DCAA Compliance Blog
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In the world of Government contracting, the government defines an allowable cost as a cost that they will pay either in full (direct costs) or an allowable portion (allowable indirect costs) of that cost. An unallowable cost is one that the government has stated that they will not reimburse the contractor for the expense. All agencies start with the Federal Acquisition Regulation (FAR) Part 31.201-6 to define unallowable costs and discusses how to account for unallowable costs. FAR Part 31.205 discusses specific costs and discusses whether they are allowed or not (it is not an all-inclusive list, however it is fairly comprehensive). Each agency can add to this list, however, with agency specific guidelines. For instance, there are Defense Federal Acquisition Requirements Supplements (DFARS), Department of Energy Acquisition Regulation Supplement (DEARS) as well as similar guidelines for other agencies. In addition, there are differences in requirements between contracts and grants. There is further delineation between awards to “For-Profit Organizations” as opposed to “Non-Profit Organizations” or “Educational Institutions” or “State, Local &/or Indian Tribe Governments”. Here are some examples of other agency restrictions for “For-Profit” Organizations (not all inclusive):
National Institute of Health (NIH) (48 CFR 74.27)
- All FAR unallowables
- Limitation on Salary, anything over is unallowable
- Independent Research and Development (IR&D)
- Sales and Marketing
- Business Development, Commercialization costs
National Science Foundation (NSF) (48 CFR 31.201-6 – Contracts & 2 CFR 215.27 - Grants)
- All FAR unallowables
- All Patent Costs
- Sales and Marketing
- Business Development
Department of Energy (DOE) (10 CFR 600.317)
- All FAR unallowables (FAR Part 31)
- All Patent costs (Phase I SBIR only – Patent prosecution costs for all funding)
- Foreign Travel
Regardless of which agency you deal with, you must make sure that all the unallowable costs are not billed to the government. How do you ensure that unallowable costs aren’t billed to the government? First of all, you must segregate your unallowable costs under general ledger control in your accounting system. You must ensure that all unallowable costs are input into this section and that these costs don’t end up in your direct or your indirect costs that are billed to the government. When a contractor is dealing with multiple government agencies, this can be a bit tricky as some costs that are unallowable for one agency could be an allowable cost for another agency.
It is imperative that you handle your unallowable costs correctly. If you are audited and unallowable costs are found to be in you allowable areas (direct or indirect), they will be disallowed and you will end up owing the government money. That is not the only implication, generally, your accounting system will also fail the audit based on this finding and you may be debarred from any future Federal Government contracts.
If you have questions about unallowable costs, how to handle them in your accounting system and anything else concerning unallowables, please contact ReliAscent (303) 999-3802.
- Brian Ormsby, ReliAscentRead More
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: