Overview
FAR 42.707 establishes the guidelines for incorporating indirect cost rate ceilings into contracts, primarily to facilitate cost-sharing arrangements or to protect the Government from financial risk associated with volatile or low-balled indirect rates.
Key Rules
- Cost-Sharing Authority: Contractors may participate in contract costs by voluntarily accepting indirect cost rates lower than their anticipated actual rates, which may be formalized via a negotiated ceiling.
- Risk-Based Ceilings: Final indirect cost rate ceilings are encouraged when a contractor:
- Is new or recently reorganized with no established cost history.
- Has rapidly increasing rates due to declining sales volume.
- Provides a low-rate proposal specifically to enhance their competitive position (preventing "buying-in").
- Government Protection: When a ceiling is utilized, the contract must explicitly state that the Government is not obligated to pay any amounts exceeding the negotiated ceiling.
- Downward Adjustment: If actual final indirect cost rates are lower than the negotiated ceiling, the Government pays the lower actual rates rather than the ceiling amount.
Practical Implications
- Risk Transfer: These provisions shift the financial risk of indirect cost overruns from the Government to the contractor, particularly in volatile business environments or for startup entities.
- One-Way Protection: Ceilings create a "lose-win" scenario for the contractor regarding indirects: they must absorb any costs above the cap but cannot keep the difference if their actual costs come in below the cap.