FAR Part 31 and Unallowable Costs

One of the most pervasive concepts for government contracts is “Unallowable Costs.”  Put simply, there are certain costs which are ordinary and necessary in the normal course of business that the government will not pay for.  Certain unallowable costs may seem obvious, such as federal taxes, however, other costs may be less apparent to contractors new to the government market  (e.g., interest expense).  Government contracts incorporate the unallowable cost requirements by reference to FAR Part 31, Contract Cost Principles and Procedures. 

Contractors may need to comply with the requirements of FAR Part 31 depending on their portfolio of government contracts and also their level of coverage under the Cost Accounting Standards (CAS).  Both “Modified” and “Full” CAS coverage incorporate CAS 405, Accounting for Unallowable Costs, which introduces FAR Part 31 by reference.  The identification and exclusion of Unallowable Costs affects each stage of the contract life cycle (e.g., estimating, accumulating and reporting, billing, etc.) bringing additional scrutiny and compliance considerations.  

  • Advise clients on the best practices for capturing and segregating unallowable cost activity within the structure of their general ledgers.
  • Train employees on unallowable cost concepts and best practices for supporting allowable costs with proper supporting documents and proper record retention to help ensure cost-recovery on government contracts.
  • Provide guidance to contractors on the common compliance pitfalls related to unallowable costs including the fines and penalties associated with certain expressly unallowable costs. 
  • Further, new contractors may be unaware of the additional regulatory requirements associated with interacting with government officials.  Certain practices such as providing a client with a gift are common business practices in the commercial market, but such activity could be inappropriate in the government space.  The rules vary by government agency.  Contractors often need to adjust their business practices surrounding gifts, meals and entertainment for government employees and agencies.
  • Advise clients on the design, review and application of statistical samples to quantify the amount of unallowable costs in general ledger accounts.
  • Perform specific reviews of high-risk accounts (e.g., legal, professional services, travel, etc.) to identify unallowable costs.
  • Prepare or review clients’ Excess Executive Compensation calculation as required under FAR 31.205-6(p).  Employee compensation in excess of the proscribed compensation caps but must be treated as unallowable.
  • Assist contractors in responding to DCAA and other government agency audit requests and negotiating the final determination of unallowable costs related to Incurred Cost Submission (ICS) and other government filings.
  • A detailed focus on unallowable costs is critical for contractors to manage cashflow by avoiding delays in billings, penalties & fines, and other cost reductions associated with improperly calculated overhead rates.

Please contact us for more information on how we can assist your company to implement the appropriate policies & procedures to identify, quantify and remove unallowable costs.