Cost-sharing rates and limitations on indirect cost rates
FAR 42.707 allows for negotiated ceilings on indirect cost rates to control government costs and requires contractors to bear the risk of exceeding these ceilings.
Overview
FAR 42.707 addresses the establishment of cost-sharing rates and the imposition of ceilings on indirect cost rates in government contracts. It allows for negotiated indirect cost rate ceilings in cost-sharing arrangements, particularly in research and development contracts, where contractors may agree to accept lower indirect cost rates than their actual rates. The regulation also permits the use of final indirect cost rate ceilings in other situations, such as with new companies lacking cost history, companies with rapidly increasing indirect rates, or when a contractor proposes lower rates to enhance competitiveness. When such ceilings are used, the contract must specify that the government will not pay above the ceiling and that rates will be adjusted downward if actual rates are lower than the ceiling.
Key Rules
- Cost-Sharing Arrangements
- Contractors may agree to lower indirect cost rates, and negotiated ceilings may be set for these rates.
- Situations for Rate Ceilings
- Ceilings may be prudent for new companies, those with unstable indirect rates, or when a contractor proposes unusually low rates.
- Ceiling Provisions
- Contracts must state the government will not pay above the ceiling and will adjust rates downward if actuals are lower.
Responsibilities
- Contracting Officers: Negotiate and incorporate appropriate indirect cost rate ceilings and ensure contract language reflects government payment limitations.
- Contractors: Accept and comply with negotiated ceilings and provide accurate cost data.
- Agencies: Oversee compliance and ensure equitable application of ceilings.
Practical Implications
- Ensures government cost control and risk mitigation in contracts with uncertain or potentially inflated indirect rates.
- Contractors must carefully assess their ability to perform under lower indirect rates and understand the financial risks of exceeding ceilings.
- Common pitfalls include underestimating actual indirect costs or failing to negotiate equitable ceilings.