FAR 31.105 Cost Principles: Pricing Equipment and Overhead
When trade subcontractors and general contractors negotiate adjustments on federal real property projects, the government does not evaluate pricing solely on open-market estimates. Under FAR 31.105, federal contracting officers judge construction and architect-engineer contract costs using specific regulatory rules. This walk-through examines how these cost principles govern owned machinery, rental gear, jobsite indirects, and home office overhead during cost negotiations.
The Scenario: Negotiating a Federal Modification
Consider a hypothetical interior and framing contractor performing work on a federal building alteration. During performance, the contracting agency issues a unilateral direction requiring extensive partition revisions, and the parties must negotiate a bilateral equitable adjustment. Because the pricing of this modification requires cost analysis, the contracting officer applies the cost principles in FAR subpart 31.2, as modified by FAR 31.105.
The contractor submits a cost breakdown that covers heavy handling machinery, rented scissor lifts, temporary field offices, jobsite supervision, and company overhead. When evaluating these line items for pricing change orders, the contracting officer examines each category against explicit regulatory benchmarks.
Judging Owned Construction Equipment Rates
In our hypothetical scenario, the contractor seeks reimbursement for company-owned equipment deployed to handle framing materials. Under FAR 31.105, allowable ownership and operating expenses are evaluated through a strict hierarchy:
- Actual accounting data: Actual cost data must be used when the contractor's accounting records can establish both ownership and operating costs for each individual piece of equipment or group of similar serial or series machinery.
- Predetermined rate schedules: When actual records cannot establish these costs, the agency may direct the use of predetermined schedules, such as the Construction Equipment Ownership and Operating Expense Schedule published by the U.S. Army Corps of Engineers, industry-sponsored guides, or commercial schedules.
- Mandatory schedule adjustments: Predetermined schedules cannot make unallowable expenses allowable. If a schedule incorporates replacement costs, unallowable interest expenses, or improper cost-of-money computations, the contracting officer must adjust the rates to exclude those unallowable factors.
- Exclusion of duplicate items: Operating rate schedules typically cover fuel, grease, oil, filters, servicing, maintenance, parts, and tire wear. However, mobilization, demobilization, direct labor, profit, and overhead are generally omitted and require separate evaluation. Furthermore, any costs covered by the schedule must be removed from the contractor's other direct and indirect expense pools.
- Suspension periods: If the government suspends work, equipment ownership allowances cannot exceed the standby cost established by the schedule or contract terms.
Handling Commercial Equipment Rentals
For elevated drywall installation in the hypothetical project, the trade contractor rents aerial work platforms from a commercial equipment supplier. Under FAR 31.105, reasonable rental costs from third-party commercial sources are allowable.
However, the regulation draws a sharp line regarding repairs and maintenance:
- Allowable maintenance: Routine maintenance, running repairs, and minor servicing necessary to operate the rented machinery are allowable if they are not already covered in the baseline rental invoice.
- Unallowable repairs: Expenses incident to major repairs and overhaul of rented equipment are expressly unallowable.
- Common-control rentals: If the contractor rents equipment from an affiliated business entity, division, or subsidiary under common control, the allowable cost cannot be billed at standard retail rates and must instead be evaluated under FAR 31.205-36(b)(3).
Jobsite Overhead and Temporary Facilities
Our scenario also includes ongoing expenses for field coordination and general conditions. Estimators handling federal work frequently balance jobsite costs against central office support, a topic often explored when estimating general conditions.
Under FAR 31.105, expenses incurred at the jobsite that are incident to performing the work are allowable as direct or indirect costs. These jobsite expenses include superintendence, clerical support, timekeeping, site engineering, utilities, supplies, material handling, restoration, and cleanup. To remain allowable, the contractor must charge these items using accounting practices that are established and consistently followed across all company projects.
Additionally, costs incurred to acquire the temporary use of land, structures, and facilities are allowable, after subtracting any applicable credits. Expenses required to fabricate or construct temporary field offices, storage sheds, or jobsite facilities are likewise allowable, less any credits received.
Preventing Overhead Disallowance with Advance Agreements
Because construction projects vary significantly in location, duration, size, and technical nature, allocating central administration costs can lead to major audit friction. To establish clarity before disputes emerge, FAR 31.105 highlights the use of advance agreements under FAR 31.109.
In our hypothetical negotiation, entering an advance agreement allows the contractor and the government to formalize an agreed methodology for home office overhead, partners' compensation, consultant fees, and equipment usage expenses. Securing this written understanding avoids subsequent cost disallowances when settling the final contract adjustment.
Sources
FAR 31.105 Construction and architect-engineer contracts. | Acquisition.GOV
Published October 31, 2026. No affiliate links on this page. Facts come from the sources linked above; check them for updates.