31.203
Indirect costs
FAR 31.203 requires contractors to logically group and allocate indirect costs using consistent, equitable methods, and prohibits double-charging or unallowable pass-through charges.
Overview
FAR 31.203 defines the requirements for identifying, accumulating, and allocating indirect costs in government contracts. Indirect costs are those not directly attributable to a single contract or work, but rather benefit multiple cost objectives. The regulation establishes rules for cost grouping, allocation bases, base periods, and special considerations for unique contract types and business changes. It also prohibits allocating the same cost as both direct and indirect, and addresses unallowable excessive pass-through charges.
Key Rules
- CAS Coverage
- For contracts subject to full Cost Accounting Standards (CAS), allocation follows CAS rules; otherwise, FAR 31.203(b)-(h) applies.
- Indirect Cost Allocation
- Indirect costs must be allocated only to cost objectives that benefit from them, and not if the same cost is already charged directly elsewhere.
- Cost Groupings and Bases
- Contractors must group indirect costs logically and select allocation bases that reflect the benefit to cost objectives, avoiding unnecessary complexity.
- Base Integrity
- Once an allocation base is set, it cannot be fragmented; all items in the base must share indirect costs proportionally, including unallowable costs.
- Revisions for Business Changes
- Allocation methods must be revised if significant business changes occur.
- Offsite Cost Groupings
- Separate groupings may be needed for offsite locations to ensure equitable cost distribution.
- Base Period
- The base period is typically the contractor’s fiscal year, unless CAS or special circumstances dictate otherwise.
- GOCO Plants
- Special care is required for Government-owned, contractor-operated plants, possibly needing more precise cost groupings and allocation methods.
- Excessive Pass-Through Charges
- Indirect costs that are excessive pass-through charges are unallowable.
Responsibilities
- Contