31.201-6 Accounting for unallowable costs
Source: FAR 31.201-6 on acquisition.gov
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.
(a) Costs that are expressly unallowable or mutually agreed to be unallowable, including mutually agreed to be unallowable directly associated costs, shall be identified and excluded from any billing, claim, or proposal applicable to a Government contract. A directly associated cost is any cost that is generated solely as a result of incurring another cost, and that would not have been incurred had the other cost not been incurred. When an unallowable cost is incurred, its directly associated costs are also unallowable.
(b) Costs that specifically become designated as unallowable or as unallowable directly associated costs of unallowable costs as a result of a written decision furnished by a contracting officer shall be identified if included in or used in computing any billing, claim, or proposal applicable to a Government contract. This identification requirement applies also to any costs incurred for the same purpose under like circumstances as the costs specifically identified as unallowable under either this paragraph or paragraph (a) of this subsection.
(c)
(1) The practices for accounting for and presentation of unallowable costs must be those described in 48 CFR 9904.405, Accounting for Unallowable Costs.
(2) Statistical sampling is an acceptable practice for contractors to follow in accounting for and presenting unallowable costs provided the criteria in paragraphs (c)(2)(i), (c)(2)(ii), and (c)(2)(iii) of this subsection are met:
(i) The statistical sampling results in an unbiased sample that is a reasonable representation of the sampling universe.
(ii) Any large dollar value or high risk transaction is separately reviewed for unallowable costs and excluded from the sampling process.
(iii) The statistical sampling permits audit verification.
(3) For any indirect cost in the selected sample that is subject to the penalty provisions at 42.709, the amount projected to the sampling universe from that sampled cost is also subject to the same penalty provisions.
(4) Use of statistical sampling methods for identifying and segregating unallowable costs should be the subject of an advance agreement under the provisions of 31.109 between the contractor and the cognizant administrative contracting officer or Federal official. The advance agreement should specify the basic characteristics of the sampling process. The cognizant administrative contracting officer or Federal official shall request input from the cognizant auditor before entering into any such agreements.
(5) In the absence of an advance agreement, if an initial review of the facts results in a challenge of the statistical sampling methods by the contracting officer or the contracting officer’s representative, the burden of proof shall be on the contractor to establish that such a method meets the criteria in paragraph (c)(2) of this subsection.
(d) If a directly associated cost is included in a cost pool that is allocated over a base that includes the unallowable cost with which it is associated, the directly associated cost shall remain in the cost pool. Since the unallowable costs will attract their allocable share of costs from the cost pool, no further action is required to assure disallowance of the directly associated costs. In all other cases, the directly associated costs, if material in amount, must be purged from the cost pool as unallowable costs.
(e)
(1) In determining the materiality of a directly associated cost, consideration should be given to the significance of-
(i) The actual dollar amount,
(ii) The cumulative effect of all directly associated costs in a cost pool, and
(iii) The ultimate effect on the cost of Government contracts.
(2) Salary expenses of employees who participate in activities that generate unallowable costs shall be treated as directly associated costs to the extent of the time spent on the proscribed activity, provided the costs are material in accordance with paragraph (e)(1) of this subsection (except when such salary expenses are, themselves, unallowable). The time spent in proscribed activities should be compared to total time spent on company activities to determine if the costs are material. Time spent by employees outside the normal working hours should not be considered except when it is evident that an employee engages so frequently in company activities during periods outside normal working hours as to indicate that such activities are a part of the employee’s regular duties.
(3) When a selected item of cost under 31.205 provides that directly associated costs be unallowable, such directly associated costs are unallowable only if determined to be material in amount in accordance with the criteria provided in paragraphs (e)(1) and (e)(2) of this subsection, except in those situations where allowance of any of the directly associated costs involved would be considered to be contrary to public policy.