FAR 42.801—Notice of intent to disallow costs.
Plain-English Summary
FAR 42.801 explains when and how a contracting officer may issue a written notice of intent to disallow costs during contract performance, and what must happen after the notice is issued. It covers the timing of the notice, the requirement to try to settle the matter first through discussions, the purpose of early notification, the contractor’s right to respond in writing, the 60-day response/decision framework, and the minimum contents of the notice itself. It also addresses who must receive copies of the notice, the special coordination required when indirect cost elements are involved, and which official must issue the final written decision if the contractor disagrees. In practice, this section is a procedural safeguard: it gives the Government a way to flag potentially unallowable costs early, while giving the contractor notice, an opportunity to explain or contest the issue, and a prompt path to resolution. For contractors, it is an early warning that questioned costs may affect billing, provisional rates, or forward pricing arrangements; for contracting officers, it is a structured process that must be documented carefully and coordinated with the right officials.
Key Rules
May issue during performance
For contracts covered by FAR 42.802, the cognizant contracting officer administering the contract may issue a written notice of intent to disallow specified incurred or planned costs at any time during performance. The authority is discretionary, but it is limited to the contracting officer responsible for administration of the contract.
Discuss before issuing
Before sending the notice, the contracting officer must make every reasonable effort to reach a satisfactory settlement through discussions with the contractor. The notice is intended to follow, not replace, meaningful pre-notice engagement when possible.
Early warning and resolution
The notice is meant to alert the contractor as early as practicable that the Government considers certain costs unallowable under the contract terms and to promote timely resolution of any disagreement. If the contractor disagrees, it may submit a written response, and the Government must answer by withdrawing the notice or issuing a written decision within 60 days.
Minimum notice contents
The notice must include specific information: reference to the contract clause, the contractor’s name and affected contract numbers, a description of the costs and estimated dollar values and time periods, the reasons for disallowance, the potential effect on billing rates and forward pricing rate agreements, the effective date, the response deadline, the recipients of copies, and a request for acknowledgment of receipt.
Copy distribution required
The issuing contracting officer must send copies to all contracting officers who are cognizant of any segment of the contractor’s organization. This ensures that related administrative offices are aware of the potential cost issue and can coordinate their actions.
Indirect cost coordination
If the notice concerns indirect cost elements, it cannot be issued without coordination with the contracting officer or auditor who has authority for final indirect cost settlement under FAR 42.705. Indirect cost issues require special handling because they can affect final rates and multiple contracts.
Decision authority after disagreement
If the contractor submits a response disagreeing with the notice, the issuing contracting officer must either withdraw the notice or issue a written decision. When indirect cost elements are involved, however, the official responsible under FAR 42.705 for determining final indirect cost rates must issue the decision.
Responsibilities
Contracting Officer
Make every reasonable effort to resolve the issue through discussions before issuing the notice; issue the written notice when appropriate; ensure the notice contains all required elements; send copies to all cognizant contracting officers; coordinate indirect cost matters with the proper contracting officer or auditor; and, if the contractor disagrees, either withdraw the notice or issue the required written decision within 60 days, unless indirect cost authority under FAR 42.705 applies.
Contractor
Review the notice, acknowledge receipt as requested, and if it disagrees, submit a written response to the contracting officer by the stated deadline. The contractor should use the response to contest the allowability determination, provide supporting facts, or seek clarification and resolution.
Cognizant Contracting Officer Administering the Contract
Monitor contract costs and determine whether a notice of intent to disallow costs is warranted for contracts covered by FAR 42.802. This official is the one authorized to issue the notice for the contract being administered.
Contracting Officers Cognizant of Contractor Segments
Receive copies of the notice so they are informed of potential disallowance issues affecting the contractor’s other organizational segments and can coordinate related administrative or pricing actions.
Auditor or Contracting Officer with Final Indirect Cost Settlement Authority
Coordinate on notices involving indirect cost elements, and where applicable, issue the written decision on a contractor’s disagreement under the authority governing final indirect cost settlement in FAR 42.705.
Practical Implications
This is an early-stage cost challenge process, not a final audit finding or final disallowance. Contractors should treat it seriously because it can affect current billings, provisional billing rates, and future pricing arrangements before the issue is fully resolved.
The notice must be specific. Vague statements about “questioned costs” are not enough; the Government must identify the costs, amounts, time periods, and reasons so the contractor can respond meaningfully.
The 60-day response/decision clock matters. Contracting officers need a disciplined workflow to avoid missing the deadline, and contractors should track the response date carefully to preserve their position.
Indirect cost issues require extra coordination and can shift decision authority away from the issuing contracting officer. A common pitfall is issuing or deciding an indirect-cost notice without involving the official responsible for final indirect cost rates.
Because the notice must be copied to other cognizant contracting officers, it can have broader administrative consequences than a single-contract dispute. Contractors should assume the issue may affect multiple contracts or segments and prepare a consistent, well-supported response.
Official Regulatory Text
(a) At any time during the performance of a contract of a type referred to in 42.802 , the cognizant contracting officer responsible for administering the contract may issue the contractor a written notice of intent to disallow specified costs incurred or planned for incurrence. However, before issuing the notice, the contracting officer responsible for administering the contract shall make every reasonable effort to reach a satisfactory settlement through discussions with the contractor. (b) A notice of intent to disallow such costs usually results from monitoring contractor costs. The purpose of the notice is to notify the contractor as early as practicable during contract performance that the cost is considered unallowable under the contract terms and to provide for timely resolution of any resulting disagreement. In the event of disagreement, the contractor may submit to the contracting officer a written response. Any such response shall be answered by withdrawal of the notice or by making a written decision within 60 days. (c) As a minimum, the notice shall- (1) Refer to the contract’s Notice of Intent to Disallow Costs clause; (2) State the contractor’s name and list the numbers of the affected contracts; (3) Describe the costs to be disallowed, including estimated dollar value by item and applicable time periods, and state the reasons for the intended disallowance; (4) Describe the potential impact on billing rates and forward pricing rate agreements; (5) State the notice’s effective date and the date by which written response must be received; (6) List the recipients of copies of the notice; and (7) Request the contractor to acknowledge receipt of the notice. (d) The contracting officer issuing the notice shall furnish copies to all contracting officers cognizant of any segment of the contractor’s organization. (e) If the notice involves elements of indirect cost, it shall not be issued without coordination with the contracting officer or auditor having authority for final indirect cost settlement (see 42.705 ). (f) In the event the contractor submits a response that disagrees with the notice (see paragraph (b) of this section), the contracting officer who issued the notice shall either withdraw the notice or issue the written decision, except when elements of indirect cost are involved, in which case the contracting officer responsible under 42.705 for determining final indirect cost rates shall issue the decision.