FAR 42.709-4—Assessing the penalty.
Plain-English Summary
FAR 42.709-4 explains when the cognizant contracting officer must assess a penalty for expressly unallowable costs and when a different penalty applies because the contractor had already been told the cost was unallowable before submitting the proposal. It also identifies the kinds of prior government actions that count as evidence of a prior unallowability determination, including DCAA notices, unappealed contracting officer final decisions, prior board or court decisions, and determinations or agreements under FAR 31.201-6. Finally, it requires the contracting officer to issue a final decision demanding payment of the penalty and to state that the decision is final under the contract’s Disputes clause, while making clear that the penalty demand is separate from any demand to repay amounts already paid for the disallowed cost. In practice, this section is about enforcement: it tells contracting officers when penalties are mandatory, what proof is enough to support them, and how to formally collect them. For contractors, it highlights the risk of submitting costs that are clearly prohibited or previously rejected, because doing so can trigger a penalty in addition to disallowance and repayment.
Key Rules
Penalty for expressly unallowable costs
If a submitted cost is expressly unallowable under a FAR cost principle or an executive agency supplement that defines allowability of selected costs, the cognizant contracting officer must assess the penalty under FAR 42.709-2(a)(1), unless a waiver is granted under FAR 42.709-6.
Penalty for previously disallowed costs
If the contractor had already been told the cost was unallowable before submitting the proposal, the contracting officer must assess the penalty under FAR 42.709-2(a)(2), unless waived. This applies when the contractor submits a cost after a prior unallowability determination.
Acceptable proof of prior unallowability
Prior determinations can be shown by specific government actions, including a DCAA Form 1 or similar notice not appealed and not withdrawn, an unappealed contracting officer final decision, a prior board or court decision upholding the disallowance, or a determination or agreement of unallowability under FAR 31.201-6.
Final decision required
The contracting officer must issue a final decision under FAR 33.211 that includes a demand for payment of any assessed penalty. The letter must state that the determination is a final decision under the contract’s Disputes clause.
Penalty is separate from repayment
Demanding payment of the penalty is separate from demanding repayment of any amount already paid for the disallowed cost. The government may pursue both remedies, but they are distinct actions.
Responsibilities
Cognizant Contracting Officer
Determine whether the submitted cost is expressly unallowable or was previously determined unallowable, assess the correct penalty unless a waiver applies, and issue a final decision demanding payment of the penalty.
Contractor
Avoid submitting expressly unallowable costs or costs previously determined unallowable, and respond appropriately to any final decision or demand for payment. If the contractor believes a prior notice or decision does not apply, it must challenge that through the proper dispute process.
DCAA or Other Cognizant Government Agency
Provide notices or determinations of unallowability that may serve as evidence for later penalty assessment, and ensure such notices are properly issued and, if applicable, not withdrawn.
Agency Board of Contract Appeals or Court
Issue decisions that may establish a prior unallowability determination when they uphold a cost disallowance, creating a basis for later penalty assessment.
Agency/Contracting Activity
Apply waiver procedures under FAR 42.709-6 when appropriate and ensure penalty actions are supported by the required documentation and final decision procedures.
Practical Implications
This section makes penalties mandatory in the covered situations; contracting officers do not have discretion to ignore an expressly unallowable cost or a cost previously ruled unallowable unless a waiver is granted.
Contractors should treat prior disallowance notices and final decisions as serious warning flags, because resubmitting the same cost can trigger a penalty even if the amount is later disallowed again.
The government needs documentation showing the prior unallowability determination, so recordkeeping matters on both sides: notices, appeal status, withdrawal status, and prior decisions can determine whether a penalty is supportable.
A penalty demand must be issued as a formal final decision under the Disputes clause, so procedural errors in the decision letter can create avoidable disputes or delay collection.
Because the penalty is separate from repayment of the disallowed amount, contractors may face two financial consequences from the same cost submission: refund of the cost and an additional penalty.
Official Regulatory Text
Unless a waiver is granted pursuant to 42.709-6 , the cognizant contracting officer shall- (a) Assess the penalty in 42.709-2 (a)(1), when the submitted cost is expressly unallowable under a cost principle in the FAR or an executive agency supplement that defines the allowability of specific selected costs; or (b) Assess the penalty in 42.709-2 (a)(2), when the submitted cost was determined to be unallowable for that contractor prior to submission of the proposal. Prior determinations of unallowability may be evidenced by- (1) A DCAA Form1, Notice of Contract Costs Suspended and/or Disapproved (see 48 CFR 242.705-2), or any similar notice which the contractor elected not to appeal and was not withdrawn by the cognizant Government agency; (2) A contracting officer final decision which was not appealed; (3) A prior executive agency Board of Contract Appeals or court decision involving the contractor, which upheld the cost disallowance; or (4) A determination or agreement of unallowability under 31.201-6 . (c) Issue a final decision (see 33.211 ) which includes a demand for payment of any penalty assessed under paragraph (a) or (b) of this section. The letter shall state that the determination is a final decision under the Disputes clause of the contract. (Demanding payment of the penalty is separate from demanding repayment of any paid portion of the disallowed cost.)