Overview
FAR 31.109 provides a framework for the Government and contractors to reach mutual agreements on the treatment of specific costs before they are incurred. Its primary purpose is to prevent future disputes or disallowances regarding the reasonableness, allocability, or allowability of "gray area" costs in complex accounting situations.
Key Rules
- Compliance with FAR: Advance agreements cannot be used to make a cost allowable if it is expressly prohibited by FAR Part 31 (e.g., an agreement cannot make interest allowable).
- Documentation Requirements: Agreements must be in writing, executed by both parties, incorporated into applicable contracts, and must clearly state their duration and applicability.
- Timing: While they can be negotiated at any time, they should ideally be executed before the costs in question are actually incurred.
- Non-Mandatory Nature: The absence of an advance agreement does not, by itself, make a cost unallowable or unreasonable.
- Coordination: The Negotiator must check for other agency interests and invite participation from other affected contracting offices or the responsible audit agency before finalizing an agreement.
- Scope of Application: Agreements can be limited to a single contract or apply broadly to a group of contracts, an entire agency, or multiple agencies.
Practical Implications
- Risk Mitigation: Contractors should aggressively pursue advance agreements for high-risk items like pre-contract costs, complex travel arrangements, or unique compensation packages to ensure payment and avoid years of administrative litigation.
- Administrative Efficiency: For contractors with multiple business units or agencies, negotiating a single "Corporate" or "Agency-wide" advance agreement on G&A allocations or statistical sampling can significantly reduce the burden of individual contract audits.