
Source: FAR 42.705-1 on acquisition.gov
Contractors must submit timely, adequate final indirect cost rate proposals and work closely with auditors and contracting officers to ensure compliance and avoid disallowed costs.
Overview
FAR 42.705-1 outlines the procedures and responsibilities for contracting officers in determining final indirect cost rates for various types of contractors, including business units of corporations, educational institutions, state and local governments, and nonprofit organizations. The section details the process for submitting, auditing, and negotiating final indirect cost rate proposals, emphasizing the roles of the contracting officer, auditor, and contractor. It establishes timelines, documentation requirements, and the need for collaboration among all parties to ensure accurate and efficient rate determinations.
Key Rules
- Applicability and Responsibility
- Specifies which contracting officer or federal official is responsible for establishing final indirect cost rates based on the contractor's organizational structure.
- Proposal Submission and Adequacy
- Contractors must submit an adequate final indirect cost rate proposal within six months after their fiscal year ends, with possible written extensions for exceptional circumstances.
- Audit and Review Process
- The auditor reviews the proposal for adequacy, communicates deficiencies, and escalates unresolved issues to the contracting office.
- Negotiation and Documentation
- The contracting officer leads negotiations, ensures all questioned costs are properly documented and reviewed, and prepares a detailed negotiation memorandum and agreement.
- Notification and Distribution
- Contractors must be notified of unallowable costs, and all relevant documents must be distributed per FAR 42.706.
Responsibilities
- Contracting Officers: Lead the determination, negotiation, and documentation of final indirect cost rates; ensure compliance with audit findings and reporting requirements.
- Contractors: Submit timely, adequate proposals with supporting data; address audit deficiencies; maintain transparency in cost submissions.
- Agencies: Oversee the process, ensure proper coordination among auditors and contracting officers, and maintain records.
Practical Implications
- This section ensures a standardized, transparent process for determining indirect cost rates, reducing disputes and audit issues.
- Contractors must be diligent in preparing proposals and responding to audit findings to avoid delays or disallowances.
- Common pitfalls include late submissions, inadequate supporting data, and failure to address audit concerns, which can result in disallowed costs or delayed settlements.
(a) Applicability and responsibility. Contracting officer determination shall be used for the following, with the indicated cognizant contracting officer (or cognizant Federal agency official) responsible for establishing the final indirect cost rates:
(1) Business units of a multidivisional corporation under the cognizance of a corporate administrative contracting officer (see subpart 42.6), with that officer responsible for the determination, assisted, as required, by the administrative contracting officers, assigned to the individual business units. Negotiations may be conducted on a coordinated or centralized basis, depending upon the degree of centralization within the contractor’s organization.
(2) Business units not under the cognizance of a corporate administrative contracting officer, but having a resident administrative contracting officer (see 42.602), with that officer responsible for the determination. For this purpose, a nonresident administrative contracting officer is considered as resident if at least 75 percent of the administrative contracting officer’s time is devoted to a single contractor.
(3) For business units not included in paragraph (a)(1) or (a)(2) of this subsection, the contracting officer (or cognizant Federal agency official) will determine whether the rates will be contracting officer or auditor determined.
(4) Educational institutions (see 42.705-3).
(5) State and local governments (see 42.705-4).
(6) Nonprofit organizations other than educational and state and local governments (see 42.705-5).
(b) Procedures.
(1) In accordance with the Allowable Cost and Payment clause at 52.216-7, the contractor is required to submit an adequate final indirect cost rate proposal to the contracting officer (or cognizant Federal agency official) and to the cognizant auditor.
(i) The required content of the proposal and supporting data will vary depending on such factors as business type, size, and accounting system capabilities. The contractor, contracting officer, and auditor must work together to make the proposal, audit, and negotiation process as efficient as possible.
(ii) Each contractor is required to submit the final indirect cost rate proposal within the six-month period following the expiration of each of its fiscal years. The contracting officer may grant, in writing, reasonable extensions, for exceptional circumstances only, when requested in writing by the contractor.
(iii) Upon receipt of the proposal-
(A) The cognizant auditor will review the adequacy of the contractor’s proposal for audit in support of negotiating final indirect cost rates and will provide a written description of any inadequacies to the contractor and contracting officer.
(B) If the auditor and contractor are unable to resolve the proposal’s inadequacies identified by the auditor, the auditor will elevate the issue to the contracting office to resolve the inadequacies.
(iv) The proposal must be supported with adequate supporting data, some of which may be required subsequent to finding that the proposal is adequate for audit in support of negotiating final indirect cost rates (e.g., during the course of the performance of the advisory audit). See the clause at 52.216-7(d)(2) for the description of an adequate final indirect cost rate proposal and supporting data.
(2) Once a proposal has been determined to be adequate for audit in support of negotiating final indirect cost rates, the auditor will audit the proposal and prepare an advisory audit report to the contracting officer (or cognizant Federal agency official), including a listing of any relevant advance agreements or restrictive terms of specific contracts.
(3) The contracting officer (or cognizant Federal agency official) shall head the Government negotiating team, which includes the cognizant auditor and technical or functional personnel as required. Contracting offices having significant dollar interest shall be invited to participate in the negotiation and in the preliminary discussion of critical issues. Individuals or offices that have provided a significant input to the Government position should be invited to attend.
(4) The Government negotiating team shall develop a negotiation position. Pursuant to https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title10-section3745&num=0&edition=prelim" target="_blank">10 U.S.C. 3745 and http://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title41-section4305&num=0&edition=prelim" target="_blank">41 U.S.C.4305, the contracting officer shall-
(i) Not resolve any questioned costs until obtaining-
(A) Adequate documentation on the costs; and
(B) The contract auditor’s opinion on the allowability of the costs.
(ii) Whenever possible, invite the contract auditor to serve as an advisor at any negotiation or meeting with the contractor on the determination of the contractor’s final indirect cost rates.
(5) The cognizant contracting officer shall-
(i) Conduct negotiations;
(ii) Prepare a written indirect cost rate agreement conforming to the requirements of the contracts;
(iii) Prepare, sign, and place in the contractor general file (see 4.801(c)(3)) a negotiation memorandum covering-
(A) The disposition of significant matters in the advisory audit report;
(B) Reconciliation of all costs questioned, with identification of items and amounts allowed or disallowed in the final settlement as well as the disposition of period costing or allocability issues;
(C) Reasons why any recommendations of the auditor or other Government advisors were not followed; and
(D) Identification of certified cost or pricing data submitted during the negotiations and relied upon in reaching a settlement; and
(iv) Distribute resulting documents in accordance with 42.706.
(v) Notify the contractor of the individual costs which were considered unallowable and the respective amounts of the disallowance.