FAR 42.703-1—Policy.
Plain-English Summary
FAR 42.703-1 sets the basic policy for establishing and using final indirect cost rates. It explains that one cognizant agency is responsible for establishing final indirect cost rates for each business unit, and that those rates generally bind all federal agencies unless a statute says otherwise. It also limits when an agency may perform its own audit of indirect cost rates, allowing reliance on another federal audit when that will reasonably satisfy the audit objective. The section further explains how billing rates and final indirect cost rates are used in reimbursing indirect costs under cost-reimbursement contracts and in calculating progress payments under fixed-price contracts. Finally, it requires use of final indirect cost rates for contract closeout and for settling indirect costs in certain fixed-price contract pricing actions, including fixed-price incentive and fixed-price redeterminable contracts, unless the quick-closeout procedure applies. In practice, this section is about avoiding duplicate audits, promoting governmentwide consistency, and ensuring indirect costs are settled correctly and timely across contract types.
Key Rules
One agency sets final rates
A single agency is responsible for establishing final indirect cost rates for each business unit. Those rates are binding on all agencies and contracting offices unless a statute specifically prohibits that result.
Avoid duplicate audits
A contracting officer should not require a new audit of indirect cost rates if the audit objective can reasonably be met by accepting the results of an audit already performed by another federal department or agency. This supports efficient use of government audit resources.
Use rates for reimbursement
Billing rates and final indirect cost rates are used to reimburse indirect costs under cost-reimbursement contracts. They are also used to determine progress payments under fixed-price contracts.
Final rates for closeout
Final indirect cost rates must be used to close out a business unit’s contracts unless the quick-closeout procedure in FAR 42.708 is used. These final rates are binding for all cost-reimbursement contracts at that business unit, subject to any contract-specific limitation or advance agreement.
Final rates for certain fixed-price settlements
Established final indirect cost rates must be used when negotiating the final price of fixed-price incentive and fixed-price redeterminable contracts, and in other situations where indirect costs must be settled before contract prices are established, unless quick-closeout applies.
Quick-closeout is an exception
The quick-closeout procedure in FAR 42.708 is the stated exception to the normal requirement to use final indirect cost rates for closeout and certain pricing settlements. When quick-closeout is used, the normal final-rate settlement process is not required in the same way.
Responsibilities
Agency responsible for final indirect cost rates
Establish final indirect cost rates for each business unit and ensure those rates are applied consistently across agencies, unless a statute specifically prevents that result.
Contracting Officer
Determine whether the objective of an indirect cost audit can reasonably be met by accepting another federal agency’s audit results instead of ordering a duplicate audit; use the proper indirect cost rates in reimbursement, progress payment, closeout, and final pricing actions.
Auditing agency or department
Conduct indirect cost audits that may be relied upon by other agencies when appropriate, helping avoid unnecessary duplicate audit work.
Contractor / Business Unit
Submit and support indirect cost rate proposals and use the established billing and final indirect cost rates in contract billing, closeout, and final price negotiations as applicable.
Contract administration personnel
Apply established final indirect cost rates in contract administration actions, including closeout and settlement of indirect costs, and coordinate use of quick-closeout when appropriate.
Practical Implications
This section reduces duplication: if another federal agency already audited the indirect cost rates, the contracting officer should consider relying on that work instead of starting over.
Contractors should expect final indirect cost rates to control closeout and certain final pricing actions, so unresolved rate issues can delay contract settlement and final payment.
Billing rates are not the same as final rates, but both matter operationally; using the wrong rate can cause reimbursement errors or progress payment mistakes.
The quick-closeout procedure is an important exception, but it must be used properly; otherwise, the normal final-rate settlement rules still apply.
Because final indirect cost rates are binding across agencies, contractors generally cannot relitigate the same indirect cost issues with different contracting offices once the cognizant agency has established the rate, absent a statutory exception or contract-specific limitation.
Official Regulatory Text
(a) A single agency (see 42.705-1 ) shall be responsible for establishing final indirect cost rates for each business unit. These rates shall be binding on all agencies and their contracting offices, unless otherwise specifically prohibited by statute. An agency shall not perform an audit of indirect cost rates when the contracting officer determines that the objectives of the audit can reasonably be met by accepting the results of an audit that was conducted by any other department or agency of the Federal Government ( 10 U.S.C. 3841(e) and 41 U.S.C. 4706(e) ). (b) Billing rates and final indirect cost rates shall be used in reimbursing indirect costs under cost-reimbursement contracts and in determining progress payments under fixed-price contracts. (c) To ensure compliance with 10 U.S.C. 3743(a) and 41 U.S.C. 4303(a) - (1) Final indirect cost rates shall be used for contract closeout for a business unit, unless the quick-closeout procedure in 42.708 is used. These final rates shall be binding for all cost-reimbursement contracts at the business unit, subject to any specific limitation in a contract or advance agreement; and (2) Established final indirect cost rates shall be used in negotiating the final price of fixed-price incentive and fixed-price redeterminable contracts and in other situations requiring that indirect costs be settled before contract prices are established, unless the quick-closeout procedure in 42.708 is used.