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Can a contract take exceptions to the Allowable Cost and Payment clause?


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I'm looking at a federal contract that contains a special term taking exceptions to 52.216-7.

"Notwithstanding FAR 52.216-7, incorporated in this contract, unless authorized in writing . . . the following shall be unallowable as direct costs:" "Subcontracts" is among the items listed.

Is it permissible to take exceptions to this clause?

If so, does that mean subcontractor costs should be rolled into indirect costs, and are there any other ramifications with respect to subcontracting?

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Guest Vern Edwards
I'm looking at a federal contract that contains a special term taking exceptions to 52.216-7.

"Notwithstanding FAR 52.216-7, incorporated in this contract, unless authorized in writing . . . the following shall be unallowable as direct costs:" "Subcontracts" is among the items listed.

Is it permissible to take exceptions to this clause?

If so, does that mean subcontractor costs should be rolled into indirect costs, and are there any other ramifications with respect to subcontracting?

It appears at first that the special term indicates that the cost of unauthorized subcontracts could be charged as indirect costs, but not as direct costs. However, I do not think the special term should be read that way, because such charging would be inconsistent with the cost principles that are incorporated into the contract via FAR 52.216-7(a)(1). Charging the cost of a subcontract that was entered into specifically for the prime contract as an indirect cost would violate FAR 31.201-4, not to mention CAS 418. I don't think an agency could get a FAR deviation that would allow such a thing.

I think that the clause is meant to be interpreted as saying only that the contractor must obtain government authorization for a subcontract before it can be reimbursed for the subcontract cost. I suspect that the author of the special term said "direct cost" to indicate that subcontracts properly allocable to indirect cost pools did not require authorization.

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Vern, that makes sense. It seems that shifting sub costs to indirects would inappropriately shift direct costs to other contracts. I considered that this term could be a way of requiring prior consent for subs, but it's a very awkward way of doing so. Why not just use fill-in-the-blank part of 244-2?

The reason this came up is that our prime contractor was directed by the Government to use the same pay rates for the upcoming period as in the current period.

When this was conveyed to me I objected on the grounds that doing so would violate our cost accounting system, as this is a cost type contract where our personnel already received raises a few months ago. I thought I should check the contract for the clause cost allowability clause and I found that special term in Section B of the prime contract which was included as an attachment to our subk. They do not seem to understand my position, so I am beginning to get concerned about them. The Government has been paying for our costs so far, so I guess this special term shouldn't be a concern.

Thank you all for the input.

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