Overview
FAR 43.203 establishes the requirement for contractors to segregate costs associated with change orders and mandates that Contracting Officers notify prospective contractors of these accounting obligations prior to contract award.
Key Rules
- Notification Requirement: Contracting officers should advise prospective contractors to revise their accounting procedures if they are not currently capable of segregating changed work costs.
- Clause Incorporation: Compliance is driven by the "Change Order Accounting" clause at FAR 52.243-6.
- Segregable Cost Categories: Contractors must be able to specifically account for the following direct costs:
- Nonrecurring costs: Such as engineering, rework, or the cost of obsolete work resulting from the change.
- Added distinct work: Includes new subcontracts, prototypes, or retrofit/backfit kits.
- Recurring work: Standard labor and material costs specifically tied to the changed performance.
Practical Implications
- Contractors must "ring-fence" change-related expenses to provide an accurate audit trail, as failure to do so may lead to the government disallowing cost claims during equitable adjustment negotiations.
- Because standard accounting systems rarely segregate these costs automatically, contractors often need to establish unique job codes or sub-accounts immediately upon receipt of a change order.