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FAR 42.709-5 Unallowable Cost Penalty Waiver Clarified

A decision finding the contracting officer was required to waive penalties for the engineering support services contractor's inclusion of expressly unallowable costs in its proposed indirect costs was modified on reconsideration by the Armed Services Board of Contract Appeals because a waiver was not required under FAR 42.709-5. The government argued the prior decision ( 11-1 BCA 34,764) erred as a matter of law in concluding the CO was required to waive the FAR 42.709-1 (a)(1) penalties for individual costs of $2,400 for life insurance, $6,080 for employee morale, $776 for boat title taxes, and $3,866 for a business meeting. The board had ruled waivers were required under FAR 42.709-5 (b) because each of these proposed costs was under $10,000. On reconsideration, the government argued a waiver is required under FAR 42.709-5 (b) only when the aggregate of unallowable costs is less than the $10,000 threshold.

Threshold Is Aggregate

The board agreed and modified the prior decision to uphold the penalties for these items. When there is uncertainty about the meaning or intent of a Federal Acquisition Regulation provision, it is appropriate to examine the contemporaneous explanatory statements of the drafters of the regulation retained in the official records. Here, a comment on proposed FAR 42.709-5 (59 FR 65460) raised the same issue, and the drafting team's response stated "[t]he waiver threshold refers to the portion of the total penalizable costs (included in a settlement proposal) which are allocated to covered contracts using the contractor's established allocation practice." Although this clarification might have been more explicit, the board was satisfied it evinced the intent that the FAR 42.709-5 (b) $10,000 waiver threshold referred to the portion of the total penalizable costs (included in a settlement proposal) allocated to covered contracts, as opposed to individual cost elements. ( Thomas Associates, Inc., ASBCA, 93,292)




(The news featured above is a selection from the news covered in the Government Contracts Report Letter, which is published weekly and distributed to subscribers of the Government Contracts Reporter. )


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