31.201-4 Determining allocability
Source: FAR 31.201-4 on acquisition.gov
Only costs that meet specific allocability criteria can be charged to government contracts, so contractors must carefully justify and document all cost allocations.
Overview
FAR 31.201-4 defines when a cost is considered allocable to a government contract, which is a fundamental requirement for cost allowability and reimbursement. A cost is allocable if it can be assigned to one or more cost objectives (such as contracts, projects, or tasks) based on the relative benefits received or another equitable relationship. The regulation outlines three specific criteria for allocability: (a) the cost is incurred specifically for the contract; (b) the cost benefits both the contract and other work and can be reasonably distributed; or (c) the cost is necessary for the overall operation of the business, even if it cannot be directly linked to a specific cost objective. This determination is essential for contractors to ensure proper cost accounting and compliance with government requirements.
Key Rules
- Definition of Allocability
- A cost must be assignable to one or more cost objectives based on benefits received or an equitable relationship.
- Criteria for Allocability
- Costs are allocable if they are incurred specifically for the contract, benefit both the contract and other work (and can be reasonably distributed), or are necessary for overall business operations.
Responsibilities
- Contracting Officers: Must verify that costs claimed by contractors meet allocability criteria before approval.
- Contractors: Must ensure costs charged to government contracts meet one of the three allocability criteria and are properly documented.
- Agencies: Oversee compliance and may audit cost allocations for accuracy and fairness.
Practical Implications
- This section ensures that only appropriate costs are charged to government contracts, protecting government funds and ensuring fairness.
- Contractors must have robust accounting systems to track and justify cost allocations.
- Common pitfalls include misallocating indirect costs or failing to document the basis for allocation, which can lead to disallowed costs during audits.
A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis 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; or
(c) Is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown.