Navigating FAR 31.205: Selected Costs: Can a company incur or reimburse an employee’s unallowable costs?

At a glance:

• The main takeaway: Contractors can’t claim unallowable costs for reimbursement, but there are still some situations where they can be helpful for your business and your employees.
• The impact to your business: Understanding how and when to incur and reimburse unallowable costs can help give your business an edge against your competition and foster a culture of appreciation and innovation in your firm.
• Next steps: Think about the insights in this piece, then reach out to Aprio for more information and ideas on how to handle unallowable costs in the future. 

Schedule a consultation with Aprio’s Government Contracting specialists today for help identifying which costs can and can’t be claimed.

• Claimed Federal Contract costs must be allowable, allocable, and reasonable.
• Company policy dictates what costs a company may incur or reimburse to employees.
• Documentation is key for compliance to both. 

The full story:

Government contracts are instrumental in driving economic growth and fostering collaboration between the public and private sectors. These contracts not only provide a significant revenue stream for companies but also encourage the development of innovative solutions for government needs. However, managing government contracts can be complex, especially when it comes to dealing with unallowable costs.

Understanding Unallowable Costs

Unallowable costs are expenses that cannot be reimbursed under a government contract and cannot be directly billed to the government. The Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS) define specific categories of costs that are considered unallowable, such as entertainment expenses, lobbying costs and certain executive compensation.

While these costs may not be directly reimbursable by the Government, they can still benefit the company in several ways, including:

• Flexibility and Innovation – The ability to manage financial affairs, invest in research and development, employee training and advanced technologies without immediate concerns about allowability or reimbursement can allow firms to explore new avenues for innovation and service improvements, ultimately benefiting both the company and its customers.
• Strengthening Competitive Advantage – Creating an atmosphere of competition where firms can encourage internal improvements that differentiate them from competitors. Companies that prioritize these improvements are likely to attract more lucrative private contracts and improve their overall performance.
• Enhanced Talent Retention and Attraction – Costs considered unallowable costs can enhance talent retention and attraction by enabling companies to offer more attractive benefits and professional development opportunities to employees. This leads to higher job satisfaction, improved retention rates and a more desirable workplace culture that attracts top talent.

Despite not being directly claimable on government contracts, unallowable costs can still indirectly benefit the projects undertaken. Investments in areas like employee well-being and company infrastructure lead to a more engaged and efficient workforce, resulting in higher-quality products and services delivered to the government.

It is important for companies to remember that while some costs may not be directly reimbursable, documenting these costs in policies and procedures is crucial. This ensures clarity, consistency and compliance with financial processes, Cost Accounting Standards and Federal Regulations.

Here are two scenarios illustrating how incurring unallowable costs may be beneficial:

1. A sales rep is on a business trip and takes a customer to dinner, a normal business practice. However, when entertaining a potential new customer, the entertainment cost associated with this activity falls in the category of expressly unallowable. Although the cost may not be claimed for reimbursement, as a direct cost on a contract, or related indirect cost applied to contract costs, it may be paid and reimbursed to the employee who incurred the cost for the purpose of enhancing the company’s business.
2. An employee is traveling for work on a contract. The cost of the travel is outlined in the contract as necessary. Therefore, the trip is allowable. However, the employee books a hotel in excess of the allowable per diem rate or a step up in class of a vehicle rental or airfare. Depending on the company’s policy, the employee may be eligible for reimbursement. So, the company may pay the costs in excess of those allowed by the Government, but the company must remove those excess costs from any claim submitted to the Federal Government.

The idea of companies incurring unallowable costs despite their ineligibility for reimbursement on government contracts is multifaceted. While some may think that it may lead to potential misuse of funds, when executing responsibly, this approach can yield numerous advantages. When a company invests in attracting clients, research & development, employee perks and infrastructure, it may ultimately foster a culture of innovation, leading to better products and services.

One thing that is important to remember when it comes to incurring or reimbursing employees for unallowable costs which are not reimbursable by the Federal Government, is that documenting the practice in policies and procedures is necessary.

The policies must provide:

a) clarity on the procedures, defining what are reimbursable and not reimbursable cost

b) consistency in reimbursement processes, and

c) compliance with financial processes, applicable Cost Accounting Standards, and Federal Regulations.

Schedule a consultation with Aprio’s Government Contracting specialists today for help with identifying costs that may or may not be claimed.

Related Resources:

FAR 31.205: Selected Costs that ARE Allowable

Navigating FAR 31.205: Selected Costs: Allowable vs Unallowable

More on Unallowable Costs – Directly Associated Costs

Avoid Overbillings: Understand the Role of GSA Schedule Ceiling Rates