10 U.S.C. § 3743 — Effect of submission of unallowable costs

**(a) Indirect Cost That Violates a FAR Cost Principle.—** The head of an agency shall require that a covered contract provide that if the contractor submits to the agency a proposal for settlement of indirect costs incurred by the contractor for any period after such costs have been accrued and if that proposal includes the submission of a cost which is unallowable because the cost violates a cost principle in the Federal Acquisition Regulation or applicable agency supplement to the Federal Acquisition Regulation, the cost shall be disallowed. **(b) Penalty for Violation of Cost Principle.—** (1) If the head of the agency determines that a cost submitted by a contractor in its proposal for settlement is expressly unallowable under a cost principle referred to in subsection (a) that defines the allowability of specific selected costs, the head of the agency shall assess a penalty against the contractor in an amount equal to— (A) the amount of the disallowed cost allocated to covered contracts for which a proposal for settlement of indirect costs has been submitted; plus (B) interest (to be computed based on provisions in the Federal Acquisition Regulation) to compensate the United States for the use of any funds which a contractor has been paid in excess of the amount to which the contractor was entitled. (2) **Cost determined to be unallowable before proposal submitted.—** — If the head of the agency determines that a proposal for settlement of indirect costs submitted by a contractor includes a cost determined to be unallowable in the case of such contractor before the submission of such proposal, the head of the agency shall assess a penalty against the contractor in an amount equal to two times the amount of the disallowed cost allocated to covered contracts for which a proposal for settlement of indirect costs has been submitted. **(c) Waiver of Penalty.—** The Federal Acquisition Regulation shall provide for a penalty under subsection (b) to be waived in the case of a contractor’s proposal for settlement of indirect costs when— (1) the contractor withdraws the proposal before the formal initiation of an audit of the proposal by the Federal Government and resubmits a revised proposal; (2) the amount of unallowable costs subject to the penalty is insignificant; or (3) the contractor demonstrates, to the contracting officer’s satisfaction, that— (A) it has established appropriate policies and personnel training and an internal control and review system that provide assurances that unallowable costs subject to penalties are precluded from being included in the contractor’s proposal for settlement of indirect costs; and (B) the unallowable costs subject to the penalty were inadvertently incorporated into the proposal. **(d) Applicability of Contract Disputes Procedure to Disallowance of Cost and Assessment of Penalty.—** An action of the head of an agency under subsection (a) or (b)— (1) shall be considered a final decision for the purposes of [section 7103 of title 41](https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title41-section7103&num=0&edition=prelim); and (2) is appealable in the manner provided in [section 7104(a) of title 41](https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title41-section7104/a&num=0&edition=prelim).