FAR 31.205-36—Rental costs.
Plain-English Summary
FAR 31.205-36 addresses when rental and lease costs are allowable as contract costs under the cost principles. It covers three main topics: operating leases for real or personal property, sale-and-leaseback arrangements, and interorganizational rentals between divisions, subsidiaries, affiliates, or other commonly controlled organizations. It also points readers to the separate rule for capital leases at FAR 31.205-11 and to the termination-cost rule at FAR 31.205-42(e) for unexpired leases tied to contract terminations. In practice, this section matters because rental costs are often significant overhead or direct costs, and allowability depends not just on whether the contractor actually paid rent, but on whether the lease decision was reasonable, whether the arrangement is at arm’s length or between related entities, and whether the amount exceeds what would be allowable under ownership. The rule is designed to prevent contractors from shifting excessive occupancy or equipment costs to the Government while still allowing legitimate market-based leasing costs.
Key Rules
Operating leases only
This subsection applies to rental or lease costs for real or personal property acquired under operating leases as defined in FASB ASC 840. Capital leases are not covered here and must be evaluated under FAR 31.205-11.
Reasonable lease rates
Rental costs under operating leases are allowable only to the extent the rates were reasonable when the lease decision was made. Reasonableness is judged by comparing comparable rental costs, local market conditions, the property’s type and condition, available alternatives, and any other lease terms that affect value.
Sale-and-leaseback limits
For sale-and-leaseback arrangements, allowable rent is capped at the amount the contractor would have been allowed if it had kept title to the property. The calculation is based on the asset’s net book value when the contractor becomes the lessee, adjusted for any gain or loss recognized under FAR 31.205-16(b).
Related-party rent capped by ownership cost
Charges in the nature of rent between divisions, subsidiaries, or organizations under common control are allowable only up to the normal costs of ownership, such as depreciation, taxes, insurance, facilities capital cost of money, and maintenance, excluding interest and other unallowable costs. These charges cannot duplicate any other allowable cost.
Affiliate personal property exception
If personal property is leased from a commonly controlled affiliate that has an established practice of leasing the same or similar property to unrelated customers, the rental cost is allowed under the same reasonableness test used for ordinary operating leases.
Termination leases handled elsewhere
The allowability of rental costs for unexpired leases connected to contract terminations is not decided here. Those costs are addressed under FAR 31.205-42(e).
Responsibilities
Contractor
Document that lease rates were reasonable at the time of the lease decision, including market comparisons and other support for the chosen arrangement. For sale-and-leaseback and related-party leases, ensure the claimed cost does not exceed the applicable cap and does not duplicate other allowable costs.
Contracting Officer
Evaluate whether claimed rental costs are allowable under the applicable lease category, whether the rate was reasonable, and whether related-party or sale-and-leaseback charges exceed the limits in this section or overlap with other cost elements.
Agency
Apply the cost principle consistently when reviewing proposals, incurred cost submissions, and termination claims, and ensure that lease costs are not reimbursed beyond the limits established by the FAR.
Practical Implications
Contractors should support lease decisions with contemporaneous market data, because reasonableness is judged at the time the lease is entered into, not after the fact.
Related-party leases are a common audit issue: if the lessor and lessee are under common control, the Government will look for ownership-cost limits and possible double counting.
Sale-and-leaseback deals can create allowability problems if the rent exceeds the amount that would have been allowable had the contractor retained the asset.
If a lease is actually a capital lease, treating it as rent under this section can lead to disallowance; the lease classification matters.
When a contract is terminated, unexpired lease costs must be analyzed under the termination-cost rules rather than assumed allowable under the general rental-cost rule.
Official Regulatory Text
(a) This subsection is applicable to the cost of renting or leasing real or personal property acquired under "operating leases" as defined in Financial Accounting Standards Board’s Accounting Standards Codification (FASB ASC) 840, Leases. (See 31.205-11 for Capital Leases.) (b) The following costs are allowable: (1) Rental costs under operating leases, to the extent that the rates are reasonable at the time of the lease decision, after consideration of- (i) Rental costs of comparable property, if any; (ii) Market conditions in the area; (iii) The type, life expectancy, condition, and value of the property leased; (iv) Alternatives available; and (v) Other provisions of the agreement. (2) Rental costs under a sale and leaseback arrangement only up to the amount the contractor would be allowed if the contractor retained title, computed based on the net book value of the asset on the date the contractor becomes a lessee of the property adjusted for any gain or loss recognized in accordance with 31.205-16 (b). (3) Charges in the nature of rent for property between any divisions, subsidiaries, or organizations under common control, to the extent that they do not exceed the normal costs of ownership, such as depreciation, taxes, insurance, facilities capital cost of money, and maintenance (excluding interest or other unallowable costs pursuant to part 31 ), provided that no part of such costs shall duplicate any other allowed cost. Rental cost of personal property leased from any division, subsidiary, or affiliate of the contractor under common control, that has an established practice of leasing the same or similar property to unaffiliated lessees shall be allowed in accordance with paragraph (b)(1) of this subsection. (c) The allowability of rental costs under unexpired leases in connection with terminations is treated in 31.205-42 (e).