An interesting fact about the cost of money – it actually costs the U.S. more to make a penny than it is actually worth! Every time a new penny is minted, it costs the U.S. around $0.02 (net increase to the national debt = $0.01 per penny). See also FAR 31.201-1. In fact, pre-1982 pennies are worth more for their metal than they are to actually purchase something ($0.025 metallurgic value). NOTE: It is illegal to melt down a penny and is punishable by 5 years in prison and up to $10,000 in fines. http://www.usmint.gov/pressroom/?action=press_release&ID=771
FAR 31.205-10, Cost of Money
First of all, cost of money is NOT interest. Interest on borrowings is covered elsewhere in FAR 31.205-20. Basically, what happens is that the time value of money plays a part in the construction of capital assets and is calculated as the cost of money applicable to cost reimbursement contracts and for progress payments on fixed-price contracts.
The cost of money is allowable in accordance with CAS 414 and 417.
CAS 414 states:
(a) A contractor’s facilities capital shall be measured and allocated in accordance with the criteria set forth in this Standard. The allocated amount shall be used as a base to which a cost of money rate is applied.
(b) The cost of money rate shall be based on rates determined by the Secretary of the Treasury, pursuant to Public Law 92-41 (85 stat. 97).
(c) The cost of capital committed to facilities shall be separately computed for each contract using facilities capital cost of money factors computed for each cost accounting period.
CAS 417 states:
The cost of money applicable to the investment in tangible and intangible capital assets being constructed, fabricated, or developed for a contractor’s own use shall be included in the capitalized acquisition cost of such assets.
Don’t you just love when the FAR implements CAS rules right in the middle of your “small”, non-CAS covered contract?! The other thing to keep in mind is there are limitations on cost of money under FAR 31.205-52 that we will discuss another day, but as long as the estimated FCCM is specifically identified and proposed in cost proposals, this cost will normally stand up in incurred cost audits and contract closeouts. In case you forgot, the regulation mentions once more so I figure I will mention it again – interest costs are unallowable.