§ 256. — Allowable costs.
[Laws in effect as of January 24, 2002]
[Document not affected by Public Laws enacted between
January 24, 2002 and December 19, 2002]
[CITE: 41USC256]
TITLE 41--PUBLIC CONTRACTS
CHAPTER 4--PROCUREMENT PROCEDURES
SUBCHAPTER IV--PROCUREMENT PROVISIONS
Sec. 256. Allowable costs
(a) Indirect cost that violates FAR cost principle
An executive agency shall require that a covered contract provide
that if the contractor submits to the executive agency a proposal for
settlement of indirect costs incurred by the contractor for any period
after such costs have been accrued and if that proposal includes the
submission of a cost which is unallowable because the cost violates a
cost principle in the Federal Acquisition Regulation (referred to in
section 421(c)(1) of this title) or an executive agency supplement to
the Federal Acquisition Regulation, the cost shall be disallowed.
(b) Penalty for violation of cost principle
(1) If the executive agency determines that a cost submitted by a
contractor in its proposal for settlement is expressly unallowable under
a cost principle referred to in subsection (a) of this section that
defines the allowability of specific selected costs, the executive
agency shall assess a penalty against the contractor in an amount equal
to--
(A) the amount of the disallowed cost allocated to covered
contracts for which a proposal for settlement of indirect costs has
been submitted; plus
(B) interest (to be computed based on provisions in the Federal
Acquisition Regulation) to compensate the United States for the use
of any funds which a contractor has been paid in excess of the
amount to which the contractor was entitled.
(2) If the executive agency determines that a proposal for
settlement of indirect costs submitted by a contractor includes a cost
determined to be unallowable in the case of such contractor before the
submission of such proposal, the executive agency shall assess a penalty
against the contractor in an amount equal to two times the amount of the
disallowed cost allocated to covered contracts for which a proposal for
settlement of indirect costs has been submitted.
(c) Waiver of penalty
The Federal Acquisition Regulation shall provide for a penalty under
subsection (b) of this section to be waived in the case of a
contractor's proposal for settlement of indirect costs when--
(1) the contractor withdraws the proposal before the formal
initiation of an audit of the proposal by the Federal Government and
resubmits a revised proposal;
(2) the amount of unallowable costs subject to the penalty is
insignificant; or
(3) the contractor demonstrates, to the contracting officer's
satisfaction, that--
(A) it has established appropriate policies and personnel
training and an internal control and review system that provide
assurances that unallowable costs subject to penalties are
precluded from being included in the contractor's proposal for
settlement of indirect costs; and
(B) the unallowable costs subject to the penalty were
inadvertently incorporated into the proposal.
(d) Applicability of contract disputes procedure to disallowance of cost
and assessment of penalty
An action of an executive agency under subsection (a) or (b) of this
section--
(1) shall be considered a final decision for the purposes of
section 605 of this title; and
(2) is appealable in the manner provided in section 606 of this
title.
(e) Specific costs not allowable
(1) The following costs are not allowable under a covered contract:
(A) Costs of entertainment, including amusement, diversion, and
social activities, and any costs directly associated with such costs
(such as tickets to shows or sports events, meals, lodging, rentals,
transportation, and gratuities).
(B) Costs incurred to influence (directly or indirectly)
legislative action on any matter pending before Congress, a State
legislature, or a legislative body of a political subdivision of a
State.
(C) Costs incurred in defense of any civil or criminal fraud
proceeding or similar proceeding (including filing of any false
certification) brought by the United States where the contractor is
found liable or had pleaded nolo contendere to a charge of fraud or
similar proceeding (including filing of a false certification).
(D) Payments of fines and penalties resulting from violations
of, or failure to comply with, Federal, State, local, or foreign
laws and regulations, except when incurred as a result of compliance
with specific terms and conditions of the contract or specific
written instructions from the contracting officer authorizing in
advance such payments in accordance with applicable provisions of
the Federal Acquisition Regulation.
(E) Costs of membership in any social, dining, or country club
or organization.
(F) Costs of alcoholic beverages.
(G) Contributions or donations, regardless of the recipient.
(H) Costs of advertising designed to promote the contractor or
its products.
