Cost Recovery in Commercial Item Contracts

Article Classification: Viewpoint Purpose: Cost recovery in commercial item contracts is difficult to calculate when contracts are terminated for convenience and contractors are seeking to recover the amount of cost to recover on the contract. For uniformity, present value methodologies and clauses are needed. Design: Based on a review of literature, FASB concept statement no. 7, and the FAR; a way to calculate present value of commercial item contracts is identified as well as present value clauses. Findings: Commercial items involving an uncertain degree of risk and dynamic costs use a fuzzy net cash flow methodology to calculate cash flow in order account for risk and changing investment and other costs. This cash flow forms basis to calculate net present value. It is recommended that clauses be inserted into commercial item contracts to allow for greater clarity as to how present value is calculated with certainty. Practical Implications: Recovery of cost of work performed prior to termination in contracts terminated for convenience is allowed, no method to calculate the present value in commercial item contracts exists. Present value clauses and methods are consistent with the intention of framers of the FAR. Originality/Value: There are no clauses concerning the calculation of net present value in commercial item contracts thus two possible alternatives are suggested. Due to lack of a current methodology to calculate the present value of commercial item contracts, FASB Concept Statement No. 7, present value, and fuzzy net cash flow are used to calculate present value of commercial items.