FAR 42.705-3—Educational institutions.
Plain-English Summary
FAR 42.705-3 explains how indirect cost rates are established and used for educational institutions, including universities, colleges, and other institutions of higher education. It covers the default rule that postdetermined final indirect cost rates are used for cost-reimbursement contracts, the role of the cognizant Government agency in negotiating billing and final rates, and the requirement to follow the OMB Uniform Guidance at 2 CFR part 200, subpart E and appendix III. It also addresses when predetermined final indirect cost rates may be used for cost-reimbursement research and development contracts, the conditions that make predetermined rates inappropriate, the audit and proposal requirements for negotiating those rates, how long predetermined rates may remain in effect, and how billing rates are used when a period is not covered by predetermined rates. In practice, this section matters because it determines how universities are reimbursed for indirect costs, which agency has authority to negotiate those rates, and what documentation and timing are needed to avoid payment disputes, overpayment risk, or delays in contract administration. It also ties FAR administration to the Uniform Guidance, so contracting officers and institutions must align FAR procedures with the education-specific cost principles and rate-setting rules in the OMB framework.
Key Rules
Postdetermined rates are the default
For cost-reimbursement contracts with educational institutions, indirect costs are normally settled using postdetermined final indirect cost rates. Predetermined final rates may be used only when authorized and used under the special rules in paragraph (b).
One cognizant agency negotiates rates
The OMB Uniform Guidance assigns each educational institution to a single Federal agency for negotiating indirect cost rates, and those rates must be accepted by all Federal agencies. The cognizant agency for indirect costs is responsible for establishing billing and final rates consistent with FAR, FAR Part 31, and the Uniform Guidance.
Disputes follow cognizant agency appeals
If the cognizant agency cannot reach agreement with the institution, the dispute is resolved through that agency’s appeals system. This means the contracting officer does not create a separate rate dispute process outside the cognizant agency framework.
Predetermined rates are limited to certain R&D contracts
Predetermined final indirect cost rates may be used for cost-reimbursement research and development contracts with universities, colleges, or other educational institutions under 41 U.S.C. 4708. The cognizant agency is not required to establish them, but if it does, the rates must be extended to all of the institution’s Government contracts.
Stability and audit history matter
Before using predetermined rates, the agency should consider whether the institution’s indirect costs and bases are stable over time and whether major changes are expected. Predetermined rates generally should not be used without a recent audit, when rates and bases fluctuate widely, or when an individual contract is expected to exceed $1 million annually unless higher-level approval is obtained.
Proposal and audit support are required
If predetermined rates will be used and no current-year rates exist, the agency must obtain a proposal from the institution and negotiate the rates if the proposal is generally acceptable. The rates should normally be based on an audit of the immediately preceding fiscal year; if that is not possible, an earlier audit may be used with analysis of significant changes, and limited exceptions apply for smaller contracts below the simplified acquisition threshold.
Rates must be written into the contract
When predetermined rates are used, the contracting officer must include the negotiated rates and bases in the contract Schedule and use the Predetermined Indirect Cost Rates clause at 52.216-15. This makes the agreed rates contractually binding for administration and payment.
Predetermined rates have a time limit
Predetermined indirect cost rates may be used for no more than four years. The agency must obtain a new proposal far enough in advance to negotiate updated rates near the start of the next fiscal year or other agreed period.
Billing rates fill gaps between rate periods
If work is performed during a period not covered by predetermined rates, the contracting officer must use billing rates established by the agency to reimburse the contractor. The Uniform Guidance also provides additional limits and guidance on how long predetermined rates may be used.
Responsibilities
Cognizant Government Agency for Indirect Costs
Negotiate and establish billing rates and final indirect cost rates for the educational institution, follow FAR 42.705-1(b) procedures, consider whether predetermined rates are appropriate, obtain and evaluate proposals and audits when needed, and use its appeals system if agreement cannot be reached.
Contracting Officer
Use the applicable indirect cost rates in administering cost-reimbursement contracts, include negotiated predetermined rates and bases in the contract Schedule when predetermined rates are used, apply the Predetermined Indirect Cost Rates clause when required, and use agency-established billing rates for periods not covered by predetermined rates.
Educational Institution
Submit proposals for predetermined rates when requested, support proposed rates with cost and audit data, participate in negotiations with the cognizant agency, and apply the negotiated rates consistently across Government contracts when predetermined rates are established.
Agency Higher-Level Approval Authority
Approve use of predetermined rates in situations where the contracting officer alone lacks authority, including cases involving no recent audit, significant fluctuations in rates or bases, or contracts expected to exceed $1 million annually.
Auditors / Audit Function
Provide audit support for rate negotiations, preferably using the institution’s costs for the immediately preceding fiscal year, and help identify and evaluate significant variations when an earlier audit must be used.
All Federal Agencies
Accept the indirect cost rates negotiated by the cognizant agency for the educational institution and apply those rates consistently in their contracts with that institution.
