137 
§ 4303. Effect of submission of unallowable costs 
(a) INDIRECT COST THAT VIOLATES FEDERAL ACQUISITION REGULA-
TION COST PRINCIPLE.—An executive agency shall require that a covered 
contract provide that if the contractor submits to the executive agency a 
proposal for settlement of indirect costs incurred by the contractor for any 
period after those costs have been accrued and if that proposal includes the 
submission of a cost that is unallowable because the cost violates a cost 
principle in the Federal Acquisition Regulation or an executive agency sup-
plement to the Federal Acquisition Regulation, the cost shall be disallowed. 
(b) PENALTY FOR VIOLATION OF COST PRINCIPLE.— 
(1) UNALLOWABLE COST IN PROPOSAL.—If the executive agency de-
termines that a cost submitted by a contractor in its proposal for set-
tlement is expressly unallowable under a cost principle referred to in 
subsection (a) that defines the allowability of specific selected costs, the 
executive agency shall assess a penalty against the contractor in an 
amount equal to— 
(A) the amount of the disallowed cost allocated to covered con-
tracts for which a proposal for settlement of indirect costs has 
been submitted; plus 
(B) interest (to be computed based on provisions in the Federal 
Acquisition Regulation) to compensate the Federal Government 
for the use of the amount which a contractor has been paid in ex-
cess of the amount to which the contractor was entitled. 
(2) COST DETERMINED TO BE UNALLOWABLE BEFORE PROPOSAL 
SUBMITTED.—If the executive agency determines that a proposal for 
settlement of indirect costs submitted by a contractor includes a cost 
determined to be unallowable in the case of that contractor before the 
submission of that proposal, the executive agency shall assess a penalty 
against the contractor in an amount equal to 2 times the amount of 
the disallowed cost allocated to covered contracts for which a proposal 
for settlement of indirect costs has been submitted. 
(c) WAIVER OF PENALTY.—The Federal Acquisition Regulation shall pro-
vide for a penalty under subsection (b) to be waived in the case of a con-
tractor’s proposal for settlement of indirect costs when— 
(1) the contractor withdraws the proposal before the formal initiation 
of an audit of the proposal by the Federal Government and resubmits 
a revised proposal; 
(2) the amount of unallowable costs subject to the penalty is insig-
nificant; or 
(3) the contractor demonstrates, to the contracting officer’s satisfac-
tion, that— 
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138 
(A) it has established appropriate policies and personnel train-
ing and an internal control and review system that provide assur-
ances that unallowable costs subject to penalties are precluded 
from being included in the contractor’s proposal for settlement of 
indirect costs; and 
(B) the unallowable costs subject to the penalty were inadvert-
ently incorporated into the proposal. 
(d) APPLICABILITY OF CONTRACT DISPUTES PROCEDURE.—An action of 
an executive agency under subsection (a) or (b)— 
(1) shall be considered a final decision for the purposes of section 
7103 of this title; and 
(2) is appealable in the manner provided in section 7104(a) of this 
title. 
§ 4304. Specific costs not allowable 
(a) SPECIFIC COSTS.—The following costs are not allowable under a cov-
ered contract: 
(1) Costs of entertainment, including amusement, diversion, and so-
cial activities, and any costs directly associated with those costs (such 
as tickets to shows or sports events, meals, lodging, rentals, transpor-
tation, and gratuities). 
(2) Costs incurred to influence (directly or indirectly) legislative ac-
tion on any matter pending before Congress, a State legislature, or a 
legislative body of a political subdivision of a State. 
(3) Costs incurred in defense of any civil or criminal fraud pro-
ceeding or similar proceeding (including filing of any false certification) 
brought by the Federal Government where the contractor is found lia-
ble or had pleaded nolo contendere to a charge of fraud or similar pro-
ceeding (including filing of a false certification). 
(4) Payments of fines and penalties resulting from violations of, or 
failure to comply with, Federal, State, local, or foreign laws and regula-
tions, except when incurred as a result of compliance with specific 
terms and conditions of the contract or specific written instructions 
from the contracting officer authorizing in advance those payments in 
accordance with applicable provisions of the Federal Acquisition Regu-
lation. 
(5) Costs of membership in any social, dining, or country club or or-
ganization. 
(6) Costs of alcoholic beverages. 
(7) Contributions or donations, regardless of the recipient. 
(8) Costs of advertising designed to promote the contractor or its 
products. 
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(9) Costs of promotional items and memorabilia, including models, 
gifts, and souvenirs. 
(10) Costs for travel by commercial aircraft that exceed the amount 
of the standard commercial fare. 
(11) Costs incurred in making any payment (commonly known as a 
‘‘golden parachute payment’’) that is— 
(A) in an amount in excess of the normal severance pay paid 
by the contractor to an employee on termination of employment; 
and 
(B) paid to the employee contingent on, and following, a change 
in management control over, or ownership of, the contractor or a 
substantial portion of the contractor’s assets. 
(12) Costs of commercial insurance that protects against the costs 
of the contractor for correction of the contractor’s own defects in mate-
rials or workmanship. 
(13) Costs of severance pay paid by the contractor to foreign nation-
als employed by the contractor under a service contract performed out-
side the United States, to the extent that the amount of severance pay 
paid in any case exceeds the amount paid in the industry involved 
under the customary or prevailing practice for firms in that industry 
providing similar services in the United States, as determined under 
the Federal Acquisition Regulation. 
(14) Costs of severance pay paid by the contractor to a foreign na-
tional employed by the contractor under a service contract performed 
in a foreign country if the termination of the employment of the foreign 
national is the result of the closing of, or the curtailment of activities 
at, a Federal Government facility in that country at the request of the 
government of that country. 
(15) Costs incurred by a contractor in connection with any criminal, 
civil, or administrative proceeding commenced by the Federal Govern-
ment or a State, to the extent provided in section 4310 of this title. 
(16) Costs of compensation of senior executives of contractors for a 
fiscal year, regardless of the contract funding source, to the extent that 
the compensation exceeds the benchmark compensation amount deter-
mined applicable for the fiscal year by the Administrator under section 
1127 of this title. 
(b) WAIVER OF SEVERANCE PAY RESTRICTIONS FOR FOREIGN NATION-
ALS.— 
(1) EXECUTIVE AGENCY DETERMINATION.—Pursuant to the Federal 
Acquisition Regulation and subject to the availability of appropriations, 
an executive agency, in awarding a covered contract, may waive the ap-
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