(I) Costs of promotional items and memorabilia, including
models, gifts, and souvenirs.
(J) Costs for travel by commercial aircraft which exceed the
amount of the standard commercial fare.
(K) Costs incurred in making any payment (commonly known as a
``golden parachute payment'') which is--
(i) in an amount in excess of the normal severance pay paid
by the contractor to an employee upon termination of employment;
and
(ii) is paid to the employee contingent upon, and following,
a change in management control over, or ownership of, the
contractor or a substantial portion of the contractor's assets.
(L) Costs of commercial insurance that protects against the
costs of the contractor for correction of the contractor's own
defects in materials or workmanship.
(M) Costs of severance pay paid by the contractor to foreign
nationals employed by the contractor under a service contract
performed outside the United States, to the extent that the amount
of severance pay paid in any case exceeds the amount paid in the
industry involved under the customary or prevailing practice for
firms in that industry providing similar services in the United
States, as determined under the Federal Acquisition Regulation.
(N) Costs of severance pay paid by the contractor to a foreign
national employed by the contractor under a service contract
performed in a foreign country if the termination of the employment
of the foreign national is the result of the closing of, or the
curtailment of activities at, a United States facility in that
country at the request of the government of that country.
(O) Costs incurred by a contractor in connection with any
criminal, civil, or administrative proceeding commenced by the
United States or a State, to the extent provided in subsection (k)
of this section.
(P) Costs of compensation of senior executives of contractors
for a fiscal year, regardless of the contract funding source, to the
extent that such compensation exceeds the benchmark compensation
amount determined applicable for the fiscal year by the
Administrator for Federal Procurement Policy under section 435 of
this title.
(2)(A) Pursuant to the Federal Acquisition Regulation and subject to
the availability of appropriations, an executive agency, in awarding a
covered contract, may waive the application of the provisions of
paragraphs (1)(M) and (1)(N) to that contract if the executive agency
determines that--
(i) the application of such provisions to the contract would
adversely affect the continuation of a program, project, or activity
that provides significant support services for employees of the
executive agency posted outside the United States;
(ii) the contractor has taken (or has established plans to take)
appropriate actions within the contractor's control to minimize the
amount and number of incidents of the payment of severance pay by
the contractor to employees under the contract who are foreign
nationals; and
(iii) the payment of severance pay is necessary in order to
comply with a law that is generally applicable to a significant
number of businesses in the country in which the foreign national
receiving the payment performed services under the contract or is
necessary to comply with a collective bargaining agreement.
(B) An executive agency shall include in the solicitation for a
covered contract a statement indicating--
(i) that a waiver has been granted under subparagraph (A) for
the contract; or
(ii) whether the executive agency will consider granting such a
waiver, and, if the executive agency will consider granting a
waiver, the criteria to be used in granting the waiver.
(C) An executive agency shall make the final determination regarding
whether to grant a waiver under subparagraph (A) with respect to a
covered contract before award of the contract.
(3) The provisions of the Federal Acquisition Regulation
implementing this section may establish appropriate definitions,
exclusions, limitations, and qualifications. Any submission by a
contractor of costs which are incurred by the contractor and which are
claimed to be allowable under Department of Energy management and
operating contracts shall be considered a ``proposal for settlement of
indirect costs incurred by the contractor for any period after such
costs have been accrued'', as used in this section.
(f) Required regulations
(1) The Federal Acquisition Regulation shall contain provisions on
the allowability of contractor costs. Such provisions shall define in
detail and in specific terms those costs which are unallowable, in whole
or in part, under covered contracts. The regulations shall, at a
minimum, clarify the cost principles applicable to contractor costs of
the following:
(A) Air shows.
(B) Membership in civic, community, and professional
organizations.
(C) Recruitment.
(D) Employee morale and welfare.
(E) Actions to influence (directly or indirectly) executive
branch action on regulatory and contract matters (other than costs
incurred in regard to contract proposals pursuant to solicited or
unsolicited bids).
(F) Community relations.
(G) Dining facilities.
(H) Professional and consulting services, including legal
services.
(I) Compensation.
(J) Selling and marketing.
(K) Travel.
