Contingencies in Federal Cost Proposals Under FAR 31.205-7
When estimators assemble bids or price modifications for federal construction work, contingency funds frequently become a point of confusion. Federal contracting officers scrutinize contingencies closely to prevent inflated pricing, but federal procurement rules do not ban all contingency planning outright. Instead, federal regulations draw a strict line between foreseeable job risks that belong in an estimate and unpredictable uncertainties that must be handled separately.
How Does the Federal Acquisition Regulation Define a Contingency?
Under FAR 31.205-7, a contingency is defined as a prospective event or condition arising from either presently known or unknown causes, where the outcome cannot be determined at the present time. In standard commercial estimating, contractors frequently use blanket contingency lines to absorb unexpected jobsite expenses or sudden changes in scope. However, in federal cost proposals, applying an unallocated percentage across an estimate conflicts directly with federal cost principles.
Can Contingency Costs Be Claimed for Historical Accounting Purposes?
As a general principle under FAR 31.205-7(b), contingency costs are unallowable when dealing with historical costing. Federal cost accounting requires historical costs to reflect actual expenses that have already been incurred and formally recorded on the contractor's books. Because historical reporting deals with documented facts rather than speculative projections, retrospective contingency allowances are barred.
There is a specific regulatory exception to this rule: during contract terminations, a contingency factor may be recognized for a past period. Contracting officers and contractors can apply this factor to resolve minor unsettled issues when expediting a termination settlement serves the interests of both parties.
Which Future Contingency Costs Can Be Included in Estimates?
When preparing estimates of future costs, FAR 31.205-7(c) divides contingencies into two distinct groups. The first category covers costs that are allowable directly within your cost buildup:
- Known and existing conditions: The contingency must stem from conditions that currently exist and are recognized.
- Foreseeable effects: The financial impact of the event or condition must be predictable within reasonable limits of accuracy.
- Direct performance estimates: The regulation specifically cites anticipated costs of rejects and defective work as an example.
These foreseeable items must be incorporated directly into your cost estimates to provide the best possible projection of performance cost. When pricing items like scrap, fabrication errors, or rework, estimators should build these realistic operational allowances into their detailed numbers rather than burying them under vague lump-sum labels. Contractors looking to balance these jobsite allowances alongside baseline numbers can review our guide on estimating contingency to understand how risk belongs in an operational estimate.
Which Contingencies Must Be Excluded from Detailed Line Items?
The second category outlined in FAR 31.205-7(c)(2) covers events that arise from known or unknown conditions whose financial impact cannot be calculated with sufficient precision. If an issue cannot be measured accurately enough to provide an equitable outcome for both the government and the contractor, it cannot be embedded inside the individual cost line items.
The regulation identifies the outcome of pending litigation as a prime example of an excluded contingency. Placing speculative sums for open lawsuits or highly volatile events into direct labor, material, or overhead lines distorts the true performance cost and violates federal bidding standards. When adjusting scopes or submitting equitable adjustments, contractors must be careful not to hide unquantified risk pools inside operational lines; see our breakdown on pricing change orders for compliant cost breakdowns.
How Should Excluded Contingencies Be Disclosed to the Government?
Exclusion from individual cost lines does not mean an uncertain cost should be ignored completely. FAR 31.205-7(c)(2) specifies the exact process for managing category two contingencies:
- Remove from line-item pricing: Ensure the uncertain cost is not bundled into general conditions, direct trade costs, or overhead rates.
- Disclose the item separately: Present the contingency as a standalone item in your proposal documentation.
- State the computational basis: Provide the government with the rationale and method used to compute the contingency amount.
- Facilitate contractual coverage: Use the separate disclosure to negotiate specific contract clauses or special coverage addressing the risk.
The regulation points contractors to related provisions, such as 31.205-6(g) and 31.205-19, to illustrate how specific liabilities and insurance reserves are addressed. By separating known operational scrap from unmeasurable legal or market uncertainties, contractors keep their cost proposals compliant under federal review.
Sources
Acquisition.GOV: FAR 31.205-7 Contingencies
Published October 31, 2026. No affiliate links on this page. Facts come from the sources linked above; check them for updates.