FAR 31.205-17—Idle facilities and idle capacity costs.
Plain-English Summary
FAR 31.205-17 addresses when a contractor may charge the Government for costs associated with unused plant, equipment, or other tangible capital assets. It defines the key terms "idle facilities," "idle capacity," and "facilities," and explains how to distinguish completely unused assets from partially used assets with excess capacity. The section then sets the allowability rules for idle facilities, including the limited circumstances in which those costs are allowable, the general rule that idle capacity costs are allowable as ordinary business costs, and the requirement that capacity not be reducible through subletting, renting, sale, or other reasonable business action. It also recognizes that widespread unused capacity may actually be treated as idle facilities rather than idle capacity, which can change allowability. Finally, it requires a separate agreement when the Government will directly pay for idle facilities or idle capacity reserved for defense mobilization production. In practice, this section matters because it determines whether overhead-like costs tied to underused assets can be billed to the Government, and it pushes contractors to document business necessity, mitigation efforts, and the reasons assets remain unused.
Key Rules
Definitions control allowability
The section first defines idle facilities, idle capacity, and facilities so the allowability rules can be applied correctly. These definitions matter because completely unused assets are treated differently from partially used assets with excess capacity.
Idle facilities usually unallowable
Costs of idle facilities are generally unallowable unless the facilities are needed to meet workload fluctuations or were originally necessary but later became idle for unforeseeable reasons such as changed requirements, production economies, reorganization, or termination.
Temporary allowability period
When idle facilities costs are allowable under the exception for unforeseen changes, they are allowable only for a reasonable period, ordinarily not more than one year. The actual period depends on how actively the contractor tries to use, lease, or dispose of the facilities, subject to any applicable termination-cost rules.
Idle capacity generally allowable
Costs of idle capacity are treated as normal business costs and are generally allowable because some unused capacity is expected in ordinary operations and overhead fluctuations. However, the capacity must be necessary or originally reasonable and not reducible through reasonable business actions.
Mitigation and business judgment required
Idle capacity costs are not allowable if the contractor can reduce or eliminate them by subletting, renting, selling, or taking other actions consistent with sound business, economic, or security practices. Contractors must show they considered practical mitigation options.
Widespread unused capacity may be idle facilities
If unused capacity is widespread across an entire plant or among assets with substantially the same function, the Government may treat the situation as idle facilities rather than idle capacity. This classification can make the costs unallowable unless an exception applies.
Separate agreement for mobilization assets
If the Government will directly pay for idle facilities or idle capacity reserved for defense mobilization production, that payment must be covered by a separate agreement. The clause does not itself authorize payment terms for mobilization reserve costs.
Responsibilities
Contractor
Correctly classify unused assets as idle facilities or idle capacity, maintain records supporting the classification, and show why the assets were necessary, originally reasonable, or needed for workload fluctuations. The contractor must also take reasonable steps to use, lease, sublet, rent, or dispose of idle assets when appropriate and avoid charging unallowable idle-facility costs.
Contracting Officer
Evaluate whether claimed idle-facility or idle-capacity costs meet the allowability standards, including whether the contractor’s mitigation efforts and business justifications are reasonable. The contracting officer must also ensure any direct Government payment for mobilization reserve assets is handled through a separate agreement.
Agency
When defense mobilization production is involved, establish any direct-payment arrangement for reserved idle facilities or idle capacity through a separate agreement. The agency should also apply the cost principle consistently when reviewing contractor proposals, incurred-cost submissions, or indirect-rate claims.
Auditors/Review Officials
Test whether the contractor’s asset classification, usage calculations, and mitigation efforts are supported by records and consistent with the FAR definitions. They should identify situations where widespread unused capacity is really idle facilities or where costs should have been reduced through reasonable business actions.
Practical Implications
Contractors should document why unused space or equipment exists, when it became idle, and what efforts were made to put it back to use or dispose of it. Without that documentation, costs are vulnerable to disallowance.
The biggest pitfall is misclassifying a completely unused asset as idle capacity. If the asset is excess and unused, the Government may treat it as idle facilities, which is usually unallowable unless an exception applies.
Reasonableness and mitigation matter. Even when costs start out allowable, they can become unallowable if the contractor does not pursue leasing, subletting, sale, or other practical ways to reduce the burden.
The one-year period for allowable idle-facility costs is not automatic. Contractors need to show active efforts and a reasonable basis for continuing to charge the costs beyond a short transition period.
For contracting officers and auditors, the key question is not just whether an asset is unused, but whether the unused condition is temporary, necessary, and supported by sound business or security reasons.
Official Regulatory Text
(a) Definitions . As used in this subsection- Costs of idle facilities or idle capacity means costs such as maintenance, repair, housing, rent, and other related costs; e.g., property taxes, insurance, and depreciation. Facilities means plant or any portion thereof (including land integral to the operation), equipment, individually or collectively, or any other tangible capital asset, wherever located, and whether owned or leased by the contractor. Idle capacity means the unused capacity of partially used facilities. It is the difference between that which a facility could achieve under 100 percent operating time on a one-shift basis, less operating interruptions resulting from time lost for repairs, setups, unsatisfactory materials, and other normal delays, and the extent to which the facility was actually used to meet demands during the accounting period. A multiple-shift basis may be used in the calculation instead of a one-shift basis if it can be shown that this amount of usage could normally be expected for the type of facility involved. Idle facilities means completely unused facilities that are excess to the contractor’s current needs. (b) The costs of idle facilities are unallowable unless the facilities- (1) Are necessary to meet fluctuations in workload; or (2) Were necessary when acquired and are now idle because of changes in requirements, production economies, reorganization, termination, or other causes which could not have been reasonably foreseen. (Costs of idle facilities are allowable for a reasonable period, ordinarily not to exceed 1 year, depending upon the initiative taken to use, lease, or dispose of the idle facilities (but see 31.205-42 )). (c) Costs of idle capacity are costs of doing business and are a factor in the normal fluctuations of usage or overhead rates from period to period. Such costs are allowable provided the capacity is necessary or was originally reasonable and is not subject to reduction or elimination by subletting, renting, or sale, in accordance with sound business, economics, or security practices. Widespread idle capacity throughout an entire plant or among a group of assets having substantially the same function may be idle facilities. (d) Any costs to be paid directly by the Government for idle facilities or idle capacity reserved for defense mobilization production shall be the subject of a separate agreement.