Are you covering yourself?

Let's talk about how advance agreements can protect you.

Due to the many different types of accounting systems and varying contract situations that arise, determining the reasonableness, allocability, and the allowability of certain costs may be difficult to determine.

So to avoid possible subsequent disallowance or dispute based on unreasonableness, unallocability or unallowability, contracting officers and contractors (you and I) should seek advance agreement on the treatment of special or unusual costs.  Especially if you are in construction or A&E.

However, an advance agreement is not an absolute requirement and the absence of an advance agreement on any cost will not, in itself, affect the reasonableness, allocability or the allowability of that cost.  It's just good business sense!

When are advance agreements negotiated?  Either before or during a contract but should be negotiated before incurrence of the costs involved.  Sound familiar?  I have been emphasizing this to workshop attendees, on DVD, and clients for years.  Get an advance agreement before you spend the money if you are not sure of its allowability, allocability, or reasonableness.

How should the advance agreement be executed? 

  1. In writing, in writing, in writing.  Dont take anyone's word.
  2. Executed by both contracting parties
  3. Incorporated into applicable current and future contracts. 
  4. There should also be a statement in the agreement on its applicability and duration

Here are some examples where advance agreements may be particularly important:

  1. Any compensation for unique situations such as incentive pay, location or hardship allowances, cost of living differentials, etc.
  2. Use charges for fully depreciated assets (this is an important one)
  3. Precontract costs (I talk about this in the Precontract Cost article)
  4. Bid and proposal costs
  5. Royalties and Patent costs
  6. Selling costs
  7. Travel and relocation costs.  Especially if costs are expected to exceed maximum per diem rates.
  8. Costs of idle facilities and idle capacity
  9. Professional services (e.g., legal, accounting, and engineering)
  10. Public relations and advertising (If you are not sure get an advance agreement), and
  11. Training and education costs
  12. Many of the costs under construction type contracts.

These types of costs have historically created confusion or misunderstandings of their allowability and reasonableness.  So keep this in mind.

Remember: The contracting officer is Not Authorized by the advance agreement clause of 31.109 to agree to treat any costs inconsistent with FAR part 31.  So therefore, you and a contracting officer cannot agree that interest is allowable because 31.205-20 states that it is unallowable.

Therefore, I hope that both you as the contractor and the contracting officer, or your prime contractor, are familiar with the cost principles of FAR part 31.  If not, get another opinion.  It could cost you too much not to.

So, what will you do if not quite sure of how a cost is to be handled for a particular contract or group of contracts?  Request an Advance Agreement based on FAR 31.109.

To see more details on Advance Agreements go to FAR 31.109.