(L) Public relations.
(M) Hotel and meal expenses.
(N) Expense of corporate aircraft.
(O) Company-furnished automobiles.
(P) Advertising.
(Q) Conventions.
(2) The Federal Acquisition Regulation shall require that a
contracting officer not resolve any questioned costs until the
contracting officer has obtained--
(A) adequate documentation with respect to such costs; and
(B) the opinion of the contract auditor on the allowability of
such costs.
(3) The Federal Acquisition Regulation shall provide that, to the
maximum extent practicable, a contract auditor be present at any
negotiation or meeting with the contractor regarding a determination of
the allowability of indirect costs of the contractor.
(4) The Federal Acquisition Regulation shall require that all
categories of costs designated in the report of a contract auditor as
questioned with respect to a proposal for settlement be resolved in such
a manner that the amount of the individual questioned costs that are
paid will be reflected in the settlement.
(g) Applicability of regulations to subcontractors
The regulations referred to in subsections (e) and (f)(1) of this
section shall require prime contractors of a covered contract, to the
maximum extent practicable, to apply the provisions of such regulations
to all subcontractors of the covered contract.
(h) Contractor certification required
(1) A proposal for settlement of indirect costs applicable to a
covered contract shall include a certification by an official of the
contractor that, to the best of the certifying official's knowledge and
belief, all indirect costs included in the proposal are allowable. Any
such certification shall be in a form prescribed in the Federal
Acquisition Regulation.
(2) An executive agency may, in an exceptional case, waive the
requirement for certification under paragraph (1) in the case of any
contract if the agency--
(A) determines in such case that it would be in the interest of
the United States to waive such certification; and
(B) states in writing the reasons for that determination and
makes such determination available to the public.
(i) Penalties for submission of cost known as not allowable
The submission to an executive agency of a proposal for settlement
of costs for any period after such costs have been accrued that includes
a cost that is expressly specified by statute or regulation as being
unallowable, with the knowledge that such cost is unallowable, shall be
subject to the provisions of section 287 of title 18 and section 3729 of
title 31.
(j) Contractor to have burden of proof
In a proceeding before a board of contract appeals, the United
States Court of Federal Claims, or any other Federal court in which the
reasonableness of indirect costs for which a contractor seeks
reimbursement from the United States is in issue, the burden of proof
shall be upon the contractor to establish that those costs are
reasonable.
(k) Proceeding costs not allowable
(1) Except as otherwise provided in this subsection, costs incurred
by a contractor in connection with any criminal, civil, or
administrative proceeding commenced by the United States or a State are
not allowable as reimbursable costs under a covered contract if the
proceeding (A) relates to a violation of, or failure to comply with, a
Federal or State statute or regulation, and (B) results in a disposition
described in paragraph (2).
(2) A disposition referred to in paragraph (1)(B) is any of the
following:
(A) In the case of a criminal proceeding, a conviction
(including a conviction pursuant to a plea of nolo contendere) by
reason of the violation or failure referred to in paragraph (1).
(B) In the case of a civil or administrative proceeding
involving an allegation of fraud or similar misconduct, a
determination of contractor liability on the basis of the violation
or failure referred to in paragraph (1).
(C) In the case of any civil or administrative proceeding, the
imposition of a monetary penalty by reason of the violation or
failure referred to in paragraph (1).
(D) A final decision--
(i) to debar or suspend the contractor,
(ii) to rescind or void the contract, or
(iii) to terminate the contract for default,
by reason of the violation or failure referred to in paragraph (1).
(E) A disposition of the proceeding by consent or compromise if
such action could have resulted in a disposition described in
subparagraph (A), (B), (C), or (D).
(3) In the case of a proceeding referred to in paragraph (1) that is
commenced by the United States and is resolved by consent or compromise
pursuant to an agreement entered into by a contractor and the United
States, the costs incurred by the contractor in connection with such
proceeding that are otherwise not allowable as reimbursable costs under
such paragraph may be allowed to the extent specifically provided in
such agreement.
