Overview
FAR Subpart 42.8 provides the policies and procedures for the government to notify contractors when costs are determined to be unallowable. It establishes a formal process for both the "Notice of Intent to Disallow Costs" (before or during incurrence) and the actual disallowance/suspension of costs already submitted for reimbursement under cost-type, time-and-materials, or labor-hour contracts.
Key Rules
- Mandatory Clause: The Contracting Officer (CO) must insert FAR clause 52.242-1, Notice of Intent to Disallow Costs, in all cost-reimbursement, fixed-price incentive, or price redetermination contracts.
- Settlement Priority: Before issuing a formal notice of intent to disallow, the CO is required to make every reasonable effort to reach a settlement through informal discussions with the contractor.
- 60-Day Response Window: If a contractor submits a written response disagreeing with a notice of intent, the CO must either withdraw the notice or issue a formal written decision within 60 days.
- Specific Content Requirements: A formal notice must include the reason for disallowance, the estimated dollar value, the impact on billing rates or Forward Pricing Rate Agreements (FPRAs), and the effective date.
- Immediate Deduction: If a contract auditor questions a cost on a voucher, they may (subject to agency regulations) issue a notice of suspension/disapproval that results in immediate deduction from current payments.
Responsibilities
- Administrative Contracting Officer (ACO):
- Monitoring contractor costs for allowability.
- Leading discussions to reach settlements before formal disallowance.
- Issuing the formal Notice of Intent and the subsequent written decision if a disagreement persists.
- Coordinating with indirect cost COs/auditors when indirect costs are involved.
- Contract Auditor:
- Reviewing reimbursement vouchers.
- Approving acceptable vouchers and suspending payment of questionable costs.
- Issuing notices of contract costs suspended or disapproved to the contractor and disbursing officer.
- Contractor:
- Acknowledging receipt of disallowance notices.
- Providing written responses to justify questioned costs within the specified timeframe.
- Deciding whether to file a formal claim under the Disputes clause if a disagreement cannot be resolved.
- Disbursing Officer:
- Executing the deduction of suspended or disapproved costs from the contractor's current payment vouchers based on auditor/CO instruction.
Practical Implications
- Cash Flow Management: For contractors, a disallowance under 42.803 results in an immediate reduction in cash flow, as the government deducts the questioned amount from the current voucher rather than waiting for a final audit years later.
- Early Warning System: The "Notice of Intent" serves as a proactive measure. It allows contractors to stop incurring a specific cost or change their accounting treatment before they accumulate a massive liability of unallowable expenses.
- Administrative Burden: COs must be meticulous in documentation. If a notice involves indirect costs, the CO cannot act unilaterally; they must coordinate with the CO responsible for final indirect cost settlement (FAR 42.705), or the notice may be procedurally deficient.
- Dispute Escalation: This subpart creates a clear "fork in the road" for contractors. Once a cost is suspended or a decision is issued, the contractor must choose between accepting the loss, negotiating a settlement, or initiating formal litigation under the Contract Disputes Act.