Practical Implications
For universities and colleges, indirect cost administration is centralized: one cognizant agency negotiates the rates, and other agencies generally must accept them. Contractors should make sure they know which agency is cognizant and keep rate proposals, audit support, and supporting schedules aligned with that agency’s expectations.
Predetermined rates can simplify billing and reduce year-end true-ups, but they are not automatic and are limited to certain cost-reimbursement R&D contracts. If a university wants predictable reimbursement, it should plan early because the agency needs current data and often a recent audit before rates can be set.
Contracting officers should be careful not to use predetermined rates casually. The section flags specific risk factors—no recent audit, unstable indirect cost patterns, or large annual contract values—that usually make predetermined rates inappropriate without higher-level approval.
When a contract period crosses a rate gap, billing rates become important. If the contract work continues but no predetermined rate is in effect, the contracting officer must use agency-established billing rates so reimbursement can continue without interruption.
A common pitfall is failing to put the negotiated rates and bases into the contract Schedule or omitting the required clause. Another is assuming a rate negotiated for one contract can be selectively applied; if predetermined rates are established, they must be extended to all of the institution’s Government contracts.
Official Regulatory Text
(a) General. (1) Postdetermined final indirect cost rates shall be used in the settlement of indirect costs for all cost-reimbursement contracts with educational institutions, unless predetermined final indirect cost rates are authorized and used (see paragraph (b) of this subsection). (2) The OMB Uniform Guidance at 2 CFR part 200 , appendix III assigns each 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 ) to a single Government agency for the negotiation of indirect cost rates and provides that those rates shall be accepted by all Federal agencies. Cognizant Government agencies and educational institutions are listed in the Directory of Federal Contract Audit Offices (see 42.103 ). (3) The cognizant agency for indirect costs shall establish the billing rates and final indirect cost rates at the educational institution (defined as an institution of higher education in 2 CFR 200 , subpart A, and 20 U.S.C. 1001 ) consistent with the requirements of this subpart, subpart 31.3 , and the OMB Uniform Guidance at 2 CFR part 200 , subpart E and appendix III. The agency shall follow the procedures outlined in 42.705-1 (b). (4) If the cognizant agency is unable to reach agreement with an institution, the appeals system of the cognizant agency shall be followed for resolution of the dispute. (b) Predetermined final indirect cost rates. (1) Under cost-reimbursement research and development contracts with universities, colleges, or other educational institutions ( 41 U.S.C. 4708 ), payment for reimbursable indirect costs may be made on the basis of predetermined final indirect cost rates. The cognizant agency is not required to establish predetermined rates, but if they are established, their use must be extended to all the institution’s Government contracts. (2) In deciding whether the use of predetermined rates would be appropriate for the educational institution concerned, the agency should consider both the stability of the institution’s indirect costs and bases over a period of years and any anticipated changes in the amount of the direct and indirect costs. (3) Unless their use is approved at a level in the agency (see paragraph (a)(2) of this subsection) higher than the contracting officer, predetermined rates shall not be used when- (i) There has been no recent audit of the indirect costs; (ii) There have been frequent or wide fluctuations in the indirect cost rates and the bases over a period of years; or (iii) The estimated reimbursable costs for any individual contract are expected to exceed $1 million annually. (4) (i) If predetermined rates are to be used and no rates have been previously established for the institution’s current fiscal year, the agency shall obtain from the institution a proposal for predetermined rates. (ii) If the proposal is found to be generally acceptable, the agency shall negotiate the predetermined rates with the institution. The rates should be based on an audit of the institution’s costs for the year immediately preceding the year in which the rates are being negotiated. If this is not possible, an earlier audit may be used, but appropriate steps should be taken to identify and evaluate significant variations in costs incurred or in bases used that may have a bearing on the reasonableness of the proposed rates. However, in the case of smaller contracts ( i.e., contracts that do not exceed the simplified acquisition threshold), an audit made at an earlier date is acceptable if- (A) There have been no significant changes in the contractor’s organization; and (B) It is reasonably apparent that another audit would have little effect on the rates finally agreed upon and the potential for overpayment of indirect cost is relatively insignificant. (5) If predetermined rates are used- (i) The contracting officer shall include the negotiated rates and bases in the contract Schedule; and (ii) See 16.307 (g), which prescribes the clause at 52.216-15 , Predetermined Indirect Cost Rates. (6) Predetermined indirect cost rates shall be applicable for a period of not more than fouryears. The agency shall obtain the contractor’s proposal for new predetermined rates sufficiently in advance so that the new rates, based on current data, may be promptly negotiated near the beginning of the new fiscal year or other period agreed to by the parties (see paragraphs (b) and (d) of the clause at 52.216-15 , Predetermined Indirect Cost Rates). (7) Contracting officers shall use billing rates established by the agency to reimburse the contractor for work performed during a period not covered by predetermined rates. (8) The OMB Uniform Guidance at 2 CFR part 200 , subpart E and appendix III, provides additional guidance on how long predetermined rates may be used.