CREDITS

FAR 31.201-5, Credits, states “The applicable portion of any income, rebate, allowance, or other credit relating to any allowable cost received by or accruing to the contractor shall be credited to the Government either as a cost reduction or by cash refund.”

This requirement compels contractors to analyze any and all credits received to ascertain their direct or indirect impact on government contracts. For example, a vendor may issue credit for direct material that was not used and was returned. This would be credited directly back to the applicable contract or contracts.

Sometimes contractors receive an annual or semiannual credit from the travel agency they employ for airline tickets purchased. This credit, because it covers all tickets written in the period, would usually be credited into overhead and/or G&A pools. This would be an indirect type of credit and the most equitable method of relaying it to the government is via the indirect pools. Another indirect credit is found in the income from the sale of scrap. These credits, which resulted from working on many contracts, are again most equitably handled by credits to an indirect pool. In these instances of contractors receiving credit for some reason, it is important to avoid automatically taking the credit to “Other Income.”

Any credit received needs to be scrutinized to ensure that the government receives its due cost reduction. For cost-reimbursement contracts, any credits must be given to the government even after the contract has been closed.