FAR 31.105—Construction and architect-engineer contracts.
Plain-English Summary
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.
Key Rules
Scope of covered contracts
This section applies to cost-negotiated construction and A-E contracts and modifications for buildings, bridges, roads, and other real property, but not to vessels, aircraft, or other personal property. It also excludes certain educational institutions, State and local governments, and nonprofit organizations except where specifically exempted under the Uniform Guidance cross-reference.
Use subpart 31.2 principles
Unless paragraph (d) says otherwise, the cost principles and procedures in FAR subpart 31.2 govern pricing when cost analysis is required. The same principles also apply to reimbursable costs, indirect rate negotiations, terminations, fixed-price incentive revisions, and pricing changes or other modifications.
Advance agreements are especially important
Because construction and A-E projects vary widely, advance agreements under FAR 31.109 are particularly important for items such as home office overhead, partners’ compensation, consultant costs, and equipment usage. These agreements help define allowability and reduce later disputes or disallowances.
Construction equipment costs
Construction equipment ownership and operating costs may be based on actual cost data when available, or on a predetermined schedule when actual data cannot be determined. Any schedule used must be reviewed to ensure it does not make otherwise unallowable costs allowable, and unallowable or improperly computed factors must be removed.
Scheduled rates require adjustments
If a predetermined equipment schedule is used, the contractor must remove from other direct and indirect charges any costs already covered by the schedule. If overhead is allocated using a cost input base, costs included in the equipment allowance may need to be included in that base as well.
Standby and suspension limits
During a suspension of work under a contract clause, the ownership allowance for equipment cannot exceed the standby amount allowed by the schedule or contract provision. This prevents contractors from recovering more than the permitted idle-equipment cost.
Rental equipment rules
Reasonable rental costs for construction equipment are allowable, but major repair and overhaul costs for rental equipment are unallowable. Maintenance and minor running repairs not included in the rental rate may be allowable, and related-party rentals are tested under the related-organization rule in FAR 31.205-36(b)(3).
Job-site costs may be direct or indirect
Costs incurred at the job site to perform the work, such as superintendence, timekeeping, clerical work, engineering, utilities, supplies, material handling, restoration, and cleanup, are allowable as direct or indirect costs if the contractor consistently applies its established accounting practice.
Responsibilities
Contracting Officer
Determine whether the contract falls within this category and apply FAR subpart 31.2 as required. Review proposed equipment schedules and cost submissions for unallowable or improperly computed factors, ensure advance agreements are used when appropriate, and apply the correct rules for reimbursable costs, indirect rates, terminations, incentive price revisions, and contract modifications.
Contractor
Price and support construction and A-E costs using allowable cost principles, maintain accounting records that support actual equipment costs when available, use predetermined schedules correctly when permitted, remove costs already covered by equipment allowances from other charges, and apply a consistent accounting practice for job-site costs.
Subcontractor
Follow the same allowability and accounting rules for cost-reimbursement subcontracts and any equipment or job-site costs passed through under the prime contract structure.
Agency
Provide or approve applicable predetermined equipment schedules or other pricing guidance when used, and ensure acquisition personnel understand the special importance of advance agreements and cost-principle application in construction and A-E contracting.
Practical Implications
Contractors should expect close scrutiny of equipment rates, especially if they rely on published schedules instead of actual cost records. A schedule is not a shortcut to recover unallowable items like interest or improperly computed cost of money.
Advance agreements can prevent major disputes later, so parties should address overhead, consultant charges, partner compensation, and equipment usage before performance or before costs are incurred.
If a contractor uses a predetermined equipment schedule, it must avoid double counting by stripping covered costs out of other direct or indirect charges. This is a common audit finding and a frequent source of overbilling.
Rental equipment is not automatically fully allowable: routine operating support may be okay, but major repair and overhaul are not, and related-party rentals require special scrutiny under the related-organization rule.
Job-site labor and support costs can be treated as direct or indirect, but only if the contractor’s accounting practice is established and consistently followed across all work. Inconsistent treatment can lead to disallowance or reclassification.
