FAR 42.703-2—Certificate of indirect costs.
Plain-English Summary
FAR 42.703-2 governs the certification of final indirect cost proposals before the Government can accept them or agree on final indirect cost rates. It addresses the basic certification requirement, when an agency head or designee may waive that requirement, what happens if the contractor does not certify, how the contracting officer should respond to a suspected false certification, the statutory penalties tied to submitting unallowable costs in a final indirect cost rate proposal, and the mandatory contract clause that implements the rule. In practice, this section is a control point in the closeout and rate-setting process: it is designed to ensure contractors attest to the accuracy and completeness of their indirect cost proposals, to give the Government a path when certification is missing, and to deter improper cost submissions through penalties and legal review. It also recognizes that some entities—such as foreign governments, certain state and local governments, educational institutions, and nonprofits subject to the Uniform Guidance—may be appropriate candidates for waiver. For contracting officers and contractors, the section matters because it affects whether final rates can be established, how disputes or noncompliance are handled, and whether the required clause must be included in the contract.
Key Rules
Certification is required
A final indirect cost proposal cannot be accepted, and no agreement can be made to establish final indirect cost rates, unless the contractor certifies the costs. This makes certification a condition precedent to final rate settlement.
Waiver is limited and public
The agency head or designee may waive certification only when doing so is in the interest of the United States, and the reasons must be written and made available to the public. The rule identifies categories where a waiver may be appropriate, including foreign governments or international organizations, state or local governments, educational institutions, and nonprofits subject to the Uniform Guidance.
Uncertified proposals may be settled unilaterally
If the contractor does not certify and no waiver applies, the contracting officer may unilaterally establish final indirect cost rates. Those rates should be based on audited historical data or other available data, with unallowable costs excluded.
Rates must protect the Government
When rates are set unilaterally, they should be low enough to ensure that unallowable costs are not reimbursed. The practical goal is to avoid overpayment while preserving the Government’s ability to close out the rate process.
False certification requires legal review
If a contractor’s certificate of final indirect costs is believed to be false, the contracting officer should consult legal counsel to determine the appropriate response. The regulation does not prescribe a single remedy, signaling that the facts and potential enforcement options must be evaluated carefully.
Penalties may apply to unallowable costs
Statutory penalties apply to submission of unallowable costs in final indirect cost rate proposals. FAR points contracting officers to the penalty provisions and related responsibilities in FAR 42.709.
Required clause must be included
The clause at 52.242-4, Certification of Final Indirect Costs, must be included in solicitations and contracts that provide for establishment of final indirect cost rates, except where the Department of Energy uses an authorized alternate clause for Management and Operating contracts.
Responsibilities
Contractor
Certify its final indirect cost proposal before the Government can accept it or establish final indirect cost rates. The contractor must ensure the proposal is accurate and must avoid including unallowable costs, because false certification and submission of unallowable costs can trigger legal consequences and statutory penalties.
Contracting Officer
Ensure the required certification clause is included in applicable solicitations and contracts, and verify that a certified proposal is received before agreeing to final rates unless a waiver applies. If certification is missing and no waiver is appropriate, the contracting officer may establish rates unilaterally using available data and excluding unallowable costs; if a certification appears false, the contracting officer should consult legal counsel.
Agency Head or Designee
Determine whether to waive the certification requirement only when it is in the interest of the United States, document the reasons in writing, and make those reasons publicly available. This authority should be used selectively and only for appropriate cases.
Legal Counsel
Advise the contracting officer on the appropriate response when a contractor’s certification is suspected to be false, including potential enforcement, contractual, or referral actions.
Agency
Apply the waiver process consistently, maintain the written public justification for any waiver, and ensure agency-specific clauses or supplements are used only where authorized, such as DOE Management and Operating contracts.
Practical Implications
Contractors cannot expect final indirect cost rates to be negotiated or accepted without a certification unless a formal waiver is granted, so proposal preparation and internal review are critical.
A missing certification does not stop the Government from closing out rates; the contracting officer can set rates unilaterally, often conservatively, which can delay recovery of costs and reduce reimbursement.
Submitting unallowable costs is not just a pricing issue—it can lead to statutory penalties, so contractors need strong cost allowability controls before submitting final indirect cost proposals.
If a certification may be false, the issue can quickly become a legal and enforcement matter, not merely an accounting correction, so contracting officers should involve counsel early.
The required clause must be in place for contracts that use final indirect cost rates; omission of the clause can create administration problems and should be checked during award and contract review.
Official Regulatory Text
(a) General. In accordance with 10 U.S.C. 3747 and 41 U.S.C.4307 , a proposal shall not be accepted and no agreement shall be made to establish final indirect cost rates unless the costs have been certified by the contractor. (b) Waiver of certification. (1) The agency head, or designee, may waive the certification requirement when- (i) It is determined to be in the interest of the United States; and (ii) The reasons for the determination are put in writing and made available to the public. (2) A waiver may be appropriate for a contract with- (i) A foreign government or international organization, such as a subsidiary body of the North Atlantic Treaty Organization; (ii) A State or local government subject to the OMB Uniform Guidance at 2 CFR part 200 , subpart E and appendices V and VII; (iii) An educational institution (defined as an institution of higher education in the OMB Uniform Guidance at 2 CFR part 200 , subpart A, and 20 U.S.C. 1001 ) subject to the OMB Uniform Guidance at 2 CFR part 200 , subpart E and appendix III; and (iv) A nonprofit organization (as defined in the OMB Uniform Guidance at 2 CFR part 200 ) subject to the OMB Uniform Guidance at 2 CFR part 200 , subpart E and appendix IV. (c) Failure to certify. (1) If the contractor has not certified its proposal for final indirect cost rates and a waiver is not appropriate, the contracting officer may unilaterally establish the rates. (2) Rates established unilaterally should be- (i) Based on audited historical data or other available data as long as unallowable costs are excluded; and (ii) Set low enough to ensure that unallowable costs will not be reimbursed. (d) False certification. The contracting officer should consult with legal counsel to determine appropriate action when a contractor’s certificate of final indirect costs is thought to be false. (e) Penalties for unallowable costs. 10 U.S.C. 3743 and 41 U.S.C.4303 prescribe penalties for submission of unallowable costs in final indirect cost rate proposals (see 42.709 for penalties and contracting officer responsibilities). (f) Contract clause. (1) Except as provided in paragraph (f)(2) of this subsection, the clause at 52.242-4 , Certification of Final Indirect Costs, shall be incorporated into all solicitations and contracts which provide for establishment of final indirect cost rates. (2) The Department of Energy may provide an alternate clause in its agency supplement for its Management and Operating contracts.