FAR 31.205-11 Depreciation: Owned-Equipment Checklist for Federal Jobs
When contractors price work involving plant facilities, vehicles, or heavy machinery, determining the allowability of capital equipment costs is critical. Under FAR 31.205-11 Depreciation, the federal government treats asset depreciation as an allowable contract cost, but it applies specific limitations on depreciable bases, salvage values, and accounting methods. Estimators assembling machinery charges for their general conditions estimate or adjusting company-wide indirect pools must ensure their accounting methods align with federal cost principles. This checklist-driven guide outlines how owned assets and capital leases are treated on federal jobs.
Checklist Item 1: Establish Depreciable Costs and Residual Value Limits
Before applying depreciation costs to a federal bid or cost proposal, check whether your asset calculations satisfy the salvage and basis thresholds under FAR 31.205-11(a):
- Evaluate the 10 percent salvage threshold: For tangible personal property, you are only required to incorporate estimated residual values into depreciable cost calculations if the residual value exceeds 10 percent of the capitalized cost.
- Check your depreciation calculation method: If your company relies on either the declining balance method or the class life asset depreciation range system, you do not have to subtract residual value from capitalized cost to establish depreciable costs.
- Enforce the residual value floor: You cannot claim any depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value. Any depreciation charged beyond that floor is unallowable.
Checklist Item 2: Align Contract Depreciation with Financial Accounting
Federal procurement rules require consistency between commercial reporting and contract costing. Under FAR 31.205-11(c), whenever a contract is not subject to a specific cost accounting standard for the depreciation of tangible capital assets, allowable depreciation cannot exceed the figure reported for financial accounting purposes.
In addition, allowable depreciation must be calculated using policies and procedures consistent with those used by the same business segment for non-Government work. Bidders cannot introduce special depreciation schedules or accelerated rates purely for federal projects. When contractors have contracts subject to the cost accounting standard for depreciation of tangible capital assets, they must comply with that standard on all fully CAS-covered work. Contractors may also choose to adopt the standard across all other contracts, provided they maintain that choice until final acceptance of deliverable items across all open negotiated Government contracts. When reviewing equipment fleet rates or updating owned-equipment rates, your underlying financial accounting records establish the ceiling for allowable contract costs.
Checklist Item 3: Filter Out Zero-Cost Property and Fully Depreciated Assets
Contractors cannot recover depreciation or rental costs on assets that were already paid for or acquired without contractor expense:
- Zero-cost Government property: Under FAR 31.205-11(d), depreciation, rental, or use charges are completely unallowable on property acquired from the Government at no cost by the contractor, or by any division, subsidiary, or affiliate under common control.
- Fully depreciated equipment: FAR 31.205-11(f) bars depreciation or rental charges on property already fully depreciated by the contractor or affiliated entities under common control.
- Negotiating use charges: While standard depreciation is barred on fully depreciated equipment, the regulation permits the parties to agree upon a reasonable charge for using fully depreciated property pursuant to 31.109(h)(2).
When negotiating an allowable use charge for an asset that has been fully depreciated, the contractor and contracting officer must consider four specific factors: the asset's original cost, total estimated useful life at the time of negotiations, the effect of increased maintenance charges or decreased operational efficiency due to age, and the amount of depreciation previously charged to Government contracts or subcontracts.
Checklist Item 4: Screen Asset Impairments and Reacquired Property
When assets undergo financial adjustments or financing restructurings, specific cost caps apply under FAR 31.205-11(g):
- Impairment write-downs: If an asset is written down from carrying value to fair value due to impairments caused by events or changed circumstances, allowable depreciation is limited to the amounts that would have been allowable had the asset never been written down (see 31.205-16(g)). However, this rule does not prevent depreciation changes resulting from permissible adjustments in estimates of service life, consumption of services, or residual value. Contractors must also observe 31.205-52.
- Reacquired property in sale and leaseback: If a contractor reacquires property previously subject to a sale and leaseback arrangement, allowable depreciation must be based on the net book value on the date the contractor originally became a lessee. That value is adjusted for any allowable gain or loss recognized under 31.205-16(b), less any depreciation expense included in the limitation calculations under 31.205-11(h)(1) and 31.205-36(b)(2).
- Reacquired property qualification: Property qualifies under this provision if it generated depreciation expense or cost of money considered under 31.205-11(h)(1) and 31.205-36(b)(2) during the most recent accounting period before reacquisition.
Checklist Item 5: Review Capital Leases and Common-Control Transfers
Under FAR 31.205-11(h), capital leases defined under Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) 840, Leases, are governed by depreciation principles rather than operating lease rules under 31.205-36:
- Capital lease treatment: FASB ASC 840 requires capital leases to be treated as purchased assets. The capitalized value must be distributed across the asset's useful life as depreciation charges, or across the lease life as amortization charges.
- Sale and leaseback caps: Lease costs in a sale and leaseback arrangement are allowable only up to the amount that would have been allowed had the contractor kept title, calculated from the asset's net book value on the date of becoming a lessee, adjusted for gain or loss under 31.205-16(b).
- Related-party leases: If capital lease terms are significantly influenced because the lessor and lessee are related, allowable depreciation charges cannot exceed what would have occurred in a lease between unrelated parties.
- Allowance at price: For any item meeting the criteria for allowance at price under 31.205-26(e), depreciation may be based on that price if the same policies and procedures are used across all business of the organization under common control.
Sources
Published October 31, 2026. No affiliate links on this page. Facts come from the sources linked above; check them for updates.