Accounting for unallowable costs
Contractors must rigorously identify, segregate, and exclude unallowable and directly associated costs from all government contract submissions, using compliant accounting practices and, if applicable, approved statistical sampling methods.
Overview
FAR 31.201-6 establishes the requirements for identifying, excluding, and accounting for unallowable costs in government contract billings, claims, and proposals. Contractors must ensure that expressly unallowable costs, as well as any directly associated costs, are not included in submissions to the government. The regulation also addresses the use of statistical sampling for identifying unallowable costs, the need for advance agreements on sampling methods, and the treatment of directly associated costs within cost pools. Materiality of directly associated costs must be evaluated based on their dollar amount, cumulative effect, and impact on government contract costs. Special attention is given to salary expenses related to unallowable activities and the need to exclude material directly associated costs unless they remain in a cost pool with the unallowable cost.
Key Rules
- Identification and Exclusion of Unallowable Costs
- Contractors must identify and exclude expressly unallowable and mutually agreed unallowable costs, including directly associated costs, from all government contract submissions.
- Written Decisions and Like Circumstances
- Costs deemed unallowable by a contracting officer's written decision must be identified, including similar costs incurred for the same purpose under like circumstances.
- Accounting Practices and Statistical Sampling
- Contractors must follow 48 CFR 9904.405 for accounting practices. Statistical sampling is allowed if it meets specific criteria (unbiased, excludes high-risk/large transactions, allows audit verification) and is preferably covered by an advance agreement.
- Treatment of Directly Associated Costs in Cost Pools
- Directly associated costs in a cost pool allocated over a base including the unallowable cost remain in the pool; otherwise, material directly associated costs must be purged.
- Materiality and Salary Expenses
- Materiality of directly associated costs must be assessed, and salary expenses for employees involved in unallowable activities are treated as directly associated costs if material.
Responsibilities
- Contracting Officers: Issue written decisions on unallowable costs, review and approve advance agreements on statistical sampling, and ensure compliance.
- Contractors: Identify, segregate, and exclude unallowable and directly associated costs; maintain proper accounting practices; seek advance agreements for statistical sampling; assess materiality; and document compliance.
- Agencies: Oversee contractor compliance, provide guidance, and request auditor input on advance agreements.
Practical Implications
- This section ensures government funds are not used to reimburse unallowable costs, protecting taxpayer interests.
- Contractors must have robust accounting systems and internal controls to identify and segregate unallowable costs.
- Failure to comply can result in penalties, disallowed costs, and increased audit scrutiny. Common pitfalls include improper identification of directly associated costs, inadequate documentation, and non-compliant statistical sampling methods.