FAR 49.303-4—Adjustment of indirect costs.
Plain-English Summary
FAR 49.303-4 addresses how indirect costs are handled when a contract is being finally settled under the Allowable Cost and Payment clause at 52.216-7, but final indirect cost rates have not yet been negotiated. The section gives the Terminating Contracting Officer (TCO) a practical way to avoid delaying closeout by either negotiating a reasonable indirect cost amount for the unsettled period or, if appropriate, using billing rates as final rates for that period. It also allows the TCO to reserve the indirect cost issue in the final settlement agreement so the matter can be resolved later under FAR subpart 42.7 when negotiated rates are established. The rule is designed to balance speed in final settlement with accuracy in cost recovery, especially in termination situations where waiting for final indirect rates could hold up payment and contract closeout. It also protects the integrity of the contractor’s indirect cost structure by requiring an adjustment to the contractor’s pool and base when indirect costs are negotiated under this section, so the same costs are not recovered again on other contracts. In practice, this section is about deciding whether to settle indirect costs now, defer them, or use billing rates as a temporary final measure, and then making sure the contractor’s accounting records are adjusted consistently.
Key Rules
Applies only with Allowable Cost clause
This procedure applies when the contract includes the Allowable Cost and Payment clause at 52.216-7. It is aimed at situations where final indirect rates are still open and would otherwise delay final settlement.
TCO may avoid settlement delays
If waiting for final indirect cost rates would unduly delay final settlement, the TCO may take an alternative approach rather than hold the case open. The decision is made after obtaining information from the appropriate audit agency.
Negotiate indirect costs now
Under paragraph (a)(1), the TCO may negotiate the amount of indirect costs for the contract period that has not yet been covered by final negotiated rates. This can also include using billing rates as final rates if those billing rates appear reasonable.
Reserve the issue for later
Under paragraph (a)(2), the TCO may leave the indirect cost adjustment unresolved in the final settlement agreement and reserve it pending establishment of negotiated rates under FAR subpart 42.7. This preserves the issue without blocking closeout.
Adjust the contractor’s pool and base
If indirect costs are negotiated under paragraph (a)(1), the contractor must remove those indirect costs and the related direct costs from the total pool and base used to compute indirect costs for other contracts in the same accounting period. This prevents double counting and protects the accuracy of future rate calculations.
Responsibilities
Terminating Contracting Officer (TCO)
Determine whether unresolved indirect cost rates would unduly delay final settlement, obtain information from the appropriate audit agency, and choose whether to negotiate the indirect costs now, accept billing rates as final if reasonable, or reserve the issue in the final settlement agreement.
Appropriate Audit Agency
Provide information the TCO needs to evaluate the indirect cost issue and support the settlement approach selected. The audit input helps determine whether billing rates are reasonable or whether negotiation is needed.
Contractor
If indirect costs are negotiated under paragraph (a)(1), eliminate the negotiated indirect costs and the related direct costs from the indirect cost pool and base used for other contracts in the applicable accounting period. The contractor must also support the cost data used in settlement and rate calculations.
Agency/Settlement Process
Carry the unresolved indirect cost issue forward when it is reserved in the final settlement agreement and resolve it later when negotiated rates are established under FAR subpart 42.7.
Practical Implications
This section is a closeout tool: it helps avoid leaving a termination settlement open just because final indirect rates are not yet available.
Contractors should be careful not to treat negotiated indirect costs as if they can remain in the pool/base for other contracts; doing so can distort future indirect rate calculations and create audit findings.
TCOs should document why waiting for final rates would unduly delay settlement and should rely on audit information before agreeing to a workaround.
Using billing rates as final rates can speed settlement, but only if those rates appear reasonable; otherwise, the TCO should negotiate or reserve the issue instead.
If the issue is reserved, everyone should track it carefully so the later rate agreement under FAR subpart 42.7 is properly reflected in the final settlement.
Official Regulatory Text
(a) If the contract contains the clause at 52.216-7 , Allowable Cost and Payment, and it appears that adjustment of indirect costs will unduly delay final settlement, the TCO, after obtaining information from the appropriate audit agency, may agree with the contractor to- (1) Negotiate the amount of indirect costs for the contract period for which final indirect cost rates have not been negotiated, or to use billing rates as final rates for this period if the billing rates appear reasonable; or (2) Reserve any indirect cost adjustment in the final settlement agreement, pending establishment of negotiated rates under subpart 42.7 . (b) When an amount of indirect cost is negotiated under paragraph (a)(1) of this section, the contractor shall eliminate the indirect cost and the related direct costs on which it was based from the total pool and base used to compute indirect costs for other contracts performed during the applicable accounting period.