Overview
FAR 42.801 establishes the procedures for a Contracting Officer (CO) to formally notify a contractor that certain incurred or planned costs are considered unallowable. The process is designed to provide early notification and facilitate the timely resolution of cost disputes during the period of contract performance.
Key Rules
- Mandatory Discussion: Before a formal notice can be issued, the CO must make every reasonable effort to reach a settlement through informal discussions with the contractor.
- Timeline for Response: If a contractor submits a written response disagreeing with the notice, the CO must either withdraw the notice or issue a formal written decision within 60 days.
- Required Content: The notice must include specific elements, including the dollar value of the costs, the reason for disallowance, the impact on billing rates, and the deadline for the contractor's response.
- Coordination on Indirect Costs: A CO cannot issue a notice regarding indirect costs without first coordinating with the specific official or auditor responsible for final indirect cost settlements.
- Distribution: The issuing CO must distribute copies of the notice to all other contracting officers who are cognizant of any segment of the contractor’s organization.
Practical Implications
- Early Risk Mitigation: This section serves as a "red flag" system, allowing contractors to adjust their spending or accounting practices early in the performance period rather than facing a massive disallowance at the end of the contract.
- Impact on Cash Flow: Because the notice requires a description of the potential impact on billing rates, a formal notice of intent to disallow can lead to an immediate reduction in the contractor's interim payments and affect future forward pricing rate agreements.