Though legal and business reasons often largely determine the particular type of arrangement, government contractors creating these new entities need to be aware of the accounting, cost allowability and cost allocability issues affecting their creation. The Federal Acquisition Regulations, particularly the cost principles of Part 31, does not separately address cost allowability under contracts performed by joint ventures or SBUs.  Rather it is necessary to identify those cost principles that most affect “covered” contracts.

Organization Costs (FAR 31.205-27). This cost principle makes costs unallowable that are in connection with the “organization or reorganization” of the “corporate structure” of a business.  Unfortunately, these terms are not defined but it would seem this cost principle would apply to the organization of a corporate joint venture or corporate subsidiary SBU. On the other hand, costs related to other organizations that do not change the “corporate structure” or alter the rights of security holders would be allowable if reasonable in amount. These would include a partnership joint venture or an unincorporated SBU.

Individual DCAA auditors may attempt to take a more expansive view making costs of all joint ventures and SBUs unallowable but they should be reminded of the distinctions above that affect the corporate structure and those that do not.  Some may also argue that such organization costs are unallowable because they bear no relationship to the work of the contractor under government contracts.  This rationale would be clearly inappropriate when formation of these new arrangements help the contractor compete for and perform their government contracts more effectively and efficiently.

IR&D & B&P Costs (FAR 31.205-18). Changes to the FAR 31.205-18) in the 1990’s and subsequent changes to the DCAA Contract Audit Manual (7-1707a) have made IR&D costs in support of cooperative arrangements (of which joint ventures are explicitly included) allowable. Contractors should be assured that effort qualifying as IR&D in the absence of a joint venture will qualify when incurred in behalf of a joint venture.

Interorganizational Transfers (FAR 31.205-26). A joint venture or SBU commonly purchases materials, supplies, and services from its co-venturers/parent and such recovery is limited by this “Material Costs” regulation. The cost principle allows transfers at price (including profit) rather than cost only when (1) it is the established practice of the transferring organization to price its interorganizational transfers at other than cost (2) the item being transferred qualifies for an exemption under FAR 15.804-1 (e.g. established catalog or market prices, commercial item) and (3) the CO has not determined the price to be unreasonable.

Rental Costs (FAR 31.205-36). To the extent a joint venture or SBU leases real or personal property, the rental charges will likely be limited to the “normal costs of ownership” – depreciation, taxes, insurance, facilities capital cost of money and maintenance. The only exception to this rule is for personal property leased from a related organization that has an established practice of leasing the same type of property to unaffiliated entities.

Legal and Other Proceedings Costs (FAR 31.205-47). This is the only cost principle that expressly addresses joint ventures. The principle disallows the costs of litigation between co-venturers unless the disputed agreement or actions are incurred as a result of compliance with specific terms and conditions of the contract or written instructions from the CO. Disallowed costs include not only outside lawyers and consultants but also the directly associated in-house management, accounting, administrative and clerical personnel costs.

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