42.709-7
Contract clause
Include the Penalties for Unallowable Costs clause in all applicable contracts over $800,000 to enforce compliance and deter unallowable cost claims.
Overview
FAR 42.709-7 mandates the inclusion of the clause at 52.242-3, "Penalties for Unallowable Costs," in all solicitations and contracts exceeding $800,000, with specific exceptions. This requirement applies unless the contract is a fixed-price contract without cost incentives or a firm-fixed-price contract for commercial products or services. The regulation primarily targets contracts that include cost-reimbursement or incentive provisions, as indicated by the presence of clauses 52.216-7, 52.216-16, 52.216-17, or similar agency-specific clauses. The purpose is to ensure contractors are aware of and subject to penalties for claiming unallowable costs, thereby promoting compliance and cost integrity in government contracting.
Key Rules
- Clause Inclusion Requirement
- The 52.242-3 clause must be included in all solicitations and contracts over $800,000, except for certain fixed-price and commercial contracts.
- Applicability to Covered Contracts
- Applies to contracts containing cost-reimbursement or incentive clauses (e.g., 52.216-7, 52.216-16, 52.216-17, or similar).
Responsibilities
- Contracting Officers: Must ensure the correct clause is included in applicable contracts and solicitations.
- Contractors: Must be aware that penalties for unallowable costs will apply if the clause is present.
- Agencies: Should verify compliance during contract formation and administration.
Practical Implications
- This section exists to deter contractors from claiming unallowable costs by imposing penalties.
- It impacts contract drafting and review processes, especially for cost-reimbursement and incentive contracts.
- Common pitfalls include failing to include the clause in eligible contracts or misapplying the exceptions.