On a cost-type contract the government pays your costs, so it decides which costs count. Cost-reimbursement contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract 1.
A cost is allowable only when it complies with all of the requirements FAR 31.201-2 lists 2. One of them is accounting: the Cost Accounting Standards if applicable, otherwise generally accepted accounting principles and practices appropriate to the circumstances 3. This lesson walks the two tests leaders are asked about most, reasonable and allocable, then the costs the FAR rules out.
Reasonable
A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business 4. One consideration is whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor's business or the contract performance 5.
The burden sits with you. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor 6, and once a specific cost is challenged, the burden of proof shall be upon the contractor to establish that such cost is reasonable 7.
Allocable
A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship 8. That includes a cost necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown 9.
Consistency matters as much as the method. When accounting practices are inconsistent with FAR subpart 31.2, costs resulting from such inconsistent practices in excess of the amount that would have resulted from using practices consistent with that subpart are unallowable 10.
Worked example. Contractor R charges a program manager's full salary to one contract, but her timesheets show a third of her hours on a second contract and on proposal work. The cost is reasonable, but charging it all to one contract does not follow the benefit received. Contractor R splits the charge by recorded hours and fixes its timesheet review.
Costs the FAR rules out
Some costs fail no matter how prudent or well allocated. Costs of amusement, diversions, social activities and any directly associated costs, such as tickets to shows or sports events, meals, lodging, rentals, transportation and gratuities, are unallowable 11. Costs of alcoholic beverages are unallowable 12. Costs of fines and penalties resulting from violations of, or failure to comply with, federal, state, local or foreign laws and regulations are unallowable 13.
Expressly unallowable costs, and costs mutually agreed to be unallowable, including directly associated costs, shall be identified and excluded from any billing, claim or proposal applicable to a government contract 14. And you must be able to prove what you claim: the contractor is responsible for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred 15.
Bids2Bank's Compliance Guard keeps a DCAA readiness self-assessment for your workspace, and one of its items is exclusion of costs that are unallowable under FAR Part 31 or contract terms 16.
Work through the DCAA readiness checklist →
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