FAR 31.103—Contracts with commercial organizations.
Plain-English Summary
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.
Key Rules
Applies to commercial organizations
This section covers negotiated contracts and contract modifications for supplies, services, and experimental, developmental, or research work with commercial organizations. It does not apply to educational institutions, construction and architect-engineer contracts, State and local governments, or nonprofit organizations, which are governed by separate FAR provisions.
Use cost principles when cost analysis is required
When the contracting officer performs cost analysis under FAR 15.404-1(c), the cost principles and procedures in FAR subpart 31.2 and any applicable agency supplements must be used in pricing the contract or modification. This means the Government cannot do a cost analysis without applying the relevant allowability, allocability, and reasonableness rules.
Incorporate cost principles by reference
For certain contract types and actions, the contracting officer must include the FAR subpart 31.2 cost principles and agency supplements by reference in the contract. This makes those principles part of the pricing or settlement framework even if the contract is otherwise with a commercial organization.
Cost-reimbursement and T&M reimbursement costs
The cost principles apply to determining reimbursable costs under cost-reimbursement contracts and cost-reimbursement subcontracts performed by commercial organizations. They also apply to the cost-reimbursement portion of time-and-materials contracts, except when material is priced on a basis other than at cost under FAR 16.601(c)(3).
Indirect rates and terminations
The section requires use of the cost principles for negotiating indirect cost rates under FAR subpart 42.7 and for proposing, negotiating, or determining costs under terminated contracts under FAR 49.103 and 49.113. These are classic situations where actual cost treatment matters more than the original contract price.
Price adjustments and modifications
The cost principles also govern price revision of fixed-price incentive contracts, price redetermination contracts, and pricing changes and other contract modifications. In these situations, the Government needs a consistent cost basis to evaluate the adjustment or revised price.
Responsibilities
Contracting Officer
Determine whether the contract action falls within this section and whether cost analysis is required. When it does, apply FAR subpart 31.2 and relevant agency supplements in pricing, and incorporate those principles by reference where the rule requires it.
Contractor
Support proposed costs with records and explanations that align with FAR cost principles when the contract action is subject to cost analysis, reimbursement, indirect rate negotiation, termination settlement, or price adjustment. Ensure claimed costs are allowable, allocable, and reasonable under the applicable rules.
Agency
Issue and apply any agency supplements to FAR subpart 31.2 consistently with this section. Ensure contracting personnel use the correct cost principles for pricing, reimbursement, indirect rates, terminations, and contract modifications.
Auditors/Cost Analysts
Evaluate proposed or claimed costs against the applicable cost principles when performing cost analysis, indirect rate reviews, termination settlements, or other cost-based reviews. Provide findings that support the contracting officer’s pricing or settlement decisions.
Practical Implications
This section matters whenever a commercial-organization contract is not purely fixed-price market pricing and the Government must analyze costs. It is the trigger for using FAR cost principles in negotiations and later adjustments.
A common pitfall is assuming that because the contractor is commercial, cost principles never apply. In reality, they apply in many cost-based or cost-adjustment situations listed in this section.
Another frequent issue is forgetting to incorporate the cost principles by reference in the contract when required. If they are not built into the contract, later reimbursement or settlement disputes become harder to manage.
Contractors should expect closer scrutiny of indirect rates, termination claims, and modification pricing when this section applies. Good cost accounting records and clear support for proposed costs are essential.
Contracting officers should verify the contract type and the specific action being taken before deciding whether subpart 31.2 applies. The wrong pricing framework can lead to unallowable costs, unsupported settlements, or defective negotiation positions.
Official Regulatory Text
This category includes all contracts and contract modifications for supplies, services, or experimental, developmental, or research work negotiated with organizations other than educational institutions (see 31.104 ), construction and architect-engineer contracts (see 31.105 ), State and local governments (see 31.107 ) and nonprofit organizations (see 31.108 ) on the basis of cost. (a) The cost principles and procedures in subpart 31.2 and agency supplements shall be used in pricing negotiated supply, service, experimental, developmental, and research contracts and contract modifications with commercial organizations whenever cost analysis is performed as required by 15.404-1 (c). (b) In addition, the contracting officer shall incorporate the cost principles and procedures in subpart 31.2 and agency supplements by reference in contracts with commercial organizations as the basis for- (1) Determining reimbursable costs under- (i) Cost-reimbursement contracts and cost-reimbursement subcontracts under these contracts performed by commercial organizations and (ii) The cost-reimbursement portion of time-and-materials contracts except when material is priced on a basis other than at cost (see 16.601 (c)(3)); (2) Negotiating indirect cost rates (see subpart 42.7 ); (3) Proposing, negotiating, or determining costs under terminated contracts (see 49.103 and 49.113 ); (4) Price revision of fixed-price incentive contracts (see 16.204 and 16.403 ); (5) Price redetermination of price redetermination contracts (see 16.205 and 16.206 ); and (6) Pricing changes and other contract modifications.