FAR 42.709-3—Responsibilities.
Plain-English Summary
FAR 42.709-3 assigns responsibility for administering penalties related to expressly unallowable costs in final indirect cost proposals. It covers three core topics for the cognizant contracting officer: deciding whether penalties under FAR 42.709-2(a) should be assessed, deciding whether those penalties should be waived under FAR 42.709-6, and referring matters to the appropriate criminal investigative organization when there is evidence the contractor knowingly submitted unallowable costs. It also assigns the contract auditor a supporting role in reviewing and/or determining final indirect cost proposals by identifying costs that may be unallowable and subject to penalties, documenting the basis for that view, and making criminal referrals when warranted. In practice, this section is about who makes the penalty decision, who supports that decision with audit findings, and how suspected knowing submission of unallowable costs is escalated. It matters because it separates audit analysis from the contracting officer’s decision authority and ensures potential fraud or misconduct is coordinated with criminal investigators when the facts suggest intentional wrongdoing.
Key Rules
CO decides penalty assessment
The cognizant contracting officer is the official responsible for determining whether penalties under FAR 42.709-2(a) should be assessed. This means the CO, not the auditor, makes the final administrative decision on whether the penalty applies.
CO decides waiver eligibility
The cognizant contracting officer also determines whether any penalty should be waived under FAR 42.709-6. The waiver decision is a separate judgment from the penalty determination and must be made by the CO based on the waiver criteria in the FAR.
CO refers suspected knowing misconduct
If there is evidence that the contractor knowingly submitted unallowable costs, the cognizant contracting officer must refer the matter to the appropriate criminal investigative organization. The referral is required to support review and coordination of remedies when the facts suggest intentional conduct.
Auditor identifies questionable costs
The contract auditor is responsible for recommending which costs may be unallowable and subject to penalties during review and/or determination of final indirect cost proposals. The auditor’s role is advisory and fact-based, helping the CO identify potential penalty items.
Auditor documents support
When making recommendations, the contract auditor must provide rationale and supporting documentation. This ensures the CO has a defensible record showing why specific costs were viewed as potentially unallowable and penalty-eligible.
Auditor refers suspected knowing misconduct
If the auditor finds evidence that the contractor knowingly submitted unallowable costs, the auditor must also refer the matter to the appropriate criminal investigative organization. This creates a parallel duty to escalate possible fraud or intentional misconduct.
Responsibilities
Cognizant Contracting Officer
Determine whether penalties under FAR 42.709-2(a) should be assessed; determine whether any penalty should be waived under FAR 42.709-6; and refer matters to the appropriate criminal investigative organization when there is evidence the contractor knowingly submitted unallowable costs.
Contract Auditor
During review and/or determination of final indirect cost proposals, recommend which costs may be unallowable and subject to penalties; provide rationale and supporting documentation for each recommendation; and refer matters to the appropriate criminal investigative organization when there is evidence the contractor knowingly submitted unallowable costs.
Practical Implications
The contracting officer owns the penalty and waiver decisions, so audit findings alone do not impose penalties. Contractors should expect the CO to make the final call after reviewing the audit record and any contractor rebuttal.
Documentation matters. Auditors must support recommendations with rationale and evidence, and contractors should be prepared to challenge unsupported findings with clear cost allowability analysis and records.
The section creates an escalation path for suspected intentional misconduct. If the facts suggest the contractor knowingly included unallowable costs, the issue is not just a pricing dispute; it may trigger criminal investigative review.
A common pitfall is treating all unallowable costs the same. This section is specifically tied to penalties for expressly unallowable costs in final indirect cost proposals, so the penalty analysis depends on the underlying allowability rules and the facts of submission.
Contractors should review indirect cost proposals carefully before submission, because knowingly including unallowable costs can lead to penalties, waiver denial, and possible criminal referral. Contracting officers and auditors should coordinate closely to ensure the record supports both administrative and any investigative actions.
Official Regulatory Text
(a) The cognizant contracting officer is responsible for— (1) Determining whether the penalties in 42.709-2 (a) should be assessed; (2) Determining whether such penalties should be waived pursuant to 42.709-6 ; and (3) Referring the matter to the appropriate criminal investigative organization for review and for appropriate coordination of remedies, if there is evidence that the contractor knowingly submitted unallowable costs. (b) The contract auditor, in the review and/or the determination of final indirect cost proposals for contracts subject to this section, is responsible for— (1) Recommending to the contracting officer which costs may be unallowable and subject to the penalties in 42.709-2 (a); (2) Providing rationale and supporting documentation for any recommendation; and (3) Referring the matter to the appropriate criminal investigative organization for review and for appropriate coordination of remedies, if there is evidence that the contractor knowingly submitted unallowable costs.