If the NRE costs are evaluated to be valid, what are the Govt's options to make the Supplier whole?
Allowability (FAR 31.201-2) of a cost to a government contract is the issue in this situation. Generally, the government pays both types of costs: Direct (FAR 31.202) and Indirect (FAR 31.203). Non-Recurring Engineering (NRE) is a common cost that can be accounted for as direct or indirect, but never both (FAR 31.202(a)), depending on how the contractor tells us they do their accounting in their disclosure statement.
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Allocability is one of the five components listed at FAR 31.201-2(a), which must be met in order for a proposed cost to be determined allowable. FAR 31.201-4 presents three separate conditions under which a proposed cost may be allocable to a particular contract as either a direct or indirect cost. The determination of cost allowability is an independent determination made without regard to potential consequence. Once determined, allowability is an accounting fact. The chips must fall where they may in light of the determined fact. The effects of these determined facts may be welcome or challenging to both the contractor and the government.
Allowability is not a determination of validity of a cost. For example, interest charges on borrowings is a perfectly valid and common cost in business. FAR 31.205-20 makes those valid interest charges unallowable on government contracts.
Finally, the government’s course of action, when a cost is determined to be allowable in accordance with FAR part 31 and the terms and conditions of the contract, is to pay that cost.