FAR 42.7—Subpart 42.7

Scope of subpart.

FAR 42.700 is the scope statement for Subpart 42.7, which tells readers what this subpart is about and what it is not. It covers the policies and procedures used to establish two specific kinds of indirect cost rates: billing rates and final indirect cost rates. In practice, this means the subpart governs how contractors and contracting officers handle provisional or interim rates used during contract performance, and how they later settle on final rates after actual indirect costs are known. The purpose is to provide a framework for pricing, invoicing, reimbursement, and year-end closeout of indirect costs under cost-reimbursement and other applicable contracts. Because indirect rates affect how much a contractor can bill during performance and how much the Government ultimately pays, this section is important for cash flow, auditability, and final contract settlement. It is a scope provision, so it does not itself set the detailed mechanics of rate negotiation or audit; instead, it identifies the two rate-setting subjects that the rest of the subpart addresses.

Definition.

FAR 42.701 defines the term "billing rate" for use in Subpart 42.7, which deals with indirect cost rates and related reimbursement practices. The definition explains that a billing rate is not a final or permanent rate; it is a temporary indirect cost rate used to reimburse a contractor for incurred indirect costs while the government and contractor are still working toward final indirect cost rates. The section also makes clear that billing rates must be adjusted as needed once more accurate cost information becomes available and until final indirect cost rates are established. In practice, this definition matters because it governs how contractors are paid during the year, how provisional reimbursement is handled, and how later adjustments are made to reconcile interim payments with final settled rates. It is a foundational term for understanding interim billing, rate negotiation, and year-end true-ups in cost-reimbursement and other flexibly priced contracts that use indirect cost recovery.

Purpose.

FAR 42.702 explains the purpose of two related administrative tools used in cost-reimbursement contracting: final indirect cost rates and billing rates. It says final indirect cost rates are established to promote uniform treatment of a contractor’s indirect costs across multiple contracts or agencies, reduce the administrative burden of settling those costs, and support timely closeout and settlement of cost-reimbursement contracts. It also explains that billing rates are used for interim reimbursement of indirect costs at estimated rates, with later adjustment when actual final indirect cost rates are determined. In practice, this section frames how the government and contractor handle indirect cost recovery during performance and after the end of the fiscal period, and it highlights the balance between paying the contractor promptly and reconciling to actual costs later. The section is purpose-oriented rather than procedural, but it sets the policy basis for rate negotiation, provisional billing, and final settlement.

General.

Billing rates.

FAR 42.704 explains how billing rates are established, revised, and used in the indirect cost reimbursement process. It covers who is responsible for setting billing rates, what information may be used to establish them, how closely they should track anticipated final indirect cost rates, when simplified methods may be used instead of a detailed proposal, how billing rates may be revised prospectively or retroactively, what happens if the parties cannot agree, and how billing rates may be adjusted when a contractor submits a certified final indirect cost rate proposal. It also makes clear that billing rates are only provisional and do not determine the final indirect cost rates, the final cost pools, or the final allocation bases used in settlement. In practice, this section is important because billing rates directly affect interim payments, cash flow, and the risk of overpayment or underpayment during contract performance. It gives the Government flexibility to set reasonable provisional rates while preserving the ability to settle actual indirect costs later through the final rate process.

Final indirect cost rates.

FAR 42.705 explains how final indirect cost rates are established and how those settled rates are used to close out a physically complete contract. It covers two alternative methods for establishing final indirect cost rates: the contracting officer determination procedure and the auditor determination procedure. It also requires the contractor, after final annual indirect cost rates are settled for all years of a physically complete contract, to submit a completion invoice or voucher within 120 days unless the contracting officer approves a longer period in writing. The section identifies the kinds of extenuating circumstances that may justify extra time, including pending subcontract closeout awaiting Government audit, pending claims, delays in Government property disposition, delays in contract reconciliation, and other pertinent factors. Finally, it gives the contracting officer authority to determine amounts due if the contractor does not timely submit the completion invoice or voucher, record that determination in a unilateral modification, and issue the determination as a final decision under FAR 33.211. In practice, this section is a key closeout control: it links indirect rate settlement to final payment processing and gives the Government a mechanism to finish contract closeout when the contractor does not act.

Distribution of documents.

FAR 42.706 explains how the government must distribute the paperwork that results from establishing indirect cost rates. It covers two related document flows: first, the prompt distribution of executed indirect cost rate agreements to the contractor, each affected contracting agency, and the relevant contract files; and second, the distribution of the supporting negotiation memorandum or audit report, depending on whether the rates were established by contracting officer determination or auditor determination. The section exists to make sure all affected parties have the same official record of the agreed rates and the basis for those rates, which is essential for billing, provisional and final indirect cost adjustments, contract administration, and later audits or disputes. In practice, this provision helps prevent inconsistent rate application across contracts and agencies, ensures the administrative record is complete, and supports transparency and traceability in indirect cost rate negotiations. It also ties the distribution process to the contract distribution guidance in FAR subpart 4.2, so the documents are filed and circulated in a way that supports proper contract modification records.

Cost-sharing rates and limitations on indirect cost rates.

FAR 42.707 explains when and how the Government may use indirect cost rate ceilings in contracts. It covers two main situations: cost-sharing arrangements, where the contractor agrees to absorb part of the cost by accepting indirect rates below anticipated actual rates, and other cases where a final indirect cost rate ceiling is prudent because of the contractor’s circumstances. The section also identifies examples that justify a ceiling, including a new or recently reorganized company with no reliable indirect cost history, a contractor with rapidly rising indirect rates due to declining sales, and a contractor that proposes unrealistically low rates to win a competition and then risks a cost overrun. In practice, this provision lets contracting officers manage risk by capping reimbursement exposure while still allowing the parties to negotiate an equitable arrangement. It also makes clear that if a ceiling is used, the contract must state both that the Government will not pay above the ceiling and that lower actual final rates will replace the ceiling. This section is especially important in cost-reimbursement and cost-sharing environments because indirect rate assumptions can materially affect price, reimbursement, and contractor financial exposure.

Quick-closeout procedure.

FAR 42.708 establishes the quick-closeout procedure, which lets the Government settle direct and indirect costs for a specific contract, task order, or delivery order before final indirect cost rates are fully determined under FAR 42.705. The section is designed to speed contract closeout when only a relatively small amount of costs remains unsettled and when the contracting officer can reasonably manage the risk of doing so. It applies only when the contract is physically complete, the remaining unsettled direct and indirect costs are small enough under the regulatory threshold, the contracting officer completes a risk assessment, and the parties can agree on a reasonable estimate of allocable dollars. The rule also explains the legal effect of a quick-closeout settlement: the indirect cost determination is final for that contract and does not trigger later adjustments to other contracts for over- or under-recoveries tied to the settled contract. Finally, it makes clear that indirect rates used in a quick-closeout settlement do not set a binding precedent for future final indirect rate negotiations on other contracts. In practice, this provision helps agencies reduce closeout backlogs and administrative burden, but it requires careful judgment because the Government is trading full rate finality for speed and efficiency.

Penalties for Unallowable Costs.