FAR 31.109—Advance agreements.
Plain-English Summary
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.
Key Rules
Advance agreements are optional
Contracting officers and contractors should seek advance agreements for special or unusual costs and statistical sampling methods when cost treatment may be hard to determine. But an advance agreement is not mandatory, and the absence of one does not by itself make a cost unreasonable, unallocable, or unallowable.
Negotiate before incurrence
Advance agreements may be made before or during a contract, but they should be negotiated before the costs are incurred. This helps prevent later disputes over how the costs will be treated.
Must be written and incorporated
The agreement must be in writing, signed by both parties, and incorporated into applicable current and future contracts. It must also state its applicability and duration so everyone knows when and where it applies.
Cannot override FAR cost rules
A contracting officer cannot use an advance agreement to approve a cost treatment that conflicts with the FAR cost principles. For example, an agreement cannot make interest allowable if FAR 31.205-20 says it is unallowable.
May cover multiple contracts
An advance agreement may apply to one contractor and a single contract, a group of contracts, or all contracts of a contracting office, an agency, or several agencies. The scope should match the issue being resolved.
Use the right negotiator
The cognizant ACO or other part 42 contracting officer normally negotiates advance agreements. A contracting officer in the contracting office may negotiate agreements affecting only one contract or a class of contracts from that office, and any delegated ACO must coordinate with the contracting officer before execution.
Coordinate with affected offices
Before negotiating, the Government negotiator must check whether other contracting offices or agencies have significant unliquidated balances with the same contractor, notify them of the issue, and invite them and the audit agency to participate as appropriate.
Distribute the final agreement
After negotiation, the sponsor must send copies of the executed agreement and the required memorandum to interested agencies and offices, including the audit agency, so the agreement is known and can be applied consistently.
Particularly important cost areas
Advance agreements are especially useful for recurring or judgment-heavy cost areas such as compensation, use charges for 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.
Responsibilities
Contracting Officer
Identify special or unusual cost issues that may benefit from an advance agreement, ensure any agreement is consistent with the FAR, and negotiate agreements for a single contract or class of contracts from the contracting office when authorized. The contracting officer must also coordinate with a delegated ACO before execution when negotiation authority is delegated.
Cognizant Administrative Contracting Officer (ACO)
Negotiate advance agreements when responsible under part 42, especially for broader contractor-wide or multi-contract issues. The ACO must coordinate with the contracting officer before executing any delegated agreement.
Contractor
Work with the Government to negotiate advance agreements before incurring the affected costs whenever possible, ensure the agreement is in writing and properly incorporated, and follow the agreed treatment only within the stated scope and duration.
Government Negotiator
Before negotiation, determine whether other contracting offices or agencies have significant unliquidated balances with the same contractor, notify those offices or agencies, and invite them and the audit agency to participate in prenegotiation discussions and negotiations as appropriate.
Sponsor
After negotiation, prepare and distribute the executed agreement and the memorandum required by FAR 15.406-3, as applicable, to interested agencies, offices, and the audit agency.
Other Contracting Offices and Agencies
Review and participate when notified of a proposed advance agreement that may affect their contracts or unliquidated balances with the contractor, and use the final agreement as applicable to their contracts.
Audit Agency
Participate in prenegotiation discussions or negotiations when invited, and receive copies of the executed agreement and supporting memorandum after completion.
Practical Implications
Advance agreements are a risk-management tool: they do not change the FAR, but they can prevent later disputes over hard-to-price or unusual costs.
Contractors should push for advance agreements before incurring costs in areas like severance, relocation, IR&D/B&P, or G&A allocations, because waiting until after the fact weakens the value of the agreement.
A common mistake is treating an advance agreement as a waiver of the FAR; it is not. If the agreement conflicts with the cost principles, it is invalid to that extent.
Another pitfall is failing to coordinate with other offices that have open contracts or large unliquidated balances with the same contractor, which can create inconsistent treatment and audit issues.
