Overview
FAR 42.708 provides a mechanism for Contracting Officers to negotiate the final settlement of direct and indirect costs for physically complete contracts before final indirect rates are established. This procedure is designed to expedite the closeout process when the remaining unsettled costs are relatively small and the risk to the government is minimal.
Key Rules
- Eligibility: The specific contract, task order, or delivery order must be physically complete.
- Monetary Thresholds: Unsettled direct and indirect costs must be "relatively insignificant," defined as the lesser of:
- $1,000,000; or
- 10 percent of the total contract, task order, or delivery order amount.
- Mandatory Risk Assessment: The Contracting Officer must determine the procedure is appropriate by reviewing the contractor’s accounting, estimating, and purchasing systems, as well as auditor concerns and rate volatility.
- Finality of Agreement: Once settled, the determination is final for that specific contract; over-recoveries or under-recoveries cannot be adjusted or shifted to other contracts.
- Non-Precedential: The indirect cost rates used for a quick closeout are not binding for any other contract negotiations or final rate determinations.
Practical Implications
- Reduced Administrative Backlog: This procedure allows both the government and contractors to close out files and deobligate funds years before the standard final indirect cost rate audit cycle is completed.
- Liquidity and Risk: Contractors benefit from the expedited release of withheld funds, but they must accept the risk that the negotiated estimate may be lower than the final rates eventually settled for the rest of their business base.