Rental Costs Under FAR 31.205-36: Estimator Scenario Guide
On federal construction projects subjected to cost analysis, equipment and facility leases cannot be billed simply because an invoice exists. Construction estimators and trade contractors must evaluate their agreements against federal cost principles. The primary standard governing operating leases is outlined in FAR 31.205-36. To see how these cost rules operate in practice, this scenario walk-through explores how a trade contractor pricing field equipment and temporary facilities handles rental cost allowability under federal procurement regulations.
The Scenario: Furnishing Project Facilities and Site Equipment
Consider a hypothetical interior contractor bidding on a negotiated federal installation where equipment and facility costs must be justified as allowable direct or indirect expenses. The project team needs temporary warehouse space to stage metal studs and drywall, scissor lifts for ceiling installation crews, and jobsite office trailers. When assembling cost proposals or pricing change orders, the estimator must classify each arrangement under Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) 840, Leases.
Subsection FAR 31.205-36 applies specifically to operating leases for real or personal property. If a lease is categorized as a capital lease rather than an operating lease, its allowability shifts to FAR 31.205-11. In our scenario, the contractor confirms all agreements qualify as operating leases under FASB ASC 840, directing the estimator to apply the allowability tests of FAR 31.205-36.
Step 1: Testing Reasonableness at the Time of the Lease Decision
In the first stage of the walk-through, the estimator reviews third-party commercial rentals for boom lifts and site utility vehicles. Under FAR 31.205-36(b)(1), rental costs are allowable only to the extent that the rates are reasonable at the time the lease decision was made. The estimator cannot rely solely on post-award convenience; the decision itself must be justified using five specific regulatory considerations:
- Rental costs of comparable property, if any;
- Market conditions in the area;
- The type, life expectancy, condition, and value of the property leased;
- Alternatives available; and
- Other provisions of the agreement.
By compiling quotes for comparable equipment and documenting local market conditions during initial procurement, the contractor establishes that the rates reflect competitive commercial practices at the exact time the commitment was entered.
Step 2: Reviewing Affiliated Entities Under Common Control
In the next phase of the scenario, the trade contractor considers leasing specialized drywall handling rigs from an equipment company owned by the contractor's parent firm. Contracting under common control triggers strict boundaries under FAR 31.205-36(b)(3). Inter-organizational rental charges between divisions, subsidiaries, or organizations under common control cannot include commercial markup or profit.
Instead, charges in the nature of rent between these related entities are allowable only to the extent that they do not exceed the normal costs of ownership. These allowable normal costs include:
- Depreciation;
- Taxes;
- Insurance;
- Facilities capital cost of money; and
- Maintenance.
Any interest expenses or other costs deemed unallowable under FAR part 31 must be excluded, and the contractor must guarantee that none of these costs duplicate any other cost allowed on the contract. However, FAR 31.205-36(b)(3) provides a critical exception: if the affiliated division or subsidiary has an established practice of leasing the same or similar personal property to unaffiliated commercial lessees, the charges can be allowed based on reasonable market rates under FAR 31.205-36(b)(1) rather than ownership costs.
Step 3: Handling Sale and Leaseback Scenarios
Suppose the contractor previously purchased field office trailers and subsequently executed a sale and leaseback arrangement with a financing firm. When including these trailers in site support calculations or estimating general conditions, the contractor cannot bill the new, higher commercial lease rate to the federal government.
Under FAR 31.205-36(b)(2), rental costs under a sale and leaseback arrangement are allowable only up to the amount the contractor would have been allowed had title been retained. This cap is computed using the asset's net book value on the date the contractor became the lessee, adjusted for any gain or loss recognized in accordance with FAR 31.205-16(b). Bumping up direct costs by transferring ownership and renting back the exact same asset is expressly restricted.
Step 4: Managing Unexpired Leases Upon Contract Termination
The final review point in our hypothetical walk-through addresses risk mitigation if the federal project ends prematurely. If a contract is terminated for government convenience, ongoing commitments for rented equipment and storage facilities do not automatically disappear. According to FAR 31.205-36(c), the allowability of rental costs under unexpired leases connected with contract terminations is determined under the specific rules of FAR 31.205-42(e). Contractors must track their lease termination clauses and cancellation periods to align their cost recovery with the proper termination principles.
Sources
Published October 31, 2026. No affiliate links on this page. Facts come from the sources linked above; check them for updates.