Stating that contractors should not be prevented from recovering their indirect costs because a business combination occurred, Director of Defense Procurement Eleanor Spector approved a deviation from the requirements of FAR 31.203(c) that requires a share of indirect costs allocated to unallowable base costs be disallowed.

The deviation is needed because when a business combination (e.g. acquisition) is made under the “purchase method”, the transaction often results in increases (“step up”) of asset values over pre-combination book values.  FAR 31.205-52 disallows the stepped up value for purposes of calculating indirect rates while the stepped up value is included in the base since all base costs, whether allowable or not, should be included.  FAR 31.203(c) disallows that share of indirect expenses allocated to unallowable base costs (“all items properly included in an indirect cost base should bear a pro rata share of indirect costs irrespective of their acceptance as government contract costs”).  Ms Spector stated contractors should not be prevented from recovering these indirect costs made unallowable by FAR 31.203(c) and hence the deviation.  The deviation applies to all future contracts and to indirect rates under open cost-reimbursable contracts provided final rates have not been established as of September 29, 1999.

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