FAR 31.105, Construction and architect-engineer contracts, provides somewhat unique cost accounting expectations (i.e., cost principles and procedures) the Federal Government has when awarding contracts for construction management or construction, alteration or repair of buildings, bridges, roads, or other kinds of real property. It also addresses architect-engineer (A&E) contracts related to construction projects. This applies to all cost-reimbursable contracts and the pricing of contracts based on cost analysis as required by FAR 15.404-1(a)(3).
The Cost Principles and Procedures in Subpart 31.2 Do Not Apply?
Not so fast – nothing with the Government is that easy. The cost principles and procedures in Subpart 31.2 apply to construction and A&E contracts, in addition to the exceptions we are about to talk about. FAR 31.105(b) states “[e]xcept as otherwise provided in … this section, the cost principles and procedures in subpart 31.2 shall be used.” The term “except” implies to us that the drafters of the FAR expect the cost accounting practices of a construction company to be different from those of a standard commercial company, at least in some respects.
What are the FAR 31.105(d) Exceptions?
- Because of the uniqueness of most construction projects, the contracting officer is encouraged to use FAR 31.109, Advance agreements, to document the understanding of both the Government and the contractor to avoid possible disputes or disallowances during contract performance. The FAR highlights particularly important areas requiring advance agreement such as home office overhead, partners’ compensation, employment of consultants, and equipment usage costs.
- Handling and costing Construction Equipment:
- Allowable cost is determined using one of the following:
- Actual cost will be used when such costs for each piece of equipment can be determined from the contractor’s accounting records. The allowability of the determined cost will be based on FAR subpart 31.2 – for example, any applicable interest cost would be unallowable. When the contractor’s records do not support this method, the contracting officer may specify the use of a particular schedule of predetermined rates based on the method below.
- Predetermined rates (e.g., the Construction Equipment Ownership and Operating Expense Schedule, published by the U.S. Army Corps of Engineers, industry sponsored construction equipment cost guides, or commercially published schedules of construction equipment use cost):
- The rate may include costs for such items as fuel, filters, oil, and grease; servicing, repairs, and maintenance; and tire wear and repair.
- Costs of labor, mobilization, demobilization, overhead, and profit are generally not reflected in the rates, and should be proposed separately.
- All costs used in the development of the rates must be identified and eliminated from the contractor’s other direct and indirect costs.
- Depending on the contractor’s accounting practices, home office, overhead, and G&A allocations may need to be included in the rate development.
- Due to Government construction projects often being impacted by the suspension of work for numerous reasons, standby rates or cost will need to be considered. For example, an on-site crane sitting idle is not using fuel, filters, oil, etc.; so, an adjusted rate would be appropriate.
- Costs otherwise unallowable under Subpart 31.2 must be adjusted out of any agreed to rates. For example, rates need to be adjusted if they are based on replacement cost, include unallowable interest costs, or use improper cost of money rates or computations. The contracting officer is instructed to ensure the contractor’s proposal includes sufficient detail on rate development so review for potentially unallowable or unacceptably cost can be performed.
- Reasonable costs of renting construction equipment and the cost of maintenance/minor repairs not included in the rental rate are allowable. Cost of major repairs and overhauls of rental equipment are unallowable. The allowability of charges for construction equipment rented from any division, subsidiary, or organization under common control, will be determined in accordance with 31.205-36(b)(3) – limited to normal and allowable cost of ownership incurred by the related organization unless that organization is in the business of renting the equipment in the commercial marketplace.
- Cost of superintendence, timekeeping and clerical work, engineering, utility costs, supplies, material handling, restoration, and cleanup, etc., are allowable as direct or indirect costs. However, your accounting practice must be established and consistently followed for all contracts/projects – You cannot charge the cost of site clean-up direct on one project and indirect (i.e., through overhead) on another project.
- Rental for the temporary use of land, structures, and facilities are allowable including construction or fabrication of temporary structures and facilities.
- Allowable cost is determined using one of the following:
Wait a Minute – What is the Difference Between Rental of and Predetermined Rates for Equipment?
We find this very confusing.
Can a contractor rent equipment and then charge it to an Army Corps of Engineers (ACE) contract at the predetermined rate based on the Construction Equipment Ownership and Operating Expense Schedule? Provided the rental cost is not included as a direct or indirect cost billed under the ACE contract – one would think that would be an acceptable practice and exactly what ACE would want the contractor to do.
Even more confusing – ok, a much greater audit risk – is a contractor utilizing equipment from an organization under common control. Government auditors are very likely to read the FAR 31.105(d)(2)(ii), Reasonable costs of renting construction equipment, statement that “[t]he allowability of charges for construction equipment rented from any division, subsidiary, or organization under common control, will be determined in accordance with 31.205-36(b)(3)” as a hard and fast rule – no ifs, ands, or buts.
The way we read the FAR 31.105(d)(2) requirements, once the contractor negotiates predetermined rates the only costing issues is to ensure that any expense item (we used this wording to make clear that the actual cost incurred does not matter at this point) considered in the development of those rates cannot be recovered as a direct or indirect cost on that, or any other, Government contract.
Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations and supporting contractors from contract award to contract closeout. We would be happy to be part of your team.
John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama Certified Public Accountant