41 U.S.C. § 4303 — Effect of submission of unallowable costs

(a) Indirect cost that violates a Federal Acquisition Regulation cost principle. An executive agency must require a covered contract^* to provide that, if a contractor submits to the executive agency a proposal to settle indirect costs incurred for a period after those costs accrued, and the proposal includes a cost that is unallowable because it violates a cost principle in the Federal Acquisition Regulation or an executive-agency supplement to that regulation, the cost must be disallowed.

(b) Penalty for violating a cost principle—

(1) Unallowable cost in proposal. If the executive agency determines that a cost in a contractor’s settlement proposal is expressly unallowable under a cost principle referred to in subsection (a) that defines whether specific selected costs are allowable, the executive agency must assess a penalty against the contractor equal to—

(A) the disallowed cost allocated to covered contracts for which a proposal to settle indirect costs has been submitted; plus

(B) interest, calculated under the Federal Acquisition Regulation, to compensate the Federal Government for the use of the amount paid to the contractor beyond the amount to which the contractor was entitled.

(2) Cost determined unallowable before proposal submitted. If the executive agency determines that a contractor’s settlement proposal includes a cost that was determined to be unallowable for that contractor before the proposal was submitted, the executive agency must assess a penalty against the contractor equal to twice the disallowed cost allocated to covered contracts for which a proposal to settle indirect costs has been submitted.

(c) Waiver of penalty. The Federal Acquisition Regulation must provide for waiving a penalty under subsection (b) for a contractor’s settlement proposal when—

(1) the contractor withdraws the proposal before the Federal Government formally begins an audit of it and submits a revised proposal;

(2) the amount of unallowable costs subject to the penalty is insignificant; or

(3) the contractor shows, to the contracting officer’s satisfaction, that—

(A) it has appropriate policies, personnel training, and an internal control and review system that assure that unallowable costs subject to penalties are excluded from its settlement proposal; and

(B) the unallowable costs subject to the penalty were included in the proposal inadvertently.

(d) Contract-disputes procedure. An executive agency’s action under subsection (a) or (b)—

(1) is considered a final decision for purposes of section 7103 of this title; and

(2) may be appealed in the manner provided in section 7104(a) of this title.