Research Administration Office

University of California

Memo Operating Guidance

No. 91-2

January 15, 1991

Subject: New DOD Contract Cost Principles and Procedures - 48 CFR Part 231.3

The Department of Defense published a final rule in the November 21, 1990 Federal Register which contains new contract cost principles and procedures for DOD contracts with educational institutions. (Copy attached.) The rule was effective November 16, 1990 and applies to all new DOD contracts entered into as of that date.

The rule was originally proposed by the FAR Councils for use government-wide. The proposed rule contained "noncommercial cost principles" that paralleled a set of cost restrictions already imposed on commercial contractors. These restrictions were congressionally mandated. However, the Office of Management and Budget intervened, stating that cost principles for educational institutions should be published in OMB Circular A-21. Nevertheless, OMB did not consider it a high priority to issue such a change in A-21. So when these noncommercial cost principles were incorporated into the DOD Authorization Act, DOD published this final rule on its own as it had to meet its statutory deadline. While OMB plans to incorporate these cost restrictions in A-21 in the next year, at this point they apply only to new DOD contracts.

Summary of Cost Restrictions

The new rule prohibits cost reimbursement in the following areas:

231.303(8) & (9)

Advertising - Promotion of the contractor its products, promotional items, and memorabilia

231.303(7) Donations - Any contributions

231.303(1), (5) & (6)

Entertainment - Social activities, tickets, lodging, social club memberships, and alcoholic beverages


Fines and Penalties - Payments which result from violations of laws

231.303(12) Insurance - Protection against contractor defects

231.303(3) & (15) Legal Counsel - Contractor defense in connection with proceedings brought by the government


Lobbying - Influencing state legislatures or Congress

'231,303(11), (13) & (14) Severance Pay - Excessive severance pay

231.303(10) Travel - Airfares which exceed the standard fare


This new rule technically applies only to DOD contracts entered into as of November 16, 1990. Campuses need to determine whether it is more efficient for administrative purposes to apply it to all DOD contracts or just to those which begin after the rule's effective date. Because there is no new DFARS clause in Part 252 to implement the rule, it will not be explicitly listed in DOD contracts but will be assumed as referenced under DFARS 252,231-7000, Supplemental Cost Principles.

Direct Cost Implications

Because these new cost restrictions apply only to DOD contracts, we have reviewed them in terms of what new unallowable costs the rule requires for DOD contracts as compared to those now required for all federal awards under OMB Circular A-21. (See attachment.) It is our judgment that the unallowable costs listed in this rule are generally not now direct charged to contracts. The only exception may be (10) "Costs for travel by commercial aircraft which exceed the amount of the standard commercial fare." The rule would not allow a Principal Investigator to charge more than the standard fare for a trip against a DOD contract. Unlike OMB Circular A-21 which states exceptions for when first class fares could be charged to an award, 48 CFR Part 231.303 (10) provides no exceptions to this restriction. So this particular restriction should be communicated to Principal Investigators and others responsible for reviewing or approving expenditures on DOD contracts.

Indirect Cost Implications

On the indirect cost side, we are now reviewing the extent to which any of the unallowable costs in this new rule might be found in the indirect cost rate. We will be reviewing this issue with the Federal Systems Committee at its next meeting, February 13, 199'1.

Please direct any questions or comments about this issue to Kip Meader at (415) 642-3817 or Samuela Evans at (415) 642-3045 in our office.

Refer: Kip Meader

(415) 642-3817

ATSS: 8-582-3817

Subject Index: 06

Organization Index: F-175

Samuela Evans

(415) 642-3045

ATSS: 8-582-3045


Accounting Officers

David F. Mears

Director, Research

Administration Office