FAR 31.1—Subpart 31.1

Scope of subpart.

FAR 31.100 is a scope statement for FAR Part 31, Subpart 31.1, and it tells readers what this subpart is about before they get into the detailed cost principles that follow. It covers two main topics: first, the applicability of the cost principles and related procedures in the succeeding subparts of FAR Part 31 to different types of contracts and subcontracts; and second, the role and need for advance agreements. In practice, this section matters because it signals that cost allowability rules are not automatically the same for every contract type or every subcontract, and that parties may need to negotiate advance agreements to reduce uncertainty about how certain costs will be treated. For contracting officers, it is a reminder to determine whether the Part 31 cost principles apply and whether an advance agreement is appropriate. For contractors and subcontractors, it highlights the need to understand which costs may be allowable, allocable, and reasonable under the applicable contract structure, and to seek clarity in advance when treatment of a cost could be disputed later.

Objectives.

FAR 31.101 explains the organizing principle for the FAR cost principles and procedures in Part 31: they are grouped by organizational type, such as commercial concerns and educational institutions, because different kinds of organizations have different accounting structures and cost practices. The section’s main objective is uniformity — to the extent practicable, organizations of the same type performing similar work should be subject to the same cost principles and procedures. It also establishes the approval framework for deviations from those cost principles, distinguishing between individual deviations and class deviations. Individual deviations require advance approval by the agency head or a designated official, while class deviations require advance approval by the appropriate higher-level authority depending on the agency: the Civilian Agency Acquisition Council for civilian agencies, the Deputy Chief Acquisition Officer for NASA, and the Principal Director, Defense Pricing and Contracting, for DoD. In practice, this section matters because it limits ad hoc departures from the FAR cost rules and ensures that any exception is reviewed at the proper level before it is used in contracting or cost allowability determinations.

Fixed-price contracts.

FAR 31.102 explains when the cost principles in FAR Part 31 apply to fixed-price contracting. It covers fixed-price contracts, subcontracts, and modifications, and it applies when the government performs cost analysis or when a fixed-price clause requires the determination or negotiation of costs. The section also clarifies an important limit: using cost principles in a fixed-price setting does not turn the negotiation into an agreement on each individual cost element, because the parties are still agreeing only to the total price. In practice, this means contracting officers and contractors may use cost data to support pricing, evaluate reasonableness, and negotiate adjustments, but the end result remains a negotiated fixed price rather than an item-by-item cost settlement. The section’s purpose is to ensure consistent use of cost principles where needed while preserving the basic nature of fixed-price contracting and the goal of obtaining fair and reasonable prices considering cost and other factors.

Contracts with commercial organizations.

FAR 31.103 explains when the cost principles in FAR subpart 31.2 apply to contracts with commercial organizations and related contract actions. It covers negotiated supply, service, experimental, developmental, and research contracts and modifications, and it specifically excludes other categories that have their own rules: educational institutions, construction and architect-engineer contracts, State and local governments, and nonprofit organizations. The section has two main functions in practice: first, it tells contracting officers when to use the cost principles and procedures in pricing negotiations if cost analysis is required under FAR 15.404-1(c); second, it requires those same cost principles to be incorporated by reference for several cost-based contract administration and pricing actions. Those actions include determining reimbursable costs under cost-reimbursement contracts and the cost-reimbursement portion of time-and-materials contracts, negotiating indirect cost rates, settling costs under terminated contracts, revising prices under fixed-price incentive contracts, redetermining prices under price redetermination contracts, and pricing changes and other modifications. In short, this section is the gateway rule that connects commercial-organization contracts to the FAR cost principles whenever the Government must evaluate, negotiate, or adjust costs rather than simply rely on a fixed market price.

Contracts with educational institutions.

FAR 31.104 explains how the cost principles apply when the Government contracts with educational institutions for research and development, training, and other work. It defines the covered population by cross-referencing the OMB Uniform Guidance definition of institutions of higher education at 2 CFR part 200, subpart A, and 20 U.S.C. 1001, so the rule is not limited to colleges and universities in the everyday sense but to institutions that meet those regulatory definitions. The section tells contracting officers to incorporate the cost principles and procedures in FAR subpart 31.3 by reference in cost-reimbursement contracts with educational institutions, and it identifies three specific uses for those principles: determining reimbursable costs, negotiating indirect cost rates, and settling costs in cost-reimbursement terminations. It also states that the same cost principles serve as a guide when evaluating costs for fixed-price contract negotiations and termination settlements. In practice, this section matters because educational institutions often have unique accounting structures, indirect cost arrangements, and research-related cost practices, so the Government needs a clear framework for allowability, allocability, and reasonableness. The rule helps ensure consistent treatment of costs across awards and modifications, while also signaling that the cost principles are relevant even when the contract type is not cost-reimbursement.

Construction and architect-engineer contracts.

