A quick internet search will yield approximately 89 meanings for “FAR”, from “False Alarm Ratio” to “Fatal Accident Rate”. In the GovCon space, we are generally concerned with only one of them, the Federal Acquisition Regulations (FAR).
Federal Acquisition Regulations (FAR)
Providing services or products to the government may allow you to diversify your revenue sources, expand profitability, increase networking capabilities, and grow, however, the FAR is a complex set of rules governing the federal government’s purchasing process. Winning or participating in a federal contract also means complying with these rules. They ensure standard, consistent purchasing procedures, to be conducted in a fair and impartial manner. There may be increased legal and accounting costs if you don’t take the time to understand the provisions in your contract, which often reference areas of the FAR.
Federal contracts contain or reference many provisions unique to the government. These provisions include requirements for:
- Changing the scope of work
- Terminating contracts
- Making payments
- Conducting inspection, testing, and acceptance of delivered goods and services
It is a good idea to understand the references to the FAR for the contract, so you can understand your specific obligations.
The Federal Acquisition Regulations (FAR) consist of 53 sections, with each section dealing with an aspect of the acquisition process. General government acquisition matters and acquisition planning are covered in the first 12 sections, with the remaining 41 sections dealing with labor laws, contract administration and other related topics.
Each governmental agency is allowed to issue its own ‘acquisition supplement’ to the FAR. This is where we get the DFARS (Defense Federal Acquisition Regulation Supplement) and the GSARS (General Services Acquisition Regulation Supplement). These documents are only supplements to the FAR, and they do not replace it, they only add to or modify portions of it. When you are dealing with a governmental agency, you must ask them which regulations (and where to find them) are applicable to their acquisition process.
You should also keep in mind that some agencies have developed their own set of regulations. The Federal Aviation Agency (FAA) has the authority from Congress to develop its own regulations, as do some ‘quasi-governmental agencies. The U.S. Postal Service and the Tennessee Valley Authority aren’t bound by FAR, but they adapted many of the FAR in their own regulations.
Cost Accounting Standards
Your accounting department frequently finds themselves buried in FAR 30 – Cost Accounting Standards Administration or FAR 31, which covers Cost Principles and Procedures.
The Cost Accounting Standards (CAS) covered in FAR 30 are not applicable to all contractors or contracts, however, once a contract is CAS covered, it remains CAS covered. Common CAS exemptions may include:
- Contract or subcontracts not in excess of the Truth in Negotiations Act (TINA) threshold of $700,000
- Sealed bids
- Awards for commercial items
- Prices set by law or regulations
- Firm Fixed Price incentive awards
Unallowable costs must be identified and excluded from all billings, claims and proposals by reducing the indirect cost pools. Expressly unallowable costs include advertising, bad debts, contributions, entertainment, fines, penalties, interest expense, goodwill, alcohol, lobbying, social club dues and memberships, employee gifts (including holiday parties and picnics) etc.
In order for a cost to be allowed under FAR 31, it must be:
- Reasonable – cost does not exceed that which would be incurred by a prudent person in the conduct of competitive business
- Allowable, and
- Allocable – cost is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship, incurred specifically for the contract, benefits both the contract and other work (but can be distributed reasonably to them) or is necessary to the overall operation of the business
You may be able to negotiate special treatment of certain costs with your contracting officer. When appropriate, these should be documented in writing, identify the specific contract or group of contracts to which they apply and include the duration of the exception. Common examples may include use charges for fully depreciated assets, idle plant costs, travel and relocation costs.
If you would like to discuss your current or future contract and how the FAR may affect the company’s recordkeeping, please contact YHB (Yount, Hyde & Barbour, P.C.) Principal Tom Moler at email@example.com or 703-777-7739.
About the Author
As a principal of the firm in its Leesburg office, Tom specializes in providing accounting, tax and business consulting to closely held companies, corporations, partnerships and limited liability companies. He champions our Professional Services Firm niche and our Government Contracting niche. He is a past Chairman and currently serves on the board of directors, executive and GovCon committee of the Loudoun County Chamber of Commerce.