FAR 42.705-5—Nonprofit organizations other than educational and state and local governments.
Plain-English Summary
FAR 42.705-5 is a cross-reference provision that tells contracting officers and contractors how to handle indirect cost rate issues for nonprofit organizations other than educational institutions and state and local governments. It does not itself set a separate rate-setting methodology; instead, it directs users to the OMB Uniform Guidance at 2 CFR part 200, subpart E, and appendix IV for the governing cost principles and allocation rules, while also pointing to appendix VIII for nonprofit organizations that are exempt from subpart E. In practice, this section matters because it identifies which federal cost-accounting framework controls the negotiation, review, and application of indirect costs for nonprofit contractors. It is especially important when establishing provisional, final, or billing rates, because the applicable rules determine what costs are allowable, how indirect cost pools are structured, and how costs are allocated to federal awards and contracts. The section’s practical significance is that it prevents parties from using the wrong cost principles and helps ensure consistency between FAR contract administration and the Uniform Guidance framework.
Key Rules
Use Uniform Guidance rules
For nonprofit organizations covered by this section, the controlling guidance is found in 2 CFR part 200, subpart E. That subpart contains the federal cost principles used to determine whether costs are allowable, allocable, and reasonable.
Apply appendix IV
Appendix IV to 2 CFR part 200 provides the indirect cost allocation guidance relevant to nonprofit organizations. Contracting officers and contractors should use it when negotiating or reviewing indirect cost rates and related cost structures.
Check appendix VIII exemption
Some nonprofit organizations are exempt from subpart E and are addressed in appendix VIII. Before applying the general nonprofit cost principles, the parties must confirm whether the organization falls into that exempt category.
No separate FAR methodology
This FAR section is a reference point, not a stand-alone rate-setting rule. The actual substantive requirements come from the cited Uniform Guidance provisions, which control the treatment of indirect costs for the affected nonprofits.
Responsibilities
Contracting Officer
Identify the correct governing cost principles for the nonprofit contractor, confirm whether subpart E applies or whether appendix VIII exemption rules apply, and use the referenced Uniform Guidance provisions when negotiating or administering indirect cost rates.
Contractor
Determine whether it is covered by subpart E or exempt under appendix VIII, maintain accounting and cost allocation practices consistent with the applicable Uniform Guidance requirements, and support proposed indirect cost rates with the proper documentation.
Agency
Ensure its contracting and audit personnel apply the correct Uniform Guidance framework for nonprofit organizations, and avoid using nonapplicable FAR concepts when the cited 2 CFR provisions control.
Practical Implications
This section is mainly a roadmap: users must go to 2 CFR part 200 rather than rely on FAR 42.705-5 for the substantive rules.
A common pitfall is assuming all nonprofits are treated the same; some are subject to subpart E while others are exempt under appendix VIII.
Indirect cost rate negotiations can go wrong if the parties use the wrong cost principles, which can lead to disallowed costs, billing adjustments, or audit findings.
Contractors should verify their nonprofit classification early so they can build compliant indirect cost pools and allocation bases before submitting proposals or rate requests.
Contracting officers should document which Uniform Guidance provisions apply to avoid later disputes over allowability and rate methodology.
Official Regulatory Text
(See the OMB Uniform Guidance at 2 CFR part 200 , subpart E and appendix IV; but see appendix VIII for nonprofit organizations exempt from subpart E.)