Clauses · FAR · Pricing and audit
FAR 52.242-3 Penalties for Unallowable Costs
Does the regulation require it to flow down?
No
No mandate: neither the clause nor FAR 42.709-7 says anything about subcontracts, and the penalty in 10 U.S.C. 3748 / 41 U.S.C. chapter 43 runs from the Government to a contractor that submitted a proposal. Primes flow it down for two reasons — to hold the same lever over a sub's indirect rate submission, and because a sub's unallowables that reach the prime's pool become the prime's penalty exposure, not the sub's.
A clause can reach your subcontract without a mandate. Once it is in your document, it is a contract term all the same. The missing mandate is a fact about the regulation. It is not a ruling on your order.
Checked against acquisition.gov on 2026-08-05 · edition DEC 2022 · base v0.9.3 Read the text ↗
What it makes you produce
One item for your checklist.
Nothing to send now
It does not hold the order. It decides what money moves later — what you can claim, what can be claimed from you, and what can be held back — and none of that changes after signature.
The penalty on what is inside a final indirect cost rate proposal or a final statement of costs — under paragraph (d) the disallowed amount plus simple interest on any overpayment, and under paragraph (e) twice the disallowed amount where the identical cost was disallowed to you in a prior determination
FAR 52.242-3(d) and (e)
When it is used
FAR 42.709-7 prescribes it 'in all solicitations and contracts over $1 million,' except fixed-price contracts without cost incentives and any firm-fixed-price contract for the purchase of commercial products or commercial services. FAR 42.709-1(b) states the same scope for the whole subpart. It rides with the contracts that generate a final indirect cost rate proposal or a final statement of costs — those carrying 52.216-7, 52.216-16, 52.216-17, or an agency-supplement equivalent. The penalty is a Government remedy against whoever submits that proposal, which at prime level is the prime. It reaches a sub only where the subcontract is cost-type or fixed-price-incentive, exceeds $1 million, and the sub submits a final indirect rate proposal or final cost statement under the flowed-down copy.
Read closely
Paragraph (c) is a prohibition on including an unallowable cost in a proposal and asks for nothing to be sent. Paragraph (g) leaves any waiver to the contracting officer on the criteria at FAR 42.709-6, and the third of those criteria is conjunctive — established policies, training and internal controls AND the cost having got in by unintentional error — so controls alone do not buy it. The other two are withdrawing the proposal before the Government formally initiates an audit of it and submitting a revised one, and a penalty amount of $10,000 or less. Paragraph (h): paying the penalty is not repayment, so the money goes back as well.
The 1 template that name it, with the line
Source: acquisition.gov, FAR 52.242-3, FAR 42.709-1, FAR 42.709-6 and FAR 42.709-7 (verified 2026-08-05)
This is research, not legal advice. It states what the regulation says about this clause and cites the paragraph behind it. It does not rule on your order, and it does not rule on whether a prime's markings are correct.