Cost Recovery in Commercial Item Contracts

Abstract

Purpose: 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, forming basis of net present value, to calculate cash flow in order account for risk and changing costs. Clauses should be inserted into commercial item contracts to allow for greater clarity as to how present value is calculated with certainty. Practical Implications: No method to calculate the present value of recovery of cost of work performed prior to termination in commercial contracts exists. Present value clauses and methods are consistent with the intention of framers of the FAR. Originality/Value: 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.