FAR 15.407—Special cost or pricing areas.

Defective certified cost or pricing data.

FAR 15.407-1 addresses defective certified cost or pricing data and explains what happens when cost or pricing data used in negotiations are inaccurate, incomplete, or noncurrent. It covers both pre-award and post-award situations, including the contracting officer’s duty to raise defects immediately, how the Government may adjust price after award, how offsets for understated data work, and when the Government may recover overpayments, interest, and penalties. The section also explains that the Government’s rights are preserved even if the contractor was a sole source, the contracting officer should have known of the defect, the contract was priced as a total cost agreement, or no Certificate of Current Cost or Pricing Data was submitted. In practice, this rule protects the Government from paying inflated prices based on bad data while also giving contractors a limited opportunity to correct or offset defects with properly supported information. It is a key defective pricing enforcement provision for negotiated procurements subject to certified cost or pricing data requirements.

Make-or-buy programs.

FAR 15.407-2 addresses make-or-buy programs in negotiated acquisitions and explains when the Government may require a contractor to identify which major items or work efforts it will perform itself and which it will subcontract. The section covers the prime contractor’s overall responsibility for contract performance, the definition of a “make item,” when make-or-buy programs may be required based on contract value and whether certified cost or pricing data are required, and special treatment for research and development acquisitions with no significant follow-on production. It also sets out solicitation requirements, including the need to tell offerors what supporting information must be submitted and what evaluation factors will be used, such as capability, capacity, small business participation, labor surplus area considerations, schedule, interface control, proprietary processes, technical superiority, and technical risk. The section then specifies the content of the contractor’s proposed program, including which items are covered, how items are categorized, what reasons support the categorization, where work will be performed, subcontractor information, and any deferred decisions. Finally, it explains how contracting officers must evaluate and negotiate the program before award and gives guidance on when they normally should not agree to a contractor’s proposed make items, while preserving discretion to do so when it is in the Government’s best interest. In practice, this section is about managing cost, technical risk, industrial capability, and socioeconomic objectives through early visibility into a contractor’s sourcing decisions.

Forward pricing rate agreements.

FAR 15.407-3 explains how forward pricing rate agreements (FPRAs) are used when pricing contracts and contract modifications that require certified cost or pricing data. It covers four main subjects: how offerors must disclose and incorporate FPRA-related data in specific pricing proposals, how contracting officers must use FPRA rates when pricing actions during the agreement period, how changes in conditions can affect the validity of an FPRA and must be reported to the administrative contracting officer (ACO), and how certification works when an FPRA or other advance agreement is used. In practice, this section is about making sure negotiated prices are based on a consistent, current, and documented set of indirect and other forward pricing rates, while avoiding duplicate certification of the same data at the FPRA stage. It also protects the Government and contractors by requiring prompt notice if the assumptions behind the agreement change. For contractors, the rule means FPRA data must be tracked and cross-referenced carefully in each proposal; for contracting officers, it means using the agreed rates unless and until the agreement is revised or invalidated.

Should-cost review.

FAR 15.407-4 explains the Government’s "should-cost" review process, which is a specialized cost analysis used to look beyond a contractor’s historical costs and assess whether current operations are economical and efficient. The section covers the general purpose of should-cost reviews, the two types of reviews—program should-cost reviews and overhead should-cost reviews—the circumstances in which each should be considered, the kinds of cost elements each review examines, and the team-based approach used to conduct them. It also addresses when separate audit reports are required, when the contracting officer must document the planned review in the acquisition plan and solicitation, and how findings are used in negotiation. In practice, this section is about finding cost-saving opportunities before award or before establishing forward pricing rates, especially in major system acquisitions, sole-source situations, or other high-dollar, high-impact procurements. It also creates a follow-through obligation: the contracting officer must communicate identified inefficient or uneconomical practices, obtain correction or disposition agreements, and establish a plan to monitor corrective action. For contractors, this means should-cost reviews can directly affect proposed prices, FPRA negotiations, and post-negotiation corrective actions. For Government personnel, it requires coordination among contracting, audit, pricing, engineering, and contract administration staff to produce realistic negotiation objectives and measurable savings recommendations.

Estimating systems.

FAR 15.407-5 addresses estimating systems used to prepare proposals and the Government’s review of those systems. It explains why an acceptable estimating system matters: it improves the accuracy and reliability of proposals, helps the Government and contractor spend less time rechecking the same estimating methods on every procurement, and can speed up negotiations. The section also covers the role of cognizant audit activities in establishing and managing regular review programs for selected contractors’ estimating systems or methods, the requirement to document review results in survey reports, and the auditor’s duty to distribute those reports and any official corrective-action notices to contracting and contract administration offices with substantial business with the contractor. Finally, it warns that unresolved significant deficiencies in the estimating system must be considered in later proposal analyses and negotiations, which means a contractor’s past estimating performance can directly affect future pricing discussions and Government confidence in proposed costs.