FAR 16.206-3—Limitations.
Plain-English Summary
FAR 16.206-3 sets strict limits on when a contract with price redetermination may be used. It covers four specific conditions: the contract must be for research and development, the estimated cost must be at or below the simplified acquisition threshold, the contractor must have an accounting system adequate for price redetermination, and there must be reasonable assurance that the redetermination will occur promptly at the specified time. It also requires written approval by the head of the contracting activity, or a higher-level official if agency procedures require it. The purpose of these limits is to reserve this contract type for narrow, low-dollar R&D situations where cost uncertainty exists but can still be managed responsibly. In practice, this section protects the Government from using a specialized pricing arrangement unless the administrative controls, timing, and approval level are all in place.
Key Rules
R&D Only
This contract type may be used only for research and development work. It is not a general-purpose contract type and should not be selected for other supplies or services.
Dollar Threshold Limit
The estimated cost must be at or below the simplified acquisition threshold. If the estimate exceeds that threshold, this contract type is not permitted under this section.
Adequate Accounting System
The contractor must have an accounting system that can support price redetermination. The system must be capable of producing reliable cost data needed to set or adjust the price.
Prompt Redetermination Assurance
There must be reasonable assurance that price redetermination will occur promptly at the specified time. The Government must be able to complete the redetermination process on schedule, not indefinitely delay it.
Written Approval Required
Use of this contract type must be approved in writing by the head of the contracting activity, or by a higher-level official if agency procedures require that level of approval. Oral approval or informal concurrence is not enough.
Responsibilities
Contracting Officer
Ensure all four conditions are satisfied before using this contract type, document the basis for the determination, and obtain the required written approval before award.
Head of the Contracting Activity
Review and approve use of the contract type in writing when required, confirming that the proposed use fits the regulatory limits and agency procedures.
Higher-Level Official
Provide written approval if agency procedures require approval above the head of the contracting activity.
Contractor
Maintain an accounting system adequate for price redetermination and provide the cost information needed to support timely redetermination.
Agency
Establish internal procedures, including any higher-level approval requirements, and ensure contracting personnel apply the limitation consistently.
Practical Implications
This is a narrow authority, so contracting officers should treat it as an exception rather than a default pricing method.
The accounting system review matters in practice; if the contractor cannot produce reliable cost data, the contract type should not be used.
Timing is critical: if the Government cannot reasonably complete price redetermination on schedule, the arrangement may be inappropriate even if the work is R&D and under the threshold.
Written approval must be obtained before use and retained in the file; missing approval is a common compliance problem.
Because the threshold and approval level are both controlling factors, officers should verify current agency procedures and the applicable simplified acquisition threshold before proceeding.
Official Regulatory Text
This contract type shall not be used unless- (a) The contract is for research and development and the estimated cost is the simplified acquisition threshold or less; (b) The contractor’s accounting system is adequate for price redetermination; (c) There is reasonable assurance that the price redetermination will take place promptly at the specified time; and (d) The head of the contracting activity (or a higher-level official, if required by agency procedures) approves its use in writing.