Navigating FAR 31.205: Selected Costs: Allowable vs Unallowable

At a glance:

• The main takeaway: Understanding and adhering to the FAR 31.205 Selected Cost topic is crucial for government contractors and contracting officers to ensure the fair and efficient administration of government contracts.
• The impact on your business: Adhering to the FAR 31.205 Selected Cost topics will help contractors comply with government regulations and avoid potential penalties and disallowances.
• Next steps: Reach out and schedule a consultation with Aprio’s Government Contracting team for more insights, answers and options for you and your business.

Schedule a consultation with Aprio’s Government Contracting specialists today.

What does the FAR mean with “Selected Costs”?

The FAR 31.205 Selected Cost section begins with cost principles governing the allowability of costs incurred by Government contractors. These direct or indirect costs undergo meticulous government scrutiny to ensure they are reasonable and allocable to contracts. The details in the rest of FAR part 31.205 detail the allowability status of 46 specific costs, determining whether they are recoverable, unallowable, or contingent on specific details.

Aprio Advice:  Always maintain thorough documentation for claimed expenses, including the purpose behind each. Understanding the rationale for incurring expenses aids in proper account booking and proves beneficial during audits. It is crucial to consistently ask whether claimed costs align with FAR 31 principles, considering their allowability, reasonableness, and allocability.

Always ask the questions – Are my claimed costs:

1. Allowable in accordance with FAR 31.201-2
2. Reasonable in accordance with FAR 31.201-3
3. Allocable in accordance with FAR 31.201-4

If any answer is “NO,” then the cost should be determined as UNALLOWABLE.

In upcoming artciles, we will explore the categories of selected cost outlined in FAR. Let’s start with the basics:

There are three categories of FAR 31.205 costs:

1. Allowable – Costs that, if allocable to a cost objective and reasonable, may be legitimately claimed as costs under a Federal contract.
2. Expressly Unallowable – Costs that are never allowed under a Federal Contract, are specifically defined in the FAR 31.202 and must be removed from claimed costs. These costs may be subject to a penalty.
3. Sometimes Allowable/Sometimes Unallowable – In other words, “It Depends” – Costs which may be considered allowable or unallowable depending on the situation under which they were incurred.

Here are the 10 Expressly Unallowable Costs identified in FAR:

1. Bad Debts (31.205-3)
2. Contributions or donations (31.205-8)
3. Entertainment Costs (301.205-14)
4. Fines, Penalties, and mischarging costs (31.205-15)
5. Interest and other financial costs (31.205-20)
6. Lobbying and political activity costs (31.205-22)
7. Losses on other contracts (31.205-23)
8. Organizational costs (31.205-27)
9. Goodwill (31.205-49)
10. Costs of Alcoholic Beverages (31.205-51)

Understanding and adhering to the FAR 31.205 Selected Cost topic is crucial for both government contractors and contracting officers to ensure the fair and efficient administration of government contracts:

For Government Contractors:

• Contractors must meticulously review their cost accounting practices, ensuring compliance with FAR 31.205.
• They must differentiate between direct and indirect costs and adequately allocate costs to each contract.
• Contractors must identify and exclude unallowable costs to avoid potential penalties or disallowances.
• Contractors should consider scrubbing their incurred cost submission or trial balance to identify and remove potential unallowable costs before submitting their claim to the government.

For Contracting Officers:

• Contracting officers must assess contractors’ cost proposals to determine the allowability of selected costs.
• They must ensure that contractors’ cost accounting practices are consistent and adhere to the principles outlined in FAR 31.205.
• Contracting officers are critical in reviewing and negotiating cost elements to ensure taxpayers’ funds are used appropriately.

Related Resources:

Using Support Items on GSA Schedule Orders

When Does Cost or Pricing Data Need to be Certified, and What Does That Mean?

Why Estimating Systems Are Critical Tools for Winning Government Contracts

Schedule a consultation with Aprio’s Government Contracting specialists today to help identify costs that may or may not be claimed under your Federal contract.