• Regulation

FAR 31.109 addresses advance agreements. It states such agreements should be established before costs are incurred to avoid confusion and clarify treatment of costs by a contractor.  Advance agreements cannot make an otherwise unallowable cost allowable but is intended to resolve in advance differences of opinions on the allowability or allocability of specific costs. Though not exhaustive the regulation identifies sixteen specific cost topics that are good candidates for advance agreements.  In our experience the following are most common: compensation, charges for depreciated assets, pre-contract costs, royalties and patents, selling and distribution costs, travel and relocation, idle facilities and capacity, severance pay, plant conversion, professional services, indirect costing methodologies, public relations and advertising, training and most common these days, independent research and development costs.

• Process

So not to “muddy the water” it is usually not advisable to put forth advance agreement proposals before contract award but rather, after contract award but well in advance of either incurring the expense or reporting the cost (e.g. claims, terminations, incurred cost proposals, forward pricing rates for other contracts). A straight forward narrative describing how the cost(s) will be treated addressed to the appropriate ACO is the best approach. Justification for the treatment and allusion to the benefits for the government is advisable. The appropriate ACO is either the contractor’s cognizant ACO or if the agreement affects only one contract then the ACO over that contract. Since it is the ACO’s decision, I would not advise sending copies to other agencies such as government auditors unless their approval is likely.  Though it is not uncommon to have DCAA review the proposal, it is also common for the ACO to by-pass DCAA and in consultation with their price analyst, to make a decision. In its guidance, DCAA instructs its auditors to incorporate all advance agreements in its reviews but if they believe such agreements are “not in the government’s interest” to express such an opinion in their audit report.

• Examples

For fixed price contracts usually awarded on a competitive basis, no cost and pricing data is normally submitted. Though many veteran contractors may have approved government accounting practices often committed to writing (e.g. disclosure statements, written procedures) more and more contractors do not so when it comes to proposing additional work based on cost estimates or preparing a claim or termination an advance agreement detailing contract costing treatment of certain costs is advisable to avoid substantial questioned costs later.  Several cost categories that contractors will want to consider under such circumstances are:

1. Direct vs. Indirect Charging. Though veteran government contractors have established criteria for direct and indirect charging, newer contractors and commercial subsidiaries of veteran contractors need to establish how, for example, computer services  will be treated.

2. Home Office G&A Rates and Pools.  Just about every contractor has their own unique ways of accumulating and allocating general and administrative costs (either at the business unit, intermediate home office or corporate level).  Mark up, percentage or daily rates may need to be established for claims based on extra work, delays, etc. These rates can be established either before or after contract award and will largely avoid protracted battles about cost allowability and allocability issues later.

3. Field Office Costs.  Overhead rates, often referred to as general condition costs for construction work and project support costs for non-construction work, are commonly recovered on both a percentage or daily rate basis.  Advanced rates using either method can be established so one method used on a prior contract need not be the presumed method for all government contracts.

4. Equipment Pricing. Whereas the contract commonly specifies equipment or supply prices when in operation, costing idle assets can be a highly disputed matter for purposes of quantifying claims. Such disputes can be avoided by proposing rates for extra work or delayed work.

5. Other Items. Other items to consider for advanced agreements include (a) fringe benefit rates (b) self insurance costs (c) overhead rates for one business unit or segment rather than for the company as a whole and (d) individual company rates when two or more companies are involved in a joint venture.

In addition to pricing items for contracts not subject to cost analysis there are the more traditional contracts requiring cost based data either for forward pricing or incurred cost purposes where advanced agreements need to be considered. In our experience, each of the cost items identified above in the Regulation section should be considered for advance agreement.  For example, DCAA will generally not recognize costs of idle facilities for longer than one year where such costs may need to be incurred longer or expensive literature used for disseminating information may be questioned as unallowable advertising expenses.  Some good candidates for advance agreements are:

1. Rate Structures. Whereas proposed rates may be based on a business segment, the contractor may plan on performing most of the contract by a specific division or group within the segment having different rates. These differences may need to be specified in the contract or in a subsequent advance agreement. In addition, it may be advisable to establish a separate rate such as a subcontract administrative or material management rate for a contract where no such rates for other contracts exist.

2. Rental Transactions. Assets that were charged to government contracts on the basis of depreciation, maintenance, cost of money, etc. would be changed under circumstances where, for example, a sale/ leaseback arrangement occurred where the assets would be charged on the basis of a rental agreement. In addition, arrangements where rental costs might be questioned because of perceived related party arrangements or unequal lease provisions (e.g. higher rents at end of lease) are excellent candidates for advance agreements.

3. Compensation levels. Though the FAR has established ceilings on executive compensation, DCAA commonly questions compensation levels for other individuals and classes of employees usually based on survey data. An advance agreement providing justification for levels of compensation likely to be disputed later can save a lot of work in this rather nebulous area.

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To discuss your needs, contact Bill Lennett, Principal, at 1-925-362-0712 or email him at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .

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