FAR 31.110—Indirect cost rate certification and penalties on unallowable costs.
Plain-English Summary
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.
Key Rules
Certification may be required
Certain contracts require the contractor to certify its proposed indirect cost rates for final payment purposes. The exact certification requirements and when they apply are governed by FAR 42.703-2 and the applicable contract clause prescription.
Final proposals must be accurate
Indirect cost rate proposals used to settle final payments must be prepared with care and supported by reliable accounting data. The certification requirement is intended to make the contractor formally attest to the proposal’s accuracy and completeness.
Unallowable costs can trigger penalties
If unallowable costs are included in a final indirect cost settlement proposal, the Government may assess penalties. FAR 31.110 points to FAR 42.709 for the procedures and clause prescription governing those penalties.
Cross-reference controls matter
This section is a gateway provision rather than a stand-alone rule set. The operative requirements, including clause use, administrative steps, and enforcement details, are found in the referenced FAR sections.
Responsibilities
Contracting Officer
Determine whether the contract requires the indirect cost rate certification clause and ensure the proper clause prescription is applied. When unallowable costs are identified in a final indirect cost settlement proposal, follow the procedures in FAR 42.709 for potential penalty action.
Contractor
Prepare final indirect cost rate proposals accurately, certify them when required, and exclude unallowable costs. The contractor must maintain adequate support for proposed rates and understand that including unallowable costs may lead to penalties.
Auditor / DCAA or Other Reviewing Official
Review final indirect cost rate proposals for accuracy, supportability, and inclusion of unallowable costs. Identify issues that may affect certification validity or trigger penalty procedures.
Agency / Government
Apply the certification and penalty framework consistently through the referenced FAR procedures and contract clauses. Use these controls to protect the Government from overpayment and to enforce cost allowability rules.
Practical Implications
Contractors should treat final indirect cost rate proposals as compliance documents, not just accounting submissions, because certification can create legal exposure if the proposal is inaccurate.
The biggest pitfall is including expressly unallowable costs in the final settlement proposal; even small amounts can create penalty risk depending on the governing procedures.
Contracting officers should verify that the correct clause prescription is used on contracts that require certification, because missing or incorrect clauses can complicate enforcement.
Both sides should keep strong documentation and internal review controls, since disputes often turn on whether a cost was allowable, adequately supported, and properly excluded from the proposal.
This section is short, but it has real financial consequences: it links final rate settlement to formal certification and to penalties, which can affect closeout, payment timing, and audit outcomes.
Official Regulatory Text
(a) Certain contracts require certification of the indirect cost rates proposed for final payment purposes. See 42.703-2 for administrative procedures regarding the certification provisions and the related contract clause prescription. (b) If unallowable costs are included in final indirect cost settlement proposals, penalties may be assessed. See 42.709 for administrative procedures regarding the penalty assessment provisions and the related contract clause prescription.