FAR 42.709-6—Waiver of the penalty.
Plain-English Summary
FAR 42.709-6 explains when the cognizant contracting officer must waive the penalties associated with expressly unallowable costs included in a contractor’s final indirect cost rate proposal under FAR 42.709-2(a). It covers three waiver paths: first, when the contractor withdraws the proposal before the Government formally initiates an audit and submits a revised proposal; second, when the amount of unallowable costs subject to the penalty is $10,000 or less; and third, when the contractor convinces the contracting officer that it has strong policies, training, internal controls, and review systems designed to prevent unallowable costs, and that the specific inclusion of the unallowable costs was an inadvertent error despite due care. The section also defines when an audit is considered formally initiated, using written notice or an entrance conference as the trigger. In practice, this provision gives contractors a limited opportunity to avoid penalties if they self-correct early, if the dollar amount is small, or if they can show a robust compliance environment and a genuine mistake. For contracting officers, it establishes mandatory waiver conditions and requires a fact-based judgment about whether the contractor’s controls and explanation are sufficient.
Key Rules
Mandatory waiver when conditions are met
The cognizant contracting officer must waive the penalties under FAR 42.709-2(a) if one of the listed waiver conditions is satisfied. This is not discretionary once the contractor qualifies under paragraph (a), (b), or (c).
Early withdrawal before audit starts
A waiver is required if the contractor withdraws the proposal before the Government formally initiates an audit and then submits a revised proposal. An audit is formally initiated when the Government gives written notice or holds an entrance conference stating that audit work on a specific final indirect cost proposal has begun.
Small-dollar exception
A waiver is required when the amount of unallowable costs subject to the penalty is $10,000 or less. This refers to the amount of expressly or previously determined unallowable costs that would be allocated to the contracts identified in FAR 42.709-1(b).
Strong controls plus inadvertent error
A waiver is required if the contractor shows, to the contracting officer’s satisfaction, that it has effective policies, training, internal controls, and review systems that prevent unallowable costs from being included, and that the specific unallowable costs were included only because of an unintentional error despite due care.
Evidence of effective compliance systems
The rule points to examples of acceptable controls, such as those used in DoD self-governance programs, specific accounting controls over indirect costs, compliance tests showing the controls work, and prior Government audits that do not show recurring expressly unallowable costs. These are examples, not an exclusive checklist.
Responsibilities
Contracting Officer
Determine whether the contractor qualifies for a waiver and waive the penalty when the regulatory conditions are met. Evaluate the contractor’s evidence of controls, training, and inadvertent error under the third waiver basis.
Contractor
Withdraw and revise the proposal before audit initiation if seeking the early-withdrawal waiver; ensure unallowable costs are not included in final indirect cost rate proposals; and, if relying on the controls-based waiver, provide persuasive evidence of policies, training, internal controls, and the unintentional nature of the error.
Government/Audit Function
Formally initiate audit work in a way that triggers the rule’s audit-start definition, using written notice or an entrance conference for a specific final indirect cost proposal.
Practical Implications
Contractors can avoid penalties only in narrow circumstances, so timing matters: once the Government has formally initiated an audit, the early-withdrawal waiver is no longer available.
The $10,000 threshold is a hard practical cutoff, but contractors should calculate carefully because the rule focuses on the amount of unallowable costs subject to the penalty, not just the total proposal value.
For the controls-based waiver, contractors need more than a general compliance statement; they should be ready to show documented policies, training records, internal control testing, and evidence that the inclusion was truly accidental.
Recurring audit findings for expressly unallowable costs can undermine a waiver request, because they suggest the controls are not effective or the error was not isolated.
Contracting officers should document the basis for granting or denying a waiver, especially when assessing whether the contractor’s systems are robust enough and whether the error was inadvertent despite due care.
Official Regulatory Text
The cognizant contracting officer shall waive the penalties at 42.709-2 (a) when— (a) The contractor withdraws the proposal before the Government formally initiates an audit of the proposal and the contractor submits a revised proposal (an audit will be deemed to be formally initiated when the Government provides the contractor with written notice, or holds an entrance conference, indicating that audit work on a specific final indirect cost proposal has begun); (b) The amount of the unallowable costs under the proposal which are subject to the penalty is $10,000 or less ( i.e., if the amount of expressly or previously determined unallowable costs which would be allocated to the contracts specified in 42.709-1 (b) is $10,000 or less); or (c) The contractor demonstrates, to the cognizant contracting officer’s satisfaction, that- (1) It has established policies and personnel training and an internal control and review system that provide assurance that unallowable costs subject to penalties are precluded from being included in the contractor’s final indirect cost rate proposals ( e.g., the types of controls required for satisfactory participation in the Department of Defense sponsored self governance programs, specific accounting controls over indirect costs, compliance tests which demonstrate that the controls are effective, and Government audits which have not disclosed recurring instances of expressly unallowable costs); and (2) The unallowable costs subject to the penalty were inadvertently incorporated into the proposal; i.e., their inclusion resulted from an unintentional error, notwithstanding the exercise of due care.