FAR Part 31 Cost Principles. The FAR provides that the cost principles in FAR 31 are to be used in determining settlement costs under traditional government contracts. T of Cs have been held to convert a fixed-price contract to a cost type for purposes of ascertaining the contractor’s allowable termination costs. However, contract terminations have been held to require special treatment of costs so the FAR added a “termination costs” cost principle in conjunction with the other cost principles in FAR 31. This termination cost principle establishes the following rules:
1. Common items are unallowable unless the contractor submits evidence the items could not be retained at cost without sustaining a loss. Common items are items reasonably usable on the contractor’s other work.
2. Costs continuing after termination, despite the contractor taking reasonable efforts to eliminate them, are allowable. Idle facilities and idle capacity are examples of such costs.
3. Initial costs that are not fully absorbed because of the termination are allowable. For example, “starting load costs” such as learning costs and training or “preparatory costs” that would all have been absorbed by all products or services envisioned in the contract cannot be fully absorbed because the termination reduced these items.
4. Loss of useful value of special tooling and special machinery and equipment is generally allowable to the extent they resulted from the termination. For example, the undepreciated asset value caused by the termination would be a way of calculating the lost useful value.
5. Rental costs under unexpired leases are allowable for a reasonable period to the extent they cannot be avoided and were necessary for contract performance.
6. Costs of alterations of lease property are allowable when alterations were necessary for performance.
7. Subcontractor claims are allowable where an appropriate share of indirect expenses may be allocated to the costs.
8. Settlement expenses for preparing and presenting the termination claim as well as termination and settlement of the subcontracts are allowable. These costs can include in-house personnel and outside experts such as consultants and attorneys.
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