42.709-7
Contract clause
Include the Penalties for Unallowable Costs clause (52.242-3) in all eligible contracts over $1 million, except for certain fixed-price and commercial contracts, to ensure compliance and cost accountability.
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 $1 million, with specific exceptions. This requirement does not apply to fixed-price contracts without cost incentives or to firm-fixed-price contracts for commercial products or services. The regulation clarifies that contracts typically covered are those containing clauses related to cost-reimbursement or incentive arrangements, such as 52.216-7, 52.216-16, or 52.216-17, or similar clauses from agency supplements. 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 solicitations and contracts over $1 million, except for certain fixed-price and commercial contracts.
- Exceptions
- Fixed-price contracts without cost incentives and firm-fixed-price contracts for commercial products/services are exempt from this requirement.
- Covered Contracts
- Contracts containing cost-reimbursement or incentive clauses (e.g., 52.216-7, 52.216-16, 52.216-17) are generally subject to this rule.
Responsibilities
- Contracting Officers: Must ensure the correct inclusion or exclusion of the 52.242-3 clause based on contract type and value.
- Contractors: Must comply with the penalties for unallowable costs if the clause is included in their contract.
- Agencies: Should oversee proper clause application and ensure compliance with FAR requirements.
Practical Implications
- This section exists to enforce accountability for unallowable cost claims in significant government contracts.
- It impacts contract formation by requiring careful review of contract type and value to determine clause applicability.
- Common pitfalls include failing to include the clause in eligible contracts or incorrectly applying it to exempt contracts.