(4) In the case of a proceeding referred to in paragraph (1) that is
commenced by a State, the executive agency that awarded the covered
contract involved in the proceeding may allow the costs incurred by the
contractor in connection with such proceeding as reimbursable costs if
the executive agency determines, in accordance with the Federal
Acquisition Regulation, that the costs were incurred as a result of (A)
a specific term or condition of the contract, or (B) specific written
instructions of the executive agency.
(5)(A) Except as provided in subparagraph (C), costs incurred by a
contractor in connection with a criminal, civil, or administrative
proceeding commenced by the United States or a State in connection with
a covered contract may be allowed as reimbursable costs under the
contract if such costs are not disallowable under paragraph (1), but
only to the extent provided in subparagraph (B).
(B)(i) The amount of the costs allowable under subparagraph (A) in
any case may not exceed the amount equal to 80 percent of the amount of
the costs incurred, to the extent that such costs are determined to be
otherwise allowable and allocable under the Federal Acquisition
Regulation.
(ii) Regulations issued for the purpose of clause (i) shall provide
for appropriate consideration of the complexity of procurement
litigation, generally accepted principles governing the award of legal
fees in civil actions involving the United States as a party, and such
other factors as may be appropriate.
(C) In the case of a proceeding referred to in subparagraph (A),
contractor costs otherwise allowable as reimbursable costs under this
paragraph are not allowable if (i) such proceeding involves the same
contractor misconduct alleged as the basis of another criminal, civil,
or administrative proceeding, and (ii) the costs of such other
proceeding are not allowable under paragraph (1).
(6) In this subsection:
(A) The term ``proceeding'' includes an investigation.
(B) The term ``costs'', with respect to a proceeding--
(i) means all costs incurred by a contractor, whether before
or after the commencement of any such proceeding; and
(ii) includes--
(I) administrative and clerical expenses;
(II) the cost of legal services, including legal
services performed by an employee of the contractor;
(III) the cost of the services of accountants and
consultants retained by the contractor; and
(IV) the pay of directors, officers, and employees of
the contractor for time devoted by such directors, officers,
and employees to such proceeding.
(C) The term ``penalty'' does not include restitution,
reimbursement, or compensatory damages.
(l) ``Covered contract'' defined
(1) In this section, the term ``covered contract'' means a contract
for an amount in excess of $500,000 that is entered into by an executive
agency, except that such term does not include a fixed-price contract
without cost incentives or any firm, fixed price contract for the
purchase of commercial items.
(2) Effective on October 1 of each year that is divisible by five,
the amount set forth in paragraph (1) shall be adjusted to the
equivalent amount in constant fiscal year 1994 dollars. An amount, as so
adjusted, that is not evenly divisible by $50,000 shall be rounded to
the nearest multiple of $50,000. In the case of an amount that is evenly
divisible by $25,000 but is not evenly divisible by $50,000, the amount
shall be rounded to the next higher multiple of $50,000.
(m) Other definitions
In this section:
(1) The term ``compensation'', for a fiscal year, means the
total amount of wages, salary, bonuses and deferred compensation for
the fiscal year, whether paid, earned, or otherwise accruing, as
recorded in an employer's cost accounting records for the fiscal
year.
(2) The term ``senior executives'', with respect to a
contractor, means the five most highly compensated employees in
management positions at each home office and each segment of the
contractor.
(3) The term ``fiscal year'' means a fiscal year established by
a contractor for accounting purposes.
(June 30, 1949, ch. 288, title III, Sec. 306, as added Pub. L. 100-700,
Sec. 8(a)(1), Nov. 19, 1988, 102 Stat. 4634; amended Pub. L. 103-355,
title II, Sec. 2151, Oct. 13, 1994, 108 Stat. 3309; Pub. L. 105-85, div.
A, title VIII, Sec. 808(b), Nov. 18, 1997, 111 Stat. 1836; Pub. L. 105-
261, div. A, title VIII, Sec. 804(b), Oct. 17, 1998, 112 Stat. 2083.)
Prior Provisions
A prior section 256, act June 30, 1949, ch. 288, title III,
Sec. 306, 63 Stat. 396, related to waiver of liquidated damages, prior
to repeal by act Sept. 5, 1950, ch. 849, Sec. 10(b), 64 Stat. 591, eff.
July 1, 1949. See section 256a of this title.
