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Determine Cost Allowability

It is important for Government Contractors to differentiate costs as to their allowability. Section 31.201-2 of the Federal Acquisition Regulations (FAR) stipulates the following factors can be considered when determining whether a cost is allowable:

Reasonableness - 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.
Allocability - A cost is allocable if it is assinable or chargeable to one or more cost objectives on the bsis of relative benefits received or other equitable relationship. Subject to the foregoing, a cost is allocable to a Government contract if it: a) Is incurred specifically for the contract. b) Benefits both the contract and other work and can be distributed to them in reasonable proportion to the benefits received. c) Is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown.
Credits - The applicable portion of any income, rebate, allowance, or other credit relating to any allowable cost and received by or accruing to the contractor shall be credited to the Government either as a cost reduction or by cash refunds.
Terms of the Contract - Any limitations set forth in Subpart 31.201 of the FAR.

Cost Principles Summary

The table below summarizes the cost guidance provided by the current cost principles in FAR 31.205.

Note that a single cost principle may classify specific costs as allowable, other costs in the same general category as unallowable, and still others as allowable with restrictions. The following is taken from Volume 3 of the DOD Contract Pricing Guide.

Allowability Of Selected Costs FAR 31.205

Selected Costs May Be:
Allowable (A), Unallowable (UA), or Allowable With Restrictions (AWR)

Selected Costs	FAR	A	UA	AWR
Alcoholic Beverages	31.205-51		X
Asset Valuations Resulting from Business Combinations	31.205-52			X
Bad Debts	31.205-3		X
Bonding Costs	31.205-4	X
Compensation for Personal Services	31.205-6	X	X	X
Contingencies	31.205-7	X	X
Contributions or Donations	31.205-8		X
Cost of Money	31.205-10			X
Deferred Research & Development Costs	31.205-48		X	X
Depreciation	31.205-11			X
Economic Planning Costs	31.205-12	X	X
Employee Morale, Health, Welfare, Food Service, & Dormitory Costs & Credits	31.205-13	X		X
Entertainment Costs	31.205-14		X
Fines, Penalties, & Mischarging Costs	31.205-15		X	X
Gains & Losses on Disposition or Impairment of Depreciable Property or Other Capital Assets	31.205-16			X
Goodwill	31.205-49		X
Idle Facilities & Idle Capacity Costs	31.205-17		X	X
Independent Research & Development/ Bid & Proposal Costs	31.205-18		X	X
Insurance & Indemnification	31.205-19	X	X	X
Interest & Other Financial Costs	31.205-20		X	X
Labor Relations Costs	31.205-21	X
Legal & Other Proceedings Costs	31.205-47		X	X
Lobbying and Political Activity Costs	31.205-22		X
Losses on Other Contracts	31.205-23		X
Maintenance & Repair Costs	31.205-24	X
Manufacturing & Production Engineering Costs	31.205-25	X
Material Costs	31.205-26	X
Organization Costs	31.205-27		X
Other Business Expenses	31.205-28	X
Plant Protection Costs	31.205-29	X
Patent Costs	31.205-30	X	X	X
Plant Reconversion Costs	31.205-31		X	X
Precontract Costs	31.205-32			X
Professional & Consultant Service Costs	31.205-33	X	X	X
Public Relations & Advertising Costs	31.205-1		X	X
Recruitment Costs	31.205-34	X	X	X
Relocation Costs	31.205-35	X	X	X
Rental Costs	31.205-36	X		X
Royalties & Other Costs for Use of Patents	31.205-37			X
Selling Costs	31.205-38	X	X
Service & Warranty Costs	31.205-39	X
Special Tooling & Special Test Equipment Costs	31.205-40			X
Taxes	31.205-41	X	X
Termination Costs	31.205-42	X		X
Trade, Business, Technical, and Professional Activity Costs	31.205-43	X		X
Training & Education Costs	31.205-44	X	X	X
Transportation Costs	31.205-45	X
Travel Costs	31.205-46			X

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