Is the inclusion of the currency exchange escalation into the rates unallowable?
FAR 31.205-7 defines contingencies as a possible future event or condition arising from presently known or unknown causes, the outcome of which is indeterminable at the present time. Contingencies with estimates of future costs fall into two categories:
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(1) Costs that may arise from presently known and existing conditions, the effects of which are foreseeable within reasonable limits of accuracy. In this case if the contractor's forecast rates are based on historical exchange rates that can accurately be escalated into the future. If that is the case, these could be allowable. You must ensure the forecasted rates are similar to escalation rates on labor that a contractor proposes based on historical actual labor rates. The contracting officer must determine the exchange rates as well as the escalation rate is fair and reasonable. In addition if the contract falls within the limits of Truth in Negotiations Act (TINA) the historical data must be factual and certified as accurate, complete and current.
(2) Costs that may arise from presently known or unknown conditions, the effect of which cannot be measured so precisely as to provide equitable results to the contractor and to the Government are to be excluded from cost estimates. These types of costs are normally set aside using a contract clause, such as Economic Price Adjustment or Differing Site Conditions clauses. The information you provided appear that you have this type of cost which is unallowable. An alternative in this situation might be to develop a special clause that would address currency exchange adjustments. Be sure to coordinate this approach with your legal office to ensure any special clause protects the Government interests and with your finance office to cover potential additional funding.