FAR 31.105 sets the cost-principle framework for construction and architect-engineer (A-E) contracts negotiated on a cost basis. It explains which contracts fall into this category, excludes contracts for vessels, aircraft, and other personal property, and tells contracting officers when to use the general cost principles in FAR subpart 31.2 for pricing, reimbursable costs, indirect rate negotiations, terminations, fixed-price incentive price revisions, and contract modifications. The section also highlights that, because construction and A-E work varies widely by project size, location, duration, and complexity, advance agreements under FAR 31.109 are especially important for items like home office overhead, partners’ compensation, consultant costs, and equipment usage. A major part of the rule addresses construction equipment: how ownership and operating costs may be determined, when actual cost data must be used, when predetermined equipment schedules may be used, how to treat unallowable costs, how to handle rented equipment, and how to treat equipment rented from related entities. It also covers job-site costs such as superintendence, timekeeping, clerical work, engineering, utilities, supplies, material handling, restoration, and cleanup, and says these may be direct or indirect if the contractor’s accounting practice is consistent. In practice, this section is a roadmap for pricing and allowability in construction and A-E contracting, and it is especially important for avoiding disputes over equipment rates, overhead, rental charges, and other project-specific costs.

[Reserved]

Contracts with State, local, and federally recognized Indian tribal governments.

FAR 31.107 explains when the cost principles in FAR subpart 31.6 apply to contracts with State, local, and federally recognized Indian tribal governments, and when they do not. It states the purpose of those principles: to provide a uniform method for determining allowable costs, promote efficiency, and support better working relationships between non-Federal governments and Federal agencies. The section also identifies two specific categories of exceptions: publicly financed educational institutions governed by FAR subpart 31.3, and publicly owned hospitals and other medical care providers governed by requirements issued by the sponsoring government agencies. Finally, it reserves authority to the Office of Management and Budget to approve other exceptions in particular cases when adequate justification is shown. In practice, this section tells contracting personnel and recipients which cost rules to apply, which bodies of rules control in special cases, and when a deviation from the normal framework requires higher-level approval.

Contracts with nonprofit organizations.

FAR 31.108 is a cross-reference provision that tells readers where to find the cost principles for contracts with nonprofit organizations. It explains that Subpart 31.7 contains the principles and standards for determining allowable costs for nonprofit organizations other than educational institutions, while pointing readers to Subpart 31.3 for educational institutions, Subpart 31.6 for State and local governments, and Subpart 31.2 for certain nonprofit organizations exempted under the OMB Uniform Guidance at 2 CFR part 200, appendix VIII. In practical terms, this section does not itself set detailed cost rules; instead, it directs contracting officers, contractors, and auditors to the correct FAR subpart based on the type of nonprofit entity involved. Its purpose is to prevent misapplication of cost principles and ensure the government uses the proper allowability framework for each organizational category. For federal contracting, this matters because the applicable cost rules can differ significantly depending on whether the contractor is a nonprofit, an educational institution, a State or local government, or a nonprofit covered by the Uniform Guidance exemption. Correctly identifying the organization type is therefore a threshold issue before evaluating costs, negotiating indirect rates, or reviewing claimed expenses.

Advance agreements.

FAR 31.109 explains when and how contracting officers and contractors should use advance agreements to resolve cost treatment issues before they become disputes. It covers the purpose of advance agreements, their timing, written form, incorporation into contracts, required scope and duration statements, and the limit that they cannot override the FAR cost principles in subparts 31.2, 31.3, 31.6, and 31.7. It also addresses who has authority to negotiate them, when coordination with other contracting offices and audit agencies is required, and what must happen after negotiation, including distribution of the executed agreement and supporting memorandum. The section highlights special or unusual costs and statistical sampling methodologies as prime candidates for advance agreements, and it lists common examples such as compensation for personal services, fully depreciated assets, deferred maintenance, precontract costs, IR&D and B&P, royalties, selling and distribution, travel and relocation, idle facilities, severance pay, plant reconversion, professional services, G&A allocations, construction plant and equipment, public relations and advertising, and statistical sampling methods. In practice, this section is meant to reduce later allowability disputes, improve consistency across contracts, and ensure that cost treatment decisions are coordinated across affected offices and agencies without authorizing anything inconsistent with the FAR.

Indirect cost rate certification and penalties on unallowable costs.

FAR 31.110 addresses two related post-performance cost-accounting controls for cost-reimbursement and other contracts that use final indirect cost rates: certification of proposed indirect cost rates for final payment purposes, and penalties for including unallowable costs in final indirect cost settlement proposals. In practice, this section does not itself spell out the detailed procedures; instead, it points readers to FAR 42.703-2 for the certification process and the related clause prescription, and to FAR 42.709 for the penalty process and the related clause prescription. The purpose is to improve the reliability of final indirect cost rate proposals, discourage the inclusion of expressly unallowable costs, and protect the Government from overpayment. For contractors, this means final indirect rate submissions must be prepared carefully, reviewed for allowability, and certified when required. For contracting officers and auditors, it means these submissions are not just accounting deliverables but compliance documents that can trigger contractual remedies and monetary penalties if inaccurate or inflated by unallowable costs.