FAR 16.301-3—Limitations.
Plain-English Summary
FAR 16.301-3 sets the gatekeeping rules for when the Government may use a cost-reimbursement contract. It covers four pre-award conditions: consideration of the contract-type factors in FAR 16.104, approval of a written acquisition plan one level above the contracting officer, confirmation that the contractor’s accounting system can properly determine contract costs, and a finding that adequate Government resources are available to award and administer a non-firm-fixed-price contract, including meaningful surveillance during performance. The section also incorporates the oversight requirement in FAR 1.602-2 and points back to FAR 7.104(e) for acquisition planning. In addition, it imposes a categorical prohibition on using cost-reimbursement contracts for commercial products and commercial services under Parts 2 and 12. In practice, this section exists to ensure cost-reimbursement contracting is used only when necessary, justified, and supportable, because these contracts place more cost risk and administration burden on the Government than fixed-price arrangements.
Key Rules
Use only when justified
A cost-reimbursement contract may be used only after the factors in FAR 16.104 have been considered. This means the contracting team must evaluate whether the requirement truly warrants this contract type rather than a fixed-price approach.
Approved acquisition plan required
A written acquisition plan must be approved and signed at least one level above the contracting officer. This adds management review and ensures the decision to use cost-reimbursement is documented and elevated appropriately.
Adequate accounting system needed
The contractor must have an accounting system adequate to determine costs applicable to the contract or order. Without reliable cost accumulation and allocation, the Government cannot properly administer or pay a cost-reimbursement contract.
Government resources must be sufficient
Before award, the Government must have adequate resources to award and manage a contract other than firm-fixed-price. This includes the surveillance and oversight needed to help ensure efficient methods and effective cost controls during performance.
Commercial items are excluded
Cost-reimbursement contracts are prohibited for the acquisition of commercial products and commercial services. For those buys, the Government must use contract types permitted under Parts 2 and 12, not cost-reimbursement.
Responsibilities
Contracting Officer
Ensure the contract-type decision is supported by consideration of FAR 16.104, obtain the required acquisition plan approval, verify the contractor’s accounting system is adequate, and confirm the Government has the personnel and oversight capability to administer the contract. The contracting officer must also avoid using cost-reimbursement for commercial products or commercial services.
Approving Official / Higher-Level Reviewer
Review and sign the written acquisition plan at least one level above the contracting officer, providing independent approval of the proposed use of cost-reimbursement contracting.
Contractor
Maintain an accounting system capable of identifying and accumulating costs applicable to the contract or order, and support Government review of that system as needed.
Agency / Program Office
Provide the resources, surveillance, and contract administration support necessary to manage a cost-reimbursement contract effectively, including oversight to promote efficient performance and cost control.
Acquisition Team
Evaluate whether the requirement is commercial or noncommercial, assess contract-type suitability, and document the rationale and planning needed before award.
Practical Implications
This section makes cost-reimbursement a controlled exception, not a default choice. If the file does not show the required analysis, approval, accounting-system adequacy, and management capability, the award is vulnerable to protest, audit findings, or internal review issues.
Contracting officers should treat the acquisition plan as a real decision document, not a formality. Missing higher-level approval is a common compliance problem and can delay award.
Accounting system adequacy is a practical gating item, especially for new contractors or small businesses. If the system cannot segregate and support allowable costs, the Government may need to delay award, require corrective action, or choose a different contract type.
The Government must be ready to administer the contract after award, not just award it. Cost-reimbursement contracts require active surveillance, cost monitoring, and strong technical and contracting oversight to prevent inefficiency and cost growth.
A frequent mistake is trying to use cost-reimbursement for commercial items because the requirement seems uncertain or complex. FAR 16.301-3 flatly prohibits that approach, so the team must instead select a contract type allowed under the commercial-item rules.
Official Regulatory Text
(a) A cost-reimbursement contract may be used only when (1) The factors in 16.104 have been considered; (2) A written acquisition plan has been approved and signed at least one level above the contracting officer; (3) The contractor’s accounting system is adequate for determining costs applicable to the contract or order; and (4) Prior to award of the contract or order, adequate Government resources are available to award and manage a contract other than firm-fixed-priced (see 7.104 (e)). This includes appropriate Government surveillance during performance in accordance with 1.602-2 , to provide reasonable assurance that efficient methods and effective cost controls are used. (b) The use of cost-reimbursement contracts is prohibited for the acquisition of commercial products and commercial services (see parts 2 and 12 ).