FAR 42.705-2—Auditor determination procedure.
Plain-English Summary
FAR 42.705-2 explains the auditor determination procedure for establishing final indirect cost rates. It covers when the cognizant Government auditor, rather than the contracting officer, may establish those rates; the circumstances that make auditor determination appropriate; the contractor’s obligation to submit a final indirect cost rate proposal; the auditor’s duties to audit the proposal, prepare an advisory audit report, and try to reach agreement with the contractor; the preparation and signing of an indirect cost rate agreement; what happens if the contractor and auditor cannot agree; and the required distribution of the resulting documents. In practice, this section is a streamlined alternative to contracting officer determination for certain business units, especially where indirect costs are relatively straightforward or the administrative cost of a more formal process would not be justified. It is designed to speed settlement of final indirect rates while still preserving oversight, documentation, and escalation to the contracting officer when needed. For contractors, it means timely submission of an adequate final indirect cost rate proposal and active participation in the audit/negotiation process. For the Government, it clarifies who leads the process, when auditor settlement is allowed, and how disagreements are resolved.
Key Rules
Auditor sets final rates
For business units not covered by FAR 42.705-1(a), the cognizant Government auditor is responsible for establishing the final indirect cost rates. This makes the auditor the primary decision-maker for those units instead of the contracting officer.
Limited use for covered units
Even when a business unit is covered by FAR 42.705-1(a), auditor determination may still be used if the contracting officer or cognizant Federal agency official and the auditor agree that settlement should be simple and one of the listed conditions applies. Those conditions include mostly fixed-price work, low expected administrative benefit from contracting officer determination, a clean dispute/cost history, or other special circumstances.
Contractor must submit proposal
The contractor must submit a final indirect cost rate proposal to both the cognizant contracting officer or cognizant Federal agency official and the auditor. The proposal must be prepared in accordance with FAR 42.705-1(b)(1), which means the submission must be complete enough to support audit and rate negotiation.
Auditor audits and seeks agreement
Once the proposal is determined adequate for audit, the auditor must audit it, prepare an advisory audit report, and include any relevant advance agreements or restrictive contract terms. The auditor must also attempt to reach agreement on indirect costs with the contractor.
Rate agreement must be signed
If agreement is reached, the auditor prepares an indirect cost rate agreement that conforms to the contract requirements. The agreement must be signed by both the contractor and the auditor, making it the formal record of the settled rates.
Disagreements go to contracting officer
If the contractor and auditor cannot agree, the auditor must forward the audit report to the identified contracting officer or cognizant Federal agency official, who then resolves the disagreement. This preserves a formal escalation path when auditor-led settlement does not succeed.
Documents must be distributed
After the rates are settled or otherwise resolved, the resulting documents must be distributed in accordance with FAR 42.706. Proper distribution ensures the final rates are communicated to the parties who need them for contract administration and billing.
Responsibilities
Cognizant Government auditor
Establish final indirect cost rates for business units not covered by FAR 42.705-1(a). When auditor determination is used, audit the contractor’s proposal, prepare an advisory audit report, include relevant advance agreements and restrictive contract terms, seek agreement with the contractor, prepare the indirect cost rate agreement if agreement is reached, and forward unresolved matters to the contracting officer or cognizant Federal agency official.
Contracting Officer / Cognizant Federal agency official
Determine, together with the auditor, whether auditor determination is appropriate for a business unit covered by FAR 42.705-1(a). Receive the contractor’s proposal, resolve disagreements forwarded by the auditor, and ensure the resulting documents are distributed as required.
Contractor
Submit a final indirect cost rate proposal to the cognizant contracting officer or cognizant Federal agency official and the auditor in accordance with FAR 42.705-1(b)(1). Participate in the audit and negotiation process, and sign the indirect cost rate agreement if agreement is reached.
Auditor and Contractor jointly
When agreement is reached, sign the indirect cost rate agreement that conforms to the contract requirements. Their signatures document the settled indirect cost rates and the basis for administration of affected contracts.
Cognizant Government auditor and Contracting Officer / Cognizant Federal agency official
Coordinate on whether auditor determination is appropriate for covered business units and ensure unresolved issues are escalated and resolved through the proper official channel.
Practical Implications
This section is a process shortcut for certain indirect rate settlements, but only when the Government agrees the case is straightforward enough to justify it. Contractors should not assume auditor determination is automatic; it depends on agency/auditor agreement and the facts of the business unit.
The quality and completeness of the final indirect cost rate proposal matter a great deal. If the proposal is not adequate for audit, the process stalls before rate negotiation can begin.
Advance agreements and restrictive contract terms must be identified early because they can affect how indirect costs are treated and what rates can be accepted.
If the auditor and contractor cannot agree, the matter does not end with the audit report; it moves to the contracting officer or cognizant Federal agency official for resolution. Contractors should be prepared for that escalation and maintain clear support for their positions.
A common pitfall is overlooking which official is the cognizant authority for submission and resolution. Misrouting the proposal or failing to coordinate with the correct auditor/contracting officer can delay final rate establishment and downstream billing or closeout actions.
Official Regulatory Text
(a) Applicability and responsibility. (1) The cognizant Government auditor shall establish final indirect cost rates for business units not covered in 42.705-1 (a). (2) In addition, auditor determination may be used for business units that are covered in 42.705-1 (a) when the contracting officer (or cognizant Federal agency official) and auditor agree that the indirect costs can be settled with little difficulty and any of the following circumstances apply: (i) The business unit has primarily fixed-price contracts, with only minor involvement in cost-reimbursement contracts. (ii) The administrative cost of contracting officer determination would exceed the expected benefits. (iii) The business unit does not have a history of disputes and there are few cost problems. (iv) The contracting officer (or cognizant Federal agency official) and auditor agree that special circumstances require auditor determination. (b) Procedures. (1) The contractor shall submit to the cognizant contracting officer (or cognizant Federal agency official) and auditor a final indirect cost rate proposal in accordance with 42.705-1 (b)(1). (2) Once a proposal has been determined to be adequate for audit in support of negotiating final indirect cost rates, the auditor shall- (i) Audit the proposal and prepare an advisory audit report, including a listing of any relevant advance agreements or restrictive terms of specific contracts; (ii) Seek agreement on indirect costs with the contractor; (iii) Prepare an indirect cost rate agreement conforming to the requirements of the contracts.The agreement shall be signed by the contractor and the auditor; (iv) If agreement with the contractor is not reached, forward the audit report to the contracting officer (or cognizant Federal agency official) identified in the Directory of Contract Administration Services Components (see 42.203 ), who will then resolve the disagreement; and (v) Distribute resulting documents in accordance with 42.706 .