FAR 31.201-5—Credits.
Plain-English Summary
FAR 31.201-5 explains how contractors must treat credits that relate to costs claimed under the cost principles. It covers income, rebates, allowances, and other credits that are connected to an otherwise allowable cost, and it requires that the Government receive the applicable portion of those credits either as a reduction of cost or as a cash refund. In practice, this means a contractor cannot keep a benefit that offsets a Government-reimbursed expense; the benefit must flow back to the Government to the extent it relates to the reimbursable cost. The rule applies broadly to many kinds of cost offsets, including vendor rebates, purchase discounts, insurance recoveries, refunds, and similar credits, so long as they relate to an allowable cost. The section also points readers to FAR 31.205-6(j)(3) for special rules on pension-related refunds and asset reversions, which are handled under a separate, more specific framework. The purpose of the rule is to prevent double recovery and ensure the Government pays only net allowable cost, not gross cost minus a benefit retained by the contractor.
Key Rules
Credits Must Reduce Government Cost
If a credit relates to an allowable cost, the portion attributable to the Government must be returned to the Government. The contractor may do this by reducing the claimed cost or by issuing a cash refund.
Applies to Many Credit Types
The rule covers income, rebates, allowances, and other credits, not just formal refunds. The key question is whether the credit relates to a cost that is otherwise allowable and reimbursable.
Only the Applicable Portion Is Credited
If a credit relates to both Government and non-Government activities, only the portion tied to the Government-reimbursed cost must be credited. Contractors must allocate the credit fairly and consistently.
Special Pension Rules Apply Separately
Pension adjustments and asset reversions are not governed solely by this section. FAR 31.205-6(j)(3) contains the specific rules for those situations and controls when those credits must be refunded or credited.
Responsibilities
Contractor
Identify all credits, rebates, allowances, refunds, and similar recoveries that relate to allowable costs. Allocate the credit to the Government-reimbursed portion, and apply it as a cost reduction or cash refund as required.
Contracting Officer
Ensure claimed costs are net of applicable credits and verify that the contractor has properly credited the Government when reviewing proposals, invoices, incurred cost submissions, or audit findings.
Auditors/Review Officials
Test whether credits were identified, properly allocated, and timely applied. Confirm that the contractor did not retain a benefit that should have reduced Government cost.
Agency/Payment Office
Process cost reductions or refunds when credits are identified, and adjust payments or recover amounts as needed to reflect the net allowable cost.
Practical Implications
Contractors need systems to capture credits as they occur; otherwise, they may overbill or submit unallowable claimed costs.
Common examples include vendor rebates, volume discounts, returned goods credits, insurance recoveries, and settlement payments tied to reimbursable expenses.
A frequent pitfall is treating a credit as general income instead of offsetting the specific cost it relates to.
If a credit benefits multiple contracts or business segments, the allocation method should be supportable and consistent.
Pension-related reversions and adjustments require special handling under FAR 31.205-6(j)(3), so do not assume the general credit rule is enough.
Official Regulatory Text
The applicable portion of any income, rebate, allowance, or other credit relating to any allowable cost and received by or accruing to the contractor shall be credited to the Government either as a cost reduction or by cash refund. See 31.205-6 (j)(3) for rules governing refund or credit to the Government associated with pension adjustments and asset reversions.