Research Administration Office

University of California

Memo Operating Guidance

No. 87-32

August 20, 1987

Subject: Defense Department Federal Acquisition Regulation Supplement Clause (DFARS): 252.231-7001 Penalties for Unallowable Costs (FEB 1987)

The main purpose of this memo is to provide guidance on the acceptability of the new DFARS clause, Penalties for Unallowable Costs, when negotiating cost-reimbursement contracts with the Department of Defense. Because this clause is used in conjunction with certain FAR clauses, this Memo will also discuss, for background purposes, FAR clauses dealing with allowable costs, cost sharing, and predetermined indirect cost rates. The sections below do not stand alone; each section builds on information provided in a previous section, and therefore the memo needs to be considered in its entirety.

FAR 52.216-7, Allowable Cost and Payment (APR 1984)

This clause (Enclosure 2) establishes the basic framework and procedures for invoicing, reimbursing costs, establishing final indirect cost rates and billing rates auditing, and close-out under most government contracts It is prescribed by FAR 16.307(a) (Enclosure 1) to be included in solicitations and contracts when a cost-reimbursement contract is contemplated. FAR 16,307(a) also directs the contracting officer to modify the clause by deleting the words from paragraph (a) "Subpart 31.2," i.e. the commercial cost principles, and substituting for them "Subpart 31.3," i.e. Circular A-21, if the contemplated cost-reimbursement contract is with an educational institution. Contracts and Grants Officer should make sure this modification has been made, if the clause is actually reprinted in the contract. If the clause is only incorporated by reference, the change may be assumed implicitly.

FAR 52.216-15 Predetermined Indirect Cost Rates (APR 1984)

FAR 16.307(i) instructs the contracting officer to insert the clause at FAR 52.216-15, Predetermined Indirect Cost Rates (Enclosure 4), when a cost-reimbursement research and development contract with an educational institution is contemplated and predetermined indirect cost rates are used. In the context of this clause, the word "predetermined" includes both "predetermined" and "fixed" indirect cost rates as they are used in A-21. The effect of having FAR 52.216-15 in a contract is that it negates the requirements of the Allowable Cost and Payment Clause (52.216-7) pertaining to final indirect cost rates and billing rates. For this reason, the clause at 52,216-15, Predetermined Indirect Cost Rates should be incorporated into all federal cost-reimbursement contracts. This should be done even if the campus has a provisional rate at the time the contract is negotiated, since all campuses have had a history of predetermined or fixed indirect cost rates, and the provisional rate will be superseded by a predetermined rate.

Three campuses (Irvine, San Diego, and San Francisco) currently have provisional indirect cost rates. In the rare event a contract begins and ends without a predetermined rate in place, the indirect costs recovered would be subject to a later adjustment when new rates for that period are finally negotiated (see 52,216-15(e) of Enclosure 4).

FAR 52,216-11, Cost Contract--No Fee (APR 1984)

This FAR clause (Enclosure 3) is prescribed by FAR 16,307(e) when a cost-reimbursement contract is contemplated that provides no fee and is not a cost sharing contract (see below) or a facilities contract. (Under a facilities contract the Government furnishes its own facilities for use by the contractor; generally no monetary award is made if the contractor is an educational institution.) In case of a cost-reimbursement research and development contract with an educational institution, the clause is to be used with its Alternate I. Alternate I deletes that portion of the clause dealing with withholding, and this Alternate should always be negotiated into the contract whenever 52,216-11, Cost Contract--No Fee, is used. The effect of the clause with its Alternate I is simply to say that the contractor shall not receive a fee for performing the contract.

FAR 52,516-12, Cost Sharing Contract--No Fee (APR 1984)

If a cost-reimbursement research and development contract with an educational institution includes requirements for cost sharing, then the clause at 52.2U6-12, Cost Sharing Contract--No Fee (Enclosure 3), is prescribed by FAR 16.307(f), with its Alternate I.

The same guidance is given as for 52,216-11 (above). However, the use of cost sharing in contracts with educational institutions is now being discouraged by the Defense Department, in accordance with a rule published in the Federal Register on July 1, 1987. Most other agencies have discontinued cost sharing requirements. See C& G Memo No. 87-28 for further discussion on cost sharing in DOD contracts. In general, Contract and Grant Officers should be able to avoid having to accept cost sharing requirements in DOD and most other federal contracts and so this clause at FAR 52,216-12 would not be used.

DFARS 252.231-7001, Penalties for Unallowable Costs (FEB 1987)

The Penalties for Unallowable Costs clause (Enclosure 5) issued by the Defense Department implements Section 2324 of the DOD Authorization Act of 1986 and is applicable to DOD contracts over $100,000 other than fixed price contracts without cost incentives. The clause applies to contractors who submit final indirect cost rates in accordance with the Allowable Cost and Payment Clause at FAR 52.216-7 (see above). If a Contracting Officer determines that a cost submitted by the contractor in its proposal for settlement of indirect is unallowable, the contractor will be assessed a penalty equal to the amount of the disallowed cost plus interest on the excess funds the contractor was paid. Additional penalties may be assessed if the contractor knowingly submits unallowable costs in its settlement proposal.

The Penalties for Unallowable Costs clause is prescribed by DFARS 231.7001(d)(i) to be included in all DOD solicitations and contracts exceeding $100,000 which contain the clause at FAR 52.216-7, Allowable Cost and Payment. Since all contracts containing FAR 52.216-7 should also have FAR 52.216-15, Predetermined Indirect Cost Rates, as the appropriate clause to be inserted in a research and development contract with an educational institution, the requirements and penalties provided in the regulation should have no effect on the University.

SUMMARY

FAR 52.216-7, Allowable Cost and Payment: Acceptable provided FAR 52.216-15, Predetermined Indirect Cost Rates, is also a part of the contract and all references to FAR 31.2 are changed to FAR 31.3.

FAR 52.216-11, Cost Contract--No Fee: Acceptable only with Alternate I.

FAR 52.216-12, Cost Sharing Contract--No Fee: Should be resisted; if necessary, accept only with Alternate I.

FAR 52.216-15, Predetermined Indirect Cost Rates: Should accompany 52.216-7.

DFARS 252.231-7001, Penalties for Unallowable Costs: Acceptable if contracting officer insists on including, but only with 52.216-15.

Refer: Bill Sellers

(415) 642-3045

ATSS 8-582-3045

Susan Tarran

(415) 642-1638

ATSS 8-582-1638

Subject Index: 04, 06, 08

Organization Index: F-005, F-175, F-622

David F. Mears

University Contracts and Grants Coordinator

Enclosures

cc: Accounting Officers