42.707 Cost-sharing rates and limitations on indirect cost rates
Source: FAR 42.707 on acquisition.gov
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.
(a) Cost-sharing arrangements, when authorized, may call for the contractor to participate in the costs of the contract by accepting indirect cost rates lower than the anticipated actual rates. In such cases, a negotiated indirect cost rate ceiling may be incorporated into the contract for prospective application. For cost sharing under research and development contracts, see 35.003(b).
(b)
(1) Other situations may make it prudent to provide a final indirect cost rate ceiling in a contract. Examples of such circumstances are when the proposed contractor-
(i) Is a new or recently reorganized company, and there is no past or recent record of incurred indirect costs;
(ii) Has a recent record of a rapidly increasing indirect cost rate due to a declining volume of sales without a commensurate decline in indirect expenses; or
(iii) Seeks to enhance its competitive position in a particular circumstance by basing its proposal on indirect cost rates lower than those that may reasonably be expected to occur during contract performance, thereby causing a cost overrun.
(2) In such cases, an equitable ceiling covering the final indirect cost rates may be negotiated and specified in the contract.
(c) When ceiling provisions are utilized, the contract shall also provide that-
(1) The Government will not be obligated to pay any additional amount should the final indirect cost rates exceed the negotiated ceiling rates, and
(2) In the event the final indirect cost rates are less than the negotiated ceiling rates, the negotiated rates will be reduced to conform with the lower rates.