This series of FAR summaries is meant to take a meaningful portion of the Federal Acquisition Regulations to ensure an easy-to-understand approach to maintain that readers comprehend the process of doing business with the government and that the government exercises a fair and reasonable approach to doing business with the general public.
FAR 31.2 Contracts With Commercial Organizations
Total cost is the sum of all direct and indirect costs assigned to a particular project under federal contract which is fair and commonly applicable to the fully-loaded price point (FAR 31.201-1)(a). This is the dollar amount estimated on the purchase request and obligated by the Contracting Officer during the project as well as the cumulative amount of the project upon completion. These figures can match from start to finish or they could be different. The government is only going to pay for stuff that the FAR and agency supplements deem appropriate (FAR 31.201-1)(b).
FAR 31.201-2 teaches us that a cost is allowable if it is sensible, just and included in the solicitation and eventually the contract. Remember, you may be subject to CAS!
FAR 31.201-3 shows what makes a cost reasonable. Recall that costs must be fair, sensible and just. In short, price points for competing firms might be different but what makes up the total proposed price should be roughly the same. If the offeror is challenged by the government than it is the responsibility of the offeror to explain themselves.
Is the cost ordinary and necessary? Is the cost a generally accepted business practice? Does the cost represent company responsibility to fulfill their end of the bargain to the government for the solicited buy? Does the cost stray from the company’s standard practices?
FAR 31.201-4 explains allocability or applicable costs. Is the cost a part of doing business with the government? Does the cost benefit the government and the company? Is the cost necessary to the overall operation of the business?
The CO determines what costs are allowable (FAR 31.201-6).
FAR 31.202 and FAR 31.203 define direct and indirect costs, respectively. This can make or break what the government pays for and it harnesses how the company goes about its work.
This can get confusing.
Direct costs pertain specifically to the government buy and indirect costs are expenses necessary to operate to fulfill responsibilities to the government that are not directly related to the government buy but are vital to completion.
If the company works strictly on the government project then all labor costs are considered direct. However, if your company staggers projects between commercial and government then labor costs are indirect. Machinery, tools and rent work the same way!
Costs are allowable to the extent they are reasonable (sensible), allocable (applicable) and allowable (per federal regulations and agency supplements) in accordance with FAR 31.204.
I’ve seen how hourly costs work their way up to the fully-loaded rate in the medical services arena while working in the VA’s FSS program. I was trained to negotiate construction projects and buy fighter jets at the VA Acquisition Academy. I have a working knowledge of contract accounting.
If you think I can help you then email nicholas.s.robertson@outlook.com for your introductory email and free consultation.
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