What regulation prohibits them from charging depreciation for these assets to DOD contracts. Does FAR 31.201-5 apply?
This response is based on the information provided. We suggest you discuss with your contracting officer and/or legal department as appropriate.
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"FAR 31.205-11 -- Depreciation.
(d) Depreciation, rental, or use charges are unallowable on property acquired from the Government at no cost by the contractor or by any division, subsidiary, or affiliate of the contractor under common control."
Should the contractor argue that this does not specifically mirror the situation then we draw on this FAR language.
"FAR 31.204 -- Application of Principles and Procedures.
(d) Section 31.205 does not cover every element of cost. Failure to include any item of cost does not imply that it is either allowable or unallowable. The determination of allowability shall be based on the principles and standards in this subpart and the treatment of similar or related selected items. When more than one subsection in 31.205 is relevant to a contractor cost, the cost shall be apportioned among the applicable subsections, and the determination of allowability of each portion shall be based on the guidance contained in the applicable subsection. When a cost, to which more than one subsection in 31.205 is relevant, cannot be apportioned, the determination of allowability shall be based on the guidance contained in the subsection that most specifically deals with, or best captures the essential nature of, the cost at issue."
Neither FAR subpart 31.6 nor DFARS part 231 has no additional information germane to the question.