The written agreement should clearly define scope, applicability, and duration; vague language can lead to disputes about whether the agreement applies to future contracts or different cost circumstances.
Official Regulatory Text
(a) The extent of allowability of the costs covered in this part applies broadly to many accounting systems in varying contract situations. Thus, the reasonableness, the allocability and the allowability under the specific cost principles at subparts 31.2 , 31.3 , 31.6 , and 31.7 of certain costs may be difficult to determine. To avoid possible subsequent disallowance or dispute based on unreasonableness, unallocability or unallowability under the specific cost principles at subparts 31.2 , 31.3 , 31.6 , and 31.7 , contracting officers and contractors should seek advance agreement on the treatment of special or unusual costs and on statistical sampling methodologies at 31.201-6 (c). However, an advance agreement is not an absolute requirement and the absence of an advance agreement on any cost will not, in itself, affect the reasonableness, allocability or the allowability under the specific cost principles at subparts 31.2 , 31.3 , 31.6 , and 31.7 of that cost. (b) Advance agreements may be negotiated either before or during a contract but should be negotiated before incurrence of the costs involved. The agreements must be in writing, executed by both contracting parties, and incorporated into applicable current and future contracts. An advance agreement shall contain a statement of its applicability and duration. (c) The contracting officer is not authorized by this 31.109 to agree to a treatment of costs inconsistent with this part. For example, an advance agreement may not provide that, notwithstanding 31.205-20 , interest is allowable. (d) Advance agreements may be negotiated with a particular contractor for a single contract, a group of contracts, or all the contracts of a contracting office, an agency, or several agencies. (e) The cognizant administrative contracting officer (ACO), or other contracting officer established in part 42 , shall negotiate advance agreements except that an advance agreement affecting only one contract, or class of contracts from a single contracting office, shall be negotiated by a contracting officer in the contracting office, or an ACO when delegated by the contracting officer. When the negotiation authority is delegated, the ACO shall coordinate the proposed agreement with the contracting officer before executing the advance agreement. (f) Before negotiating an advance agreement, the Government negotiator shall- (1) Determine if other contracting offices inside the agency or in other agencies have a significant unliquidated dollar balance in contracts with the same contractor; (2) Inform any such office or agency of the matters under consideration for negotiation; and (3) As appropriate, invite the office or agency and the responsible audit agency to participate in prenegotiation discussions and/or in the subsequent negotiations. (g) Upon completion of the negotiation, the sponsor shall prepare and distribute to other interested agencies and offices, including the audit agency, copies of the executed agreement and a memorandum providing the information specified in 15.406-3 , as applicable. (h) Examples for which advance agreements may be particularly important are- (1) Compensation for personal services, including but not limited to allowances for off-site pay, incentive pay, location allowances, hardship pay, cost of living differential, and termination of defined benefit pension plans; (2) Use charges for fully depreciated assets; (3) Deferred maintenance costs; (4) Precontract costs; (5) Independent research and development and bid and proposal costs; (6) Royalties and other costs for use of patents; (7) Selling and distribution costs; (8) Travel and relocation costs, as related to special or mass personnel movements, as related to travel via contractor-owned, -leased, or -chartered aircraft; or as related to maximum per diem rates; (9) Costs of idle facilities and idle capacity; (10) Severance pay to employees on support service contracts; (11) Plant reconversion; (12) Professional services ( e.g., legal, accounting, and engineering); (13) General and administrative costs ( e.g., corporate, division, or branch allocations) attributable to the general management, supervision, and conduct of the contractor’s business as a whole. These costs are particularly significant in construction, job-site, architect-engineer, facilities, and Government-owned contractor operated (GOCO) plant contracts (see 31.203 (h)); (14) Costs of construction plant and equipment (see 31.105 (d)); (15) Costs of public relations and advertising; and (16) Statistical sampling methods (see 31.201-6 (c)(4).