Great question – and one that I wish I could give you a simple, clear answer. So let me provide you the specific reference and language. FAR 52.245-1(d)(2)(iii) states – and I have truncated the paragraphs,
“(d) Government-furnished property.
(iii) The Government may, at its option, furnish property in an “as-is” condition. The Contractor will be given the opportunity to inspect such property prior to the property being provided. In such cases, the Government makes no warranty with respect to the serviceability and/or suitability of the property for contract performance. Any repairs, replacement, and/or refurbishment shall be at the Contractor's expense. “
So – quite clearly the clause states that the repair, etc, shall be at “Contractor’s Expense.” So, yes, from that simple statement -- the contractor shall pay for the repairs.
I cannot specifically answer your question as to the proper charging method. That is dependent upon too many variables – including any discussion of this practice in your Disclosure Statement, if you are a Cost Accounting Standards (CAS) covered contractor.
Quite clearly the issue of charging it as a direct item of cost under a Cost Reimbursement type contract would appear to be inappropriate – as those costs would be DIRECTLY charged back to the contract. More appropriately, in that situation the costs would be unallowable – as it contradicts the clausal requirement.
As to using profit, or charging it to overhead – both of those concepts deal with the issues of allowability that are much more complex and generally differ from contractor to contractor.
But, if I were to take a common sense approach (Which sometimes does not hold up when dealing with Government regulations) if you, the contractor are to bear that expense, i.e., at CONTRACTOR’s EXPENSE, then why should the Government pay for ANY of that cost – direct or indirect? If you were to charge this cost to an overhead account – the Government WOULD be paying for the repair. Granted, not all of the repair, as the costs would be “peanut butter spread” (That’s a technical term) across ALL of the contractor’s work – and charged to all of the buyers of the contractor’s work. But still the Government would end up paying for a portion of that repair. Pragmatically, again I encourage you to review your Disclosure Statement (CASB-DS1 Form) for the proper treatment of these costs -- as applying them in the fashion you described MAY end up with them being deemed “unallowable.” And, if necessary, discuss this with the cognizant Contracting Officer and DCAA Auditor for the proper application under your disclosure statement in light of your contracts.
But, I would like to ask you to check one other requirement in your contract. Please ensure that the Government SPECIFIED the “AS IS” Government Furnished Property (GFP) in the contract. The FAR policy of 45.201(a)(5) directs the Contracting Officer to specify any GFP to be furnished in an “As Is” condition.
Even more descriptive is the DFARS 245.201-71 which references the DOD PGI at 245.201-71. This PGI requires the Contracting Officer to insert lists of serialized and non-serialized GFP – and included in that listing is a column for specifying whether or not the GFP is furnished in an “As Is” condition.
This is another area where most definitely you need to “Read the Contract.”