FAR 31 and Federal Contracts: A Guide to Contract Types for SBIR/STTR Newbies
If you’re new to Small Business Innovation Research (SBIR) or Small Business Technology Transfer (STTR) programs, congratulations—you’re in the game! But before you start cashing those federal checks, you need to understand the Federal Acquisition Regulation (FAR) Part 31 and how it shapes the types of contracts you’ll encounter. FAR 31, the rulebook for contract costs, dictates what you can charge and how you prove it, and its impact varies by contract type. For small businesses, getting this right is the difference between smooth sailing and an audit-induced headache. Let’s break down the main contract types, their differences, and how FAR 31 applies to keep your SBIR/STTR journey on track.
Why FAR 31 Matters Across Contract Types
FAR Part 31, “Contract Cost Principles and Procedures,” sets the standards for federal contract allowable, reasonable, and allocable costs. For SBIR/STTR newbies, it’s your guide to getting paid for legitimate expenses while avoiding the wrath of the Defense Contract Audit Agency (DCAA). Whether you’re on a Phase I feasibility study or a Phase II prototype project, FAR 31 ensures taxpayer dollars are spent wisely. Its three pillars—allowability (FAR 31.201-2), reasonableness (FAR 31.201-3), and allocability (FAR 31.201-4)—apply to all contracts, but how they’re enforced depends on the contract type. Let’s explore the main types and what they mean for you.
The Big Three Contract Types
Federal contracts come in various flavors, each with unique cost management and risk profiles. Here’s how the most common types intersect with FAR 31:
- Firm-Fixed-Price (FFP) Contracts
- What It Is: You agree to deliver a product or service for a set price, regardless of actual costs. Common in SBIR Phase I, where deliverables are straightforward (e.g., a feasibility report).
- FAR 31 Impact: Cost scrutiny is lighter because the government pays a fixed amount, not your actual costs. However, FAR 31.205 unallowable costs (e.g., alcohol, lobbying) still apply if you’re audited, especially for financial reporting. You must ensure costs are reasonable and allocable internally to avoid losses, as overruns are on you.
- Pros: Predictable payments and less DCAA oversight.
- Cons: You bear all cost overrun risks.
- Example: Your SBIR Phase I contract pays $150,000 for a study. If you spend $160,000, you eat the extra $10,000. FAR 31 ensures your internal cost tracking excludes unallowables like entertainment.
- Cost-Reimbursement (Cost-Plus) Contracts
- What It Is: The government reimburses your allowable costs up to a ceiling, often with a fee (profit). This type of agreement is common in SBIR/STTR Phase II, where R&D costs are harder to predict (e.g., prototype development).
- FAR 31 Impact: This is where FAR 31 shines—and stings. Every cost must be allowable (per FAR 31.205), reasonable (market-norm prices), and allocable (tied to the contract). You’ll need detailed records—timesheets, receipts, vendor quotes—to pass a DCAA audit. Unallowable costs (e.g., marketing) or poor documentation can lead to disallowed expenses.
- Pros: Flexibility for uncertain costs, government shares risk.
- Cons: Heavy documentation and audit scrutiny.
- Example: Your Phase II contract covers $500,000 in costs. You claim $50,000 for lab equipment, but without quotes proving reasonableness, the DCAA may disallow it.
- Time-and-Materials (T&M) Contracts
- What It Is: You’re paid for labor hours at fixed hourly rates (including overhead and profit) plus actual material costs. Less common in SBIR/STTR but used for consulting or testing tasks.
- FAR 31 Impact: Labor costs must be reasonable and allocable, with precise timekeeping to tie hours to the contract. Material costs are subject to FAR 31.205 unallowables and must be documented (e.g., invoices). Audits focus on timekeeping accuracy and material cost justification.
- Pros: Balances risk between you and the government.
- Cons: Requires robust timekeeping and material tracking.
- Example: Your T&M contract pays $100/hour for 100 hours of testing. Those costs get disallowed if timesheets don’t show hours allocated to the contract.
Key Differences and FAR 31 Challenges
Each contract type shifts the risk and compliance burden differently:
- Risk: FFP puts all cost overrun risk on you, while cost-reimbursement shares it with the government. T&M splits the difference, with labor rates fixed but hours variable.
- Documentation: Cost-reimbursement contracts face the heaviest FAR 31 scrutiny, requiring detailed records for every cost. FFP contracts need less external reporting but still require internal FAR 31 compliance. T&M hinges on timekeeping and material documentation.
- Flexibility: Cost reimbursement contracts offer the most flexibility for R&D uncertainties, which is ideal for SBIR/STTR Phase II. FFP is rigid and best for predictable tasks. T&M suits tasks with variable labor needs.
For SBIR/STTR newbies, cost-reimbursement contracts are the most common in Phase II, making FAR 31’s rules, especially on unallowable costs and timekeeping, critical. A common trap is assuming FFP contracts are “audit-proof.” Even here, FAR 31 applies if financial records are reviewed.
Your FAR 31 Toolkit for Contract Success
Ready to tackle FAR 31 across contract types? Here’s a newbie-friendly toolkit:
- Cost Compliance Checklist:
- Confirm contract type (FFP, cost-reimbursement, T&M).
- Verify costs are allowable per FAR 31.205 (no alcohol, fines, etc.).
- Ensure costs are reasonable with market comparisons (e.g., vendor quotes).
- Allocate costs correctly with timesheets or project codes.
- Timekeeping Rule: Use a DCAA-compliant tool like QuickBooks Time. Log hours daily, tying them to contract tasks (e.g., “SBIR Phase II, Prototype Design”).
- Accounting Setup: Configure QuickBooks or Xero for job cost accounting. Separate direct costs (e.g., lab supplies) and indirect costs (e.g., rent). Flag unallowable costs.
- Training: Hold a 30-minute team session on FAR 31 and contract types. Explain why daily timekeeping matters, especially for cost-reimbursement and T&M contracts.
- DCAA Guide: Bookmark www.dcaa.mil for the “Information for Contractors” manual, which covers FAR 31 and audit tips.
Real-World Lesson
An SBIR Phase II contractor on a cost-reimbursement contract claimed $20,000 for “general supplies” without receipts. The DCAA disallowed it, citing FAR 31.201-2’s documentation requirement. Another newbie on an FFP contract tracked costs internally per FAR 31, avoided unallowables, and passed a financial review with ease. Preparation made the difference.
Your First Step Forward
FAR 31 is your compass for navigating federal contract types. By understanding how allowability, reasonableness, and allocability apply to FFP, cost-reimbursement, and T&M contracts, you’ll keep your SBIR/STTR project compliant and your payments flowing. Start with timekeeping, review FAR 31.205, and know your contract type. You’re not just a small business but a federal contractor, and FAR 31 is your playbook.
