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DCAA Unallowable Costs and other Agency rules

Posted by Mike Anderson on Tue, Jul 09, 2013 @ 04:20 PM

Government contractors must pay close attention to costs and whether or not the government considers them allowable costs or unallowable costs.  The government outlines specific costs that they do not want to see in their direct billings and they also do not want to see these included in any part of the calculation of the indirect rates.  The accounting system should provide a mechanism to prevent the inclusion of these types of costs.  An audit of an accounting system for compliance to government requirements will always look for such a systematic way of preventing these costs from billing to the government.  The allowability of these costs is defined in the Federal Acquisition Regulations (the FAR) in part 31.205.  There are certain costs in this part of the FAR that are unallowable under any circumstance.  A summary of some of this type of unallowable costs are:

Selected Cost

FAR Reference


Alcoholic Beverages

FAR 31.205-51


Bad Debts

FAR 31.205-3


Contributions or Donations

FAR 31.205-8


Entertainment Costs

FAR 31.205-14



FAR 31.205-49


Lobbying Costs (Executive)

FAR 31.205-50


Loss on other Contracts

FAR 31.205-23


Organization Costs

FAR 31.205-27


There are a number of other costs that are unallowable under certain circumstances and allowable under other circumstances.  These are the ones that you really need to pay attention to.  These type of costs include:

Selected Costs

FAR Reference


Compensation for Personal Services

FAR 31.205-6

Allowable With Restrictions


FAR 31.205-11

Allowable With Restrictions

Employee Morale, Health, Welfare, etc.

FAR 31.205-13

Allowable With Restrictions

Interest & Other Financial Cost

FAR 31.205-20

Allowable With Restrictions

IR&D &/or B&P Costs

FAR 31.205-18

Allowable With Restrictions

Patent Costs

FAR 31.205-30

FAR 31.205-37

Allowable With Restrictions

Public Relations & Advertising

FAR 31.205-1

Allowable With Restrictions

This is where the tricky part comes in, interpreting the restrictions.  When can these costs be allowable and when are they unallowable?  Could there be instances where the allowability is up to interpretation of the auditor? For instance, let's look at Employee Morale, Health & Welfare.  Many costs under this heading are allowable.  However, costs of gifts are unallowable. (Gifts do not include awards for performance made pursuant to 31.205-6(f) or awards made in recognition of employee achievements pursuant to an established contractor plan or policy.) Costs of recreation are unallowable, except for the costs of employees’ participation in company sponsored sports teams or employee organizations designed to improve company loyalty, team work, or physical fitness. As you can see, it becomes very important on how costs are used and especially important on how you label these costs. 

For someone that has not had extensive experience in allowable and unallowable costs for government contracts, this can be a very difficult and time consuming activity to sort and classify these costs to make sure you meet the FAR.  In addition, when other agencies are dealt with there are often different rules on allowability.  For instance, the DoE does not allow Patent prosecution costs unless specifically authorized in the award document (reference 10 CFR 600-317(a)(1)).  Another example is the HHS does not allow independent research and development costs (reference 45 CFR 74.27(a)).  As you can see from these examples, it pays to know the requirements and how they are related to make sure the allowability is determined correctly.  Experts like ReliAscent can do this for clients quickly and easily.

Topics: Unallowable Cost, DCAA Unallowable cost, Allowable cost