42.709-5
Computing Interest
FAR 42.709-5 requires contractors to pay interest on overpaid, disallowed costs, calculated from the fiscal year midpoint using a Treasury-specified rate, ensuring financial accountability for unallowable costs.
Overview
FAR 42.709-5 outlines the procedures for computing interest on overpayments related to disallowed costs under government contracts. This section provides a standardized method for determining when interest begins to accrue, the applicable interest rate, the period for which interest is calculated, and the process for determining the amount subject to interest. The intent is to ensure that contractors are held financially accountable for unallowable costs that have been reimbursed and subsequently disallowed, by requiring them to pay interest on those amounts.
Key Rules
- Interest Accrual Start Date
- Interest on overpaid, disallowed costs begins accruing from the midpoint of the contractor’s fiscal year, unless an alternate equitable method is justified.
- Applicable Interest Rate
- The interest rate used is the one specified by the Secretary of the Treasury pursuant to Pub.L.92-41 (85 Stat. 97).
- Interest Calculation Period
- Interest is computed from the date of overpayment to the date of the demand letter for payment of the penalty.
- Determining Paid Portion
- The paid portion of disallowed costs must be determined in consultation with the contract auditor.
Responsibilities
- Contracting Officers: Ensure interest is properly calculated and demand letters are issued for penalties on disallowed costs.
- Contractors: Cooperate in determining the paid portion of disallowed costs and pay interest as calculated.
- Agencies: Oversee compliance and coordinate with auditors as needed.
Practical Implications
- This section ensures contractors do not benefit from government overpayments on unallowable costs.
- Accurate recordkeeping and timely cooperation with auditors are essential to avoid disputes or additional penalties.
- Misunderstanding the calculation method or applicable interest rate can lead to compliance issues and increased financial liability.