To fix the problem of prior rules not clearly addressing the treatment of materials, the new rule now says “materials” are direct materials, subcontracts for supplies and incidental services (services for which there is no labor category specified), other direct costs (ODCs) and indirect costs. Materials meeting the definition of commercial items may be reimbursed at the established catalog or market price while materials not meeting this definition will be reimbursed at actual cost.
FAR Commercial T&M Rule. For contractor-furnished direct material and “incidental services” that meet the definition of commercial items in FAR 2.201 the price paid will be the established catalog or market price, adjusted to reflect the quantities being purchased and any modifications required under the contract. The provision does not limit material to those owned by the contractor so third party materials which the prime contractor acts as a reseller may also apply. If the direct materials or incidental services do not meet the commercial item definition the price to be paid is the cost to the prime contractor - i.e. it does not include profit or G&A. Even though reimbursed at “cost”, those items under the commercial T&M rule are not subject to the FAR Part 31 cost principles.
For ODCs such as travel, computer usage charges, etc agencies may reimburse contractors based on cost but only for the types of ODCs designated in the contract. So, ODCs must be identified up front in the contract. For indirect costs not already included in the fixed hourly rates (e.g. material handling costs) agencies may reimburse contractors at a fixed amount allocated on a pro-rata basis set forth in the contract payment schedule. Contractors bear the risk of the indirect costs exceeding the fixed amount negotiated and specified in the contract.
FAR Noncommercial T&M Rule. For contractorfurnished direct materials and incidental services, a revised FAR payments clause allows payments for commercial items owned by the contractor to be paid by established catalog or market prices. If not owned, then payment will be at the amount of cost incurred by the contractor subject to FAR cost principles and the Allowable Cost and Payments clause at FAR 52.216-7. The latter clause expressly says the government does not pay profit or fee on materials except for the commercial item exception – contractor may recover such fees through their fixed hourly labor rates. For ODCs and indirect costs, the contractor may include such allocable costs (e.g. handling rates) to the extent they are comprised only of costs that are clearly excluded from the hourly rate and allocated in accordance with the contractor’s established accounting practices. Indirect costs may not be applied to subcontract labor that is paid at the hourly rates.
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