Amendments
1998--Subsec. (m)(2). Pub. L. 105-261 amended par. (2) generally.
Prior to amendment, par. (2) read as follows: ``The term `senior
executive', with respect to a contractor, means--
``(A) the chief executive officer of the contractor or any
individual acting in a similar capacity for the contractor;
``(B) the four most highly compensated employees in management
positions of the contractor other than the chief executive officer;
and
``(C) in the case of a contractor that has components which
report directly to the contractor's headquarters, the five most
highly compensated individuals in management positions at each such
component.''
1997--Subsec. (e)(1)(P). Pub. L. 105-85, Sec. 808(b)(1), added
subpar. (P).
Subsec. (m). Pub. L. 105-85, Sec. 808(b)(2), added subsec. (m).
1994--Pub. L. 103-355 amended section generally, substituting
present provisions for provisions outlining limitations on allowability
of costs incurred by contractors in criminal, civil, or administrative
proceedings relating to violations of Federal or State statutes or
regulations, which resulted in dispositions against contractors based on
such violations.
Effective Date of 1998 Amendment
Amendment by Pub. L. 105-261 applicable with respect to costs of
compensation of senior executives incurred after Jan. 1, 1999, under
covered contracts entered into before, on, or after Oct. 17, 1998, see
section 804(d) of Pub. L. 105-261, set out as a note under section 2324
of Title 10, Armed Forces.
Effective Date of 1997 Amendment
Amendment by Pub. L. 105-85 effective on date that is 90 days after
Nov. 18, 1997, and applicable with respect to costs of compensation
incurred after Jan. 1, 1998, under covered contracts entered into
before, on, or after Nov. 18, 1997, see section 808(e) of Pub. L. 105-
85, set out as an Effective Date note under section 435 of this title.
Effective Date of 1994 Amendment
For effective date and applicability of amendment by Pub. L. 103-
355, see section 10001 of Pub. l. 103-355, set out as a note under
section 251 of this title.
Effective Date
Section effective with respect to contracts awarded after Nov. 19,
1988, see section 8(e) of Pub. L. 100-700, set out as an Effective and
Termination Dates of 1988 Amendment note under section 2324 of Title 10,
Armed Forces.
Revision of Cost Principle Relating to Entertainment, Gift, and
Recreation Costs for Contractor Employees
Section 2192 of Pub. L. 103-355 provided that:
``(a) Costs Not Allowable.--(1) The costs of gifts or recreation for
employees of a contractor or members of their families that are provided
by the contractor to improve employee morale or performance or for any
other purpose are not allowable under a covered contract unless, within
120 days after the date of the enactment of this Act [Oct. 13, 1994],
the Federal Acquisition Regulatory Council prescribes amendments to the
Federal Acquisition Regulation specifying circumstances under which such
costs are allowable under a covered contract.
``(2) Not later than 90 days after the date of the enactment of this
Act, the Federal Acquisition Regulatory Council shall amend the cost
principle in the Federal Acquisition Regulation that is set out in
section 31.205-14 of title 48, Code of Federal Regulations, relating to
unallowability of entertainment costs--
``(A) by inserting in the cost principle a statement that costs
made specifically unallowable under that cost principle are not
allowable under any other cost principle; and
``(B) by striking out `(but see 31.205-1 and 31.205-13)'.
``(b) Definitions.--In this section:
``(1) The term `employee' includes officers and directors of a
contractor.
``(2) The term `covered contract' has the meaning given such
term in section 2324(l) of title 10, United States Code (as amended
by section 2101(c)), and section 306(l) of the Federal Property and
Administrative Services Act of 1949 (as added by section 2151) [41
U.S.C. 256(l)].
``(c) Effective Date.--Any amendments to the Federal Acquisition
Regulation made pursuant to subsection (a) shall apply with respect to
costs incurred after the date on which the amendments made by section
2101 apply (as provided in section 10001) [set out as an Effective Date
of 1994 Amendment note under section 251 of this title]) or the date on
which the amendments made by section 2151 apply (as provided in section
10001), whichever is later.''
Section Referred to in Other Sections
This section is referred to in section 435 of this title.
