FAR 42.803—Disallowing costs after incurrence.
Plain-English Summary
FAR 42.803 explains how the Government may disallow costs after they have already been incurred under cost-reimbursement contracts, the cost-reimbursement portion of fixed-price contracts, reimbursable letter contracts, and time-and-materials or labor-hour contracts. It addresses the mechanics of voucher handling, including when the contracting officer receives and acts on vouchers, when an agency auditor may receive vouchers directly from the contractor, and how approved or questionable costs are routed for payment or suspension. The section also covers the auditor’s authority to suspend or disapprove questionable costs, issue notices of contract costs suspended and/or disapproved, and coordinate with the contractor, disbursing officer, and contracting officer. Finally, it explains the contractor’s options when it disagrees with a deduction from current payments, including requesting review by the cognizant contracting officer, filing a claim under the Disputes clause, or doing both. In practice, this section is about controlling reimbursement risk, preserving the Government’s ability to withhold payment for unallowable costs, and giving contractors a process to challenge those determinations.
Key Rules
Applies to reimbursable contracts
This procedure applies to cost-reimbursement contracts, the cost-reimbursement portion of fixed-price contracts, reimbursable letter contracts, and time-and-materials or labor-hour contracts. The common feature is that costs are billed after incurrence and may later be questioned or disallowed.
Agency procedures control voucher handling
When the contracting officer receives vouchers directly from the contractor, approval or disapproval must follow the normal procedures of the individual agency. FAR 42.803 does not create a single governmentwide voucher-review process; it defers to agency-specific procedures.
Auditors may receive vouchers directly
If agency regulations authorize it, the contract auditor may receive reimbursement vouchers directly from contractors, approve acceptable vouchers, and suspend payment of questionable costs. Approved vouchers are then forwarded to the appropriate contracting, finance, or disbursing officer for payment.
Questionable costs may be suspended
If voucher review raises a question about allowability under the contract terms, the auditor may, after informal discussion as appropriate, issue a notice of contract costs suspended and/or disapproved. That notice goes to the contractor and disbursing officer, with a copy to the cognizant contracting officer, so the questioned amount can be deducted from current payments.
Contractor may challenge deductions
If the contractor disagrees with the deduction from current payments, it may ask the cognizant contracting officer to review whether the unreimbursed costs should be paid and discuss the findings, file a claim under the Disputes clause, or do both. The contracting officer must process any claim in accordance with agency procedures.
Responsibilities
Contracting Officer
Receive and act on vouchers when they are submitted directly to the contracting officer, following agency procedures. If the contractor challenges a deduction or files a claim, the contracting officer must review the issue, discuss findings with the contractor as appropriate, and process any Disputes clause claim under agency procedures.
Contract Auditor
If authorized by agency regulations, receive reimbursement vouchers directly from contractors, approve vouchers that are acceptable, and suspend payment of questionable costs. The auditor must forward approved vouchers to the proper contracting, finance, or disbursing officer and may issue notices of suspended and/or disapproved costs when allowability is in doubt.
Contractor
Submit vouchers for reimbursement and, if costs are deducted or disallowed, decide whether to request review by the cognizant contracting officer, file a claim under the Disputes clause, or both. The contractor should also respond to informal discussions and provide support for questioned costs.
Disbursing Officer
Receive notices of suspended and/or disapproved costs and deduct unreimbursable amounts from current payments as directed by the notice and agency procedures.
Finance Officer
Process approved vouchers for payment when routed through the agency’s payment system, consistent with agency procedures and any auditor or contracting officer approvals.
Agency
Establish the internal procedures and regulations that determine whether auditors may receive vouchers directly, how vouchers are reviewed, how suspensions are documented, and how disputes and claims are processed.
Practical Implications
This section is a payment-control tool: it lets the Government stop questionable reimbursement before it becomes final payment, which is especially important on cost-type and T&M/LH work where billing is based on incurred costs.
Contractors should expect that a voucher can be approved in part and suspended in part; a payment reduction does not necessarily mean the issue is closed, but it does mean the contractor must actively challenge the deduction if it wants reimbursement.
A common pitfall is assuming the auditor’s role is the same in every agency. FAR 42.803 expressly depends on agency regulations, so the exact voucher path, approval authority, and notice format can vary.
Another pitfall is failing to distinguish between informal discussion and a formal claim. A contractor may request review by the contracting officer, file a Disputes clause claim, or do both, but each path has different procedural consequences and timing considerations.
For contracting officers and auditors, the key operational issue is documentation: questioned costs should be clearly identified, routed to the right officials, and tied to the contract terms so the Government can support any suspension or disallowance if challenged.
Official Regulatory Text
Cost-reimbursement contracts, the cost-reimbursement portion of fixed-price contracts, letter contracts that provide for reimbursement of costs, and time-and-material and labor-hour contracts provide for disallowing costs during the course of performance after the costs have been incurred. The following procedures shall apply: (a) Contracting officer receipt of vouchers. When contracting officers receive vouchers directly from the contractor and, with or without auditor assistance, approve or disapprove them, the process shall be conducted in accordance with the normal procedures of the individual agency. (b) Auditor receipt of vouchers. (1) When authorized by agency regulations, the contract auditor may be authorized to (i) receive reimbursement vouchers directly from contractors, (ii) approve for payment those vouchers found acceptable, and (iii)suspend payment of questionable costs. The auditor shall forward approved vouchers for payment to the cognizant contracting, finance, or disbursing officer, as appropriate under the agency’s procedures. (2) If the examination of a voucher raises a question regarding the allowability of a cost under the contract terms, the auditor, after informal discussion as appropriate, may, where authorized by agency regulations, issue a notice of contract costs suspended and/or disapproved simultaneously to the contractor and the disbursing officer, with a copy to the cognizant contracting officer, for deduction from current payments with respect to costs claimed but not considered reimbursable. (3) If the contractor disagrees with the deduction from current payments, the contractor may- (i) Submit a written request to the cognizant contracting officer to consider whether the unreimbursed costs should be paid and to discuss the findings with the contractor; (ii) File a claim under the Disputes clause, which the cognizant contracting officer will process in accordance with agency procedures; or (iii) Do both of the above.