FAR 31.205-39—Service and warranty costs.
Plain-English Summary
FAR 31.205-39 addresses the allowability of service and warranty costs under government contracts. It covers costs arising from a contractor’s contractual obligation to provide post-delivery or post-performance support, including installation, training, correcting defects in products, replacing defective parts, and making refunds when performance is inadequate. The section’s purpose is to tell contractors and contracting officers when these costs may be charged to the Government and to prevent double counting of the same risk or cost in pricing and cost buildup. In practice, this means a contractor may recover legitimate warranty or service obligations if the contract terms permit it, but must not build the same expected cost into both the estimated product cost and a separate risk or contingency element. The rule is important because warranty and service obligations can be significant, especially in supply and production contracts, and improper treatment can affect proposal pricing, incurred cost allowability, and audit findings.
Key Rules
Warranty and service costs covered
This section applies to costs incurred to satisfy contractual obligations to provide services such as installation, training, defect correction, replacement of defective parts, and refunds for inadequate performance. The rule is broad enough to cover both direct service obligations and corrective actions tied to product performance.
Allowable if contract permits
Service and warranty costs are allowable when they are not inconsistent with the terms of the contract. If the contract shifts, limits, or excludes warranty responsibility, the contractor cannot claim costs that conflict with those terms.
Contractual obligation is the trigger
The costs must arise from a contractor’s contractual obligation, not merely from voluntary customer service or business goodwill. The section is aimed at costs the contractor is required to incur because of the contract’s service or warranty commitments.
Avoid double counting
Contractors must take care not to include the same expected warranty exposure in both estimated product cost and risk. The Government should not pay twice for the same underlying obligation through separate pricing elements.
Reasonable cost treatment
Although the text focuses on allowability, the costs still must be treated consistently with cost principles and contract terms. Contractors should support the basis for estimating warranty exposure and ensure the costs are properly allocated and documented.
Responsibilities
Contractor
Identify warranty and service obligations created by the contract, estimate and accumulate the related costs properly, and ensure those costs are not duplicated in both product cost and risk/contingency pricing. The contractor must also confirm that claimed costs are consistent with the contract terms and supported by records.
Contracting Officer
Review proposed pricing and cost submissions to ensure warranty and service costs are treated consistently with the contract and are not duplicated in other pricing elements. The contracting officer should also ensure the contract language clearly states the scope of any warranty or service obligations.
Agency
Structure solicitations and contracts so warranty and service requirements are clear, and evaluate whether proposed costs reflect the actual contractual obligations without double counting. The agency should also monitor cost allowability in incurred cost reviews and audits where applicable.
Practical Implications
Warranty and service costs are often allowable, but only to the extent the contract actually requires them, so contract language matters a great deal.
A common mistake is pricing the same defect or failure risk twice: once in the product cost and again in a separate risk or contingency line.
Contractors should keep clear records showing how warranty reserves or estimates were developed and how they relate to specific contract obligations.
If the contract limits warranty coverage, broad internal service policies cannot be charged to the Government beyond those limits.
Contracting officers should look for inconsistent pricing narratives, especially where proposals include both warranty costs and broad risk allowances for the same performance exposure.
Official Regulatory Text
Service and warranty costs include those arising from fulfillment of any contractual obligation of a contractor to provide services such as installation, training, correcting defects in the products, replacing defective parts, and making refunds in the case of inadequate performance. When not inconsistent with the terms of the contract, service and warranty costs are allowable. However, care should be exercised to avoid duplication of the allowance as an element of both estimated product cost and risk.