FAR 31.701—Purpose.
Plain-English Summary
FAR 31.701 states the purpose of Subpart 31.7, which is to provide the cost principles used to determine what costs are allowable, allocable, and otherwise applicable to work performed by nonprofit organizations under Government contracts. It also supplies the basic identification definition of a nonprofit organization for purposes of applying these rules. The definition focuses on organizations organized and operated exclusively for charitable, scientific, or educational purposes, with no private inurement of net earnings, no substantial lobbying or political campaign activity, and exemption from Federal income tax under section 501 of the Internal Revenue Code. In practice, this section matters because it tells contracting officers and contractors when the special nonprofit cost principles apply and helps prevent using the wrong cost framework for a contractor’s organizational status. It is the gateway provision for understanding how the Government evaluates nonprofit contract costs and whether an entity qualifies for treatment under this subpart.
Key Rules
Subpart purpose
This subpart exists to establish the principles for determining the costs applicable to work performed by nonprofit organizations under Government contracts. It is the starting point for applying the nonprofit-specific cost rules in FAR Part 31.
Nonprofit identification definition
For purposes of this subpart, a nonprofit organization is defined by its organizational purpose, operational restrictions, tax-exempt status, and limits on private benefit and political activity. The definition is used to identify which entities may be treated as nonprofits under these cost principles.
Charitable, scientific, or educational purpose
The organization must be organized and operated exclusively for charitable, scientific, or educational purposes. This means the entity’s governing documents and actual operations must align with those exempt purposes.
No private inurement
No part of the net earnings may inure to the benefit of any private shareholder or individual. This rule prevents profits or surplus from being distributed for private gain.
Limits on lobbying and politics
No substantial part of the organization’s activities may involve propaganda, attempts to influence legislation, or participation in political campaigns on behalf of candidates. The organization must remain within the activity limits associated with nonprofit status.
Federal tax exemption required
The organization must be exempt from Federal income taxation under section 501 of the Internal Revenue Code. This tax status is part of the identification standard for applying this subpart.
Responsibilities
Contracting Officer
Determine whether the contractor is a nonprofit organization for purposes of applying Subpart 31.7 and use the correct cost principles when evaluating proposed, incurred, or billed costs. The contracting officer should verify that the contractor’s status and activities fit the definition before relying on nonprofit-specific cost treatment.
Nonprofit Contractor
Establish and maintain its nonprofit status, including proper organizational purpose, operational conduct, tax-exempt status, and compliance with limits on private inurement, lobbying, and political activity. The contractor must support its status if questioned and apply the correct cost principles in contract performance and billing.
Agency/Cost Analysts
Apply the nonprofit cost principles consistently when reviewing cost submissions, indirect rates, and incurred cost data. They should ensure the organization’s claimed status matches the definition used in this subpart and flag any inconsistencies.
Legal/Tax Advisors
Advise on whether the organization meets the nonprofit identification criteria, especially tax-exempt status and restrictions on activities. They may also help document the basis for nonprofit treatment in contract files or internal compliance records.
Practical Implications
This section is a threshold provision: before anyone applies the nonprofit cost rules, they must confirm the contractor actually qualifies as a nonprofit under the FAR definition.
A common pitfall is assuming that tax-exempt status alone is enough; the organization must also meet the purpose, private inurement, and activity-limit requirements.
Contracting officers should not rely on labels alone. An entity calling itself a nonprofit may still need review of its charter, IRS status, and actual operations.
For contractors, misclassification can lead to incorrect cost treatment, questioned costs, billing disputes, or audit findings if the wrong FAR cost framework is used.
Because this section defines the scope of the subpart, it affects downstream decisions on cost allowability, rate development, and contract administration for nonprofit work.
Official Regulatory Text
This subpart provides the principles for determining the cost applicable to work performed by nonprofit organizations under contracts with the Government. A nonprofit organization, for purpose of identification, is defined as a business entity organized and operated exclusively for charitable, scientific, or educational purposes, of which no part of the net earnings inure to the benefit of any private shareholder or individual, of which no substantial part of the activities is carrying on propaganda or otherwise attempting to influence legislation or participating in any political campaign on behalf of any candidate for public office, and which are exempt from Federal income taxation under section 501 of the Internal Revenue Code.