FAR 31.205-25—Manufacturing and production engineering costs.
Plain-English Summary
FAR 31.205-25 explains when manufacturing and production engineering costs are allowable in government contract pricing and when they are not. It covers four allowable categories: developing and deploying new or improved materials, systems, processes, methods, equipment, tools, and techniques used in production; developing and deploying pilot production lines; improving current production functions such as plant layout, scheduling and control, methods and job analysis, equipment capability and capacity, inspection techniques, and tooling analysis/design improvements; and material and manufacturing producibility analysis to determine production suitability and optimize manufacturing processes. It also draws important boundaries by excluding basic and applied research under FAR 31.205-18 and excluding development effort for items intended for sale, which is also governed by FAR 31.205-18. Finally, it addresses capitalization: if these development costs are capitalized, or must be capitalized under the contractor’s policies, their allowability is determined under FAR 31.205-11, Depreciation. In practice, this section matters because contractors must correctly classify engineering effort, separate allowable production-improvement work from research or commercial development, and apply the right accounting treatment when costs are capitalized.
Key Rules
Allowable production engineering
Costs for manufacturing and production engineering effort are allowable when they are tied to improving or supporting production. This includes developing and deploying new or improved production-related materials, systems, processes, methods, equipment, tools, and techniques.
Pilot production lines allowed
Costs to develop and deploy pilot production lines are allowable under this section. The work must relate to production engineering rather than research or commercial product development.
Current production improvements
Costs to improve existing production functions are allowable, including plant layout, production scheduling and control, methods and job analysis, equipment capabilities and capacities, inspection techniques, and tooling analysis or tooling design/application improvements.
Producibility analysis allowed
Material and manufacturing producibility analysis is allowable when it is used to assess production suitability and optimize manufacturing processes, methods, and techniques. The focus is on making the item producible efficiently and effectively.
Research is excluded
Basic and applied research related to new technology, materials, systems, processes, methods, equipment, tools, and techniques is not covered here. That effort is governed by FAR 31.205-18, not this cost principle.
Commercial development excluded
Development effort for manufacturing or production materials, systems, processes, methods, equipment, tools, and techniques intended for sale is also excluded from this section and is governed by FAR 31.205-18.
Capitalized costs follow depreciation rules
If manufacturing or production development costs are capitalized, or must be capitalized under the contractor’s policies, allowability is determined under FAR 31.205-11, Depreciation. The contractor cannot treat capitalized amounts as ordinary current-period engineering expense.
Responsibilities
Contractor
Classify manufacturing and production engineering costs correctly, document the purpose of the work, and ensure the costs fit one of the allowable categories in this section. The contractor must also separate excluded research or commercial development effort and apply capitalization and depreciation rules when required by its accounting policies.
Contracting Officer
Review claimed costs to determine whether they are truly production engineering costs, whether any portion belongs under FAR 31.205-18, and whether capitalized amounts are being recovered only through allowable depreciation treatment. The contracting officer should challenge unsupported allocations or mixed-purpose charges.
Agency/Cost Auditor
Evaluate whether the contractor’s accounting records, project descriptions, and capitalization practices support the claimed allowability. The auditor should verify that research, bid and proposal, or sale-intended development work has not been improperly charged as allowable production engineering.
Practical Implications
This section is often a classification issue: the same technical staff may do both allowable production-improvement work and unallowable research or commercial development, so timekeeping and project coding matter.
Contractors should keep clear records showing how the work improves production, supports a pilot line, or analyzes producibility; vague descriptions like "engineering support" are usually not enough.
If a cost is capitalized under company policy, it cannot simply be billed as current engineering expense; the contractor must recover it through depreciation under FAR 31.205-11.
A common pitfall is mislabeling early-stage technology development as manufacturing engineering when it is really basic/applied research or development for sale.
Another frequent issue is mixed-purpose tooling or process work, where only the production-related portion is allowable and the rest must be segregated or excluded.
Official Regulatory Text
(a) The costs of manufacturing and production engineering effort as described in (1) through (4) of this paragraph are all allowable: (1) Developing and deploying new or improved materials, systems, processes, methods, equipment, tools and techniques that are or are expected to be used in producing products or services; (2) Developing and deploying pilot production lines; (3) Improving current production functions, such as plant layout, production scheduling and control, methods and job analysis, equipment capabilities and capacities, inspection techniques, and tooling analysis (including tooling design and application improvements); and (4) Material and manufacturing producibility analysis for production suitability and to optimize manufacturing processes, methods, and techniques. (b) This cost principle does not cover- (1) Basic and applied research effort (as defined in 31.205-18 (a)) related to new technology, materials, systems, processes, methods, equipment, tools and techniques. Such technical effort is governed by 31.205-18 , Independent research and development and bid and proposal costs; and (2) Development effort for manufacturing or production materials, systems, processes, methods, equipment, tools, and techniques that are intended for sale is also governed by 31.205-18 . (c) Where manufacturing or production development costs are capitalized or required to be capitalized under the contractor’s capitalization policies, allowable cost will be determined in accordance with the requirements of 31.205-11 , Depreciation.