42.709-6 Waiver of the penalty
Source: FAR 42.709-6 on acquisition.gov
Penalties for unallowable costs can be waived if the contractor acts promptly, the amount is minimal, or strong internal controls and inadvertent error are demonstrated.
Overview
FAR 42.709-6 outlines the circumstances under which the cognizant contracting officer must waive penalties for unallowable costs included in a contractor’s final indirect cost rate proposal. The regulation provides three specific situations where penalties, as described in FAR 42.709-2(a), are not applied: (a) if the contractor withdraws the proposal before a formal audit is initiated and submits a revised proposal; (b) if the total unallowable costs subject to penalty are $10,000 or less; or (c) if the contractor demonstrates effective internal controls and training to prevent unallowable costs, and the inclusion of such costs was inadvertent despite due care. This waiver provision is designed to encourage proactive correction and robust internal compliance systems.
Key Rules
- Withdrawal Before Audit
- Penalties are waived if the contractor withdraws the proposal before the government formally initiates an audit and submits a revised proposal.
- De Minimis Unallowable Costs
- Penalties are waived if the unallowable costs subject to penalty total $10,000 or less.
- Effective Controls and Inadvertent Error
- Penalties are waived if the contractor proves to the contracting officer that strong internal controls exist and the unallowable costs were included by unintentional error, despite due care.
Responsibilities
- Contracting Officers: Must assess waiver eligibility and grant waivers when criteria are met.
- Contractors: Should proactively withdraw and revise proposals if errors are found, maintain strong internal controls, and document inadvertent errors.
- Agencies: Oversee compliance and ensure proper application of waiver provisions.
Practical Implications
- This section incentivizes contractors to maintain robust compliance systems and promptly correct errors.
- Contractors can avoid penalties by acting quickly and demonstrating effective controls.
- Common pitfalls include failing to withdraw proposals before audit initiation or lacking sufficient documentation of internal controls.
The cognizant contracting officer shall waive the penalties at 42.709-2(a) when—
(a) The contractor withdraws the proposal before the Government formally initiates an audit of the proposal and the contractor submits a revised proposal (an audit will be deemed to be formally initiated when the Government provides the contractor with written notice, or holds an entrance conference, indicating that audit work on a specific final indirect cost proposal has begun);
(b) The amount of the unallowable costs under the proposal which are subject to the penalty is $10,000 or less (i.e., if the amount of expressly or previously determined unallowable costs which would be allocated to the contracts specified in 42.709-1(b) is $10,000 or less); or
(c) The contractor demonstrates, to the cognizant contracting officer’s satisfaction, that-
(1) It has established policies and personnel training and an internal control and review system that provide assurance that unallowable costs subject to penalties are precluded from being included in the contractor’s final indirect cost rate proposals (e.g., the types of controls required for satisfactory participation in the Department of Defense sponsored self governance programs, specific accounting controls over indirect costs, compliance tests which demonstrate that the controls are effective, and Government audits which have not disclosed recurring instances of expressly unallowable costs); and
(2) The unallowable costs subject to the penalty were inadvertently incorporated into the proposal; i.e., their inclusion resulted from an unintentional error, notwithstanding the exercise of due care.