Waiver of the penalty
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.