Official Regulatory Text
(a) This category includes all contracts and contract modifications negotiated on the basis of cost with organizations other than educational institutions (see 31.104 ), State and local governments (see 31.107 ), and nonprofit organizations except those exempted under OMB Uniform Guidance at 2 CFR part 200 , appendix VIII (see 31.108 ) for construction management or construction, alteration or repair of buildings, bridges, roads, or other kinds of real property. It also includes architect-engineer contracts related to construction projects. It does not include contracts for vessels, aircraft, or other kinds of personal property. (b) Except as otherwise provided in (d) of this section, the cost principles and procedures in subpart 31.2 shall be used in the pricing of contracts and contract modifications in this category if cost analysis is performed as required by 15.404-1 (c). (c) In addition, the contracting officer shall incorporate the cost principles and procedures in subpart 31.2 (as modified by (d) of this section by reference in contracts in this category as the basis for- (1) Determining reimbursable costs under cost-reimbursement contracts, including cost-reimbursement subcontracts thereunder; (2) Negotiating indirect cost rates; (3) Proposing, negotiating, or determining costs under terminated contracts; (4) Price revision of fixed-price incentive contracts; and (5) Pricing changes and other contract modifications. (d) Except as otherwise provided in this paragraph (d), the allowability of costs for construction and architect-engineer contracts shall be determined in accordance with subpart 31.2 . (1) Because of widely varying factors such as the nature, size, duration, and location of the construction project, advance agreements as set forth in 31.109 , for such items as home office overhead, partners’ compensation, employment of consultants, and equipment usage costs, are particularly important in construction and architect-engineer contracts. When appropriate, they serve to express the parties’ understanding and avoid possible subsequent disputes or disallowances. (2) "Construction equipment," as used in this section, means equipment (including marine equipment) in sound workable condition, either owned or controlled by the contractor or the subcontractor at any tier, or obtained from a commercial rental source, and furnished for use under Government contracts. (i) Allowable ownership and operating costs shall be determined as follows: (A) Actual cost data shall be used when such data can be determined for both ownership and operations costs for each piece of equipment, or groups of similar serial or series equipment, from the contractor’s accounting records. When such costs cannot be so determined, the contracting agency may specify the use of a particular schedule of predetermined rates or any part thereof to determine ownership and operating costs of construction equipment (see subdivisions (d)(2)(i)(B) and (C) of this section). However, costs otherwise unallowable under this part shall not become allowable through the use of any schedule (see 31.109 (c)). For example, schedules need to be adjusted for Government contract costing purposes if they are based on replacement cost, include unallowable interest costs, or use improper cost of money rates or computations. Contracting officers should review the computations and factors included within the specified schedule and ensure that unallowable or unacceptably computed factors are not allowed in cost submissions. (B) Predetermined schedules of construction equipment use rates ( e.g., the Construction Equipment Ownership and Operating Expense Schedule, published by the U.S. Army Corps of Engineers, industry sponsored construction equipment cost guides, or commercially published schedules of construction equipment use cost) provide average ownership and operating rates for construction equipment. The allowance for operating costs may include costs for such items as fuel, filters, oil, and grease; servicing, repairs, and maintenance; and tire wear and repair. Costs of labor, mobilization, demobilization, overhead, and profit are generally not reflected in schedules, and separate consideration may be necessary. (C) When a schedule of predetermined use rates for construction equipment is used to determine direct costs, all costs of equipment that are included in the cost allowances provided by the schedule shall be identified and eliminated from the contractor’s other direct and indirect costs charged to the contract. If the contractor’s accounting system provides for site or home office overhead allocations, all costs which are included in the equipment allowances may need to be included in any cost input base before computing the contractor’s overhead rate. In periods of suspension of work pursuant to a contract clause, the allowance for equipment ownership shall not exceed an amount for standby cost as determined by the schedule or contract provision. (ii) Reasonable costs of renting construction equipment are allowable (but see paragraph (C) of this subsection). (A) Costs, such as maintenance and minor or running repairs incident to operating such rented equipment, that are not included in the rental rate are allowable. (B) Costs incident to major repair and overhaul of rental equipment are unallowable. (C) The allowability of charges for construction equipment rented from any division, subsidiary, or organization under common control, will be determined in accordance with 31.205-36 (b)(3). (3) Costs incurred at the job site incident to performing the work, such as the cost of superintendence, timekeeping and clerical work, engineering, utility costs, supplies, material handling, restoration and cleanup, etc., are allowable as direct or indirect costs, provided the accounting practice used is in accordance with the contractor’s established and consistently followed cost accounting practices for all work. (4) Rental and any other costs, less any applicable credits incurred in acquiring the temporary use of land, structures, and facilities are allowable. Costs, less any applicable credits, incurred in constructing or fabricating structures and facilities of a temporary nature are allowable.