FAR 52.242-3 - Penalties for Unallowable Costs

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Prescribed in 42.709-6
Effective Date:	1 May 2014
Clause or Provision:	Clause
Provision or Clause Number:	52.242-3 - Penalties for Unallowable Costs
Principle Type And/Or Purpose of Contract:
Required:
Applicable:	Time and Materials/Labor Hour; Architect-Engineering; Dismantling, Demolition or Removal of Improvements; Cost Reimbursement, Supply; Leasing of Motor Vehicles; Time & Material/Labor Hour; Cost Reimbursement, Construction; Cost Reimbursement, Service; Cost Reimbursement, R&D; Indefinite Delivery; Transportation
Optional:	Utility Services; Simplified Acquisition Procedures (Excludes Micro-Purchase); Facilities; Fixed Price, Construction; Fixed Price, Service
Subject:
ProcurementType:
Contract Threshold:
Prescription Overview:	Prescription Use the clause at 52.242-3, Penalties for Unallowable Costs, in all solicitations and contracts over $750,000 except fixed-price contracts without cost incentives or any firm-fixed-price contract for the purchase of commercial items. Generally, covered contracts are those which contain one of the clauses at 52.216-7, 52.216-16, or 52.216-17, or a similar clause from an executive agency’s supplement to the FAR.
Clause Overview:	Clause (a) Definition “Proposal,” as used in this clause, means either— (1) A final indirect cost rate proposal submitted by the Contractor after the expiration of its fiscal year which— (i) Relates to any payment made on the basis of billing rates; or (ii) Will be used in negotiating the final contract price; or (2) The final statement of costs incurred and estimated to be incurred under the Incentive Price Revision clause (if applicable), which is used to establish the final contract price. Penalty Statement (b) Contractors which include unallowable indirect costs in a proposal may be subject to penalties. The penalties are prescribed in 10 U.S.C. 2324 or 41 U.S.C. chapter 43, as applicable, which is implemented in Section 42.709 of the Federal Acquisition Regulation (FAR). Contractor Requirements (c) The Contractor shall not include in any proposal any cost that is unallowable, as defined in Subpart 2.1 of the FAR, or an executive agency supplement to the FAR. Penalty Assessment (d) If the Contracting Officer determines that a cost submitted by the Contractor in its proposal is expressly unallowable under a cost principle in the FAR, or an executive agency supplement to the FAR, that defines the allowability of specific selected costs, the Contractor shall be assessed a penalty equal to— (1) The amount of the disallowed cost allocated to this contract; plus (2) Simple interest, to be computed— (i) On the amount the Contractor was paid (whether as a progress or billing payment) in excess of the amount to which the Contractor was entitled; and (ii) Using the applicable rate effective for each six-month interval prescribed by the Secretary of the Treasury pursuant to Pub. L. 92-41 (85 Stat. 97). Unallowable Costs (e) If the Contracting Officer determines that a cost submitted by the Contractor in its proposal includes a cost previously determined to be unallowable for that Contractor, then the Contractor will be assessed a penalty in an amount equal to two times the amount of the disallowed cost allocated to this contract. Final Decision (f) Determinations under paragraphs (d) and (e) of this clause are final decisions within the meaning of 41 U.S.C. chapter 71, Contract Disputes. Waiver of Penalties (g) Pursuant to the criteria in FAR 42.709-5, the Contracting Officer may waive the penalties in paragraph (d) or (e) of this clause. Penalty Payment is not Unallowable Cost Repayment (h) Payment by the Contractor of any penalty assessed under this clause does not constitute repayment to the Government of any unallowable cost which has been paid by the Government to the Contractor.
Important Notes/Requirements:	Only applies to Cost Type contracts or Time and Material Contracts. For Time and Materials contracts, it is only applicable to the Material portion, and then only the indirects that are applied to Materials. In all solicitations and contracts over $700,000 except fixed-price contracts without cost incentives or any firm fixed-price contract for the purchase of commercial items.Generally, covered contracts are those which contain one of the clauses at 52.216-7, 52.216-16, or 52.216-17, or a similar clause from an executive agency's supplement to the FAR.
Subcontract Threshold:
Incorporated by Reference:	Yes
Uniform Contract Format:	I
Editor:	Marshall

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Personal notes.