FAR 31.205-26 Material Costs: A Step-by-Step Estimator Walkthrough

By QuickBidSetup Editorial Team · Published October 31, 2026 · Sources linked below

Estimating material costs on federal projects requires a clear grasp of government cost principles. Whether you are assembling a proposal for an interiors package or pricing modifications, FAR 31.205-26 dictates exactly how raw supplies, warehouse inventory, scrap credits, and inter-affiliate transfers must be calculated. Trade contractors who simply drop standard commercial material quotes into federal bids risk pricing disputes or audit adjustments. Walking through the regulation step by step ensures your estimates remain compliant and defensible.

Step 1: Define Direct Items and Collateral Costs

The first step in building a compliant material estimate is recognizing what constitutes a material cost under the regulation. Federal rules define material costs to encompass raw materials, parts, subassemblies, components, and manufacturing supplies. This applies whether the contractor purchases the goods from an outside supplier or manufactures them internally.

In addition to base purchase prices, estimators can include collateral items that directly support getting the materials ready for performance. Specifically, the regulation permits including inbound transportation and in-transit insurance. When coordinating your deliveries for framing track, gypsum boards, or ceiling grid, capture these freight and transit coverage figures directly inside your material totals rather than leaving them unallocated or buried in unrelated line items.

Step 2: Factor in Spoilage, Defective Work, and Reasonable Overruns

Field installations never match nominal drawing dimensions down to the exact stud or board. In computing material figures, federal cost principles explicitly instruct contractors to consider reasonable overruns, spoilage, or defective work. Estimators do not have to price materials as if zero jobsite waste occurs.

However, this allowance comes with an important boundary: you cannot claim allowances for defective work if the contract includes a specific provision governing how defective work is inspected and corrected. When applying standard job factors—such as those reviewed in our guide on waste factors in takeoffs—ensure that your scrap percentages remain defensible, realistic, and consistent with the explicit terms of the solicitation.

Step 3: Apply Mandatory Discounts, Rebates, and Scrap Credits

Under FAR 31.205-26, material costs cannot simply reflect gross vendor invoice figures. The contractor is required to adjust material costs for income and other credits. Estimators must account for the following credits:

• Available trade discounts
• Refunds, rebates, and allowances
• Cash discounts offered by suppliers
• Credits received for scrap and salvage
• Credits for materials returned to vendors

The regulation allows flexibility in how these credits are handled on the balance sheet: you can apply the credit directly to the cost of the material itself, or allocate it as a credit to indirect cost pools. There is also an exception for prompt-payment discounts: if your firm can demonstrate that failing to take cash discounts was reasonable under the circumstances, you do not have to credit those lost discounts back to the government.

Step 4: Select an Approved Method for Stores Inventory and Jobsite Purchases

How materials are sourced dictates how they must be charged under federal rules. When items are purchased specifically for and are identifiable solely with performance on a particular contract, the actual purchase cost of those materials should be charged directly to that contract.

If your business pulls stock out of internal storage yards or company warehouses, different rules apply. You may price issues from stores using any generally recognized method of pricing material, provided that your selected method is consistently applied across operations and produces equitable results. Furthermore, contractors may incorporate reasonable adjustments arising from physical inventory differences compared against book inventory, as long as those physical inventory adjustments relate to the contract performance period.

Step 5: Structure Inter-Affiliate and Interorganizational Transfers

Drywall, framing, or interior contractors that operate multiple divisions, subsidiaries, or affiliated entities under common control must pay close attention when shifting materials between entities. As a baseline rule, allowances for all materials, supplies, and services transferred between divisions, subdivisions, subsidiaries, or affiliates under common control must be priced on the basis of actual costs incurred in accordance with federal cost principles.

A price-based transfer—rather than a cost-based transfer—is permissible only when two strict conditions are met:

1. It is the established practice of the transferring organization to price interorganizational transfers at other than cost for commercial work.
2. The item qualifies for an exception under FAR 15.403-1(b), and the contracting officer has not determined the price to be unreasonable.

When transferring a commercial product or commercial service at catalog or market pricing, estimators should adjust that transfer price to reflect the specific quantities being acquired for the job. You may also adjust the price to reflect the actual cost of modifications necessary to fulfill contract specifications. This structured approach prevents audit write-downs when preparing estimates or pricing change orders on federal work.

Sources

31.205-26 Material costs. | Acquisition.GOV

Published October 31, 2026. No affiliate links on this page. Facts come from the sources linked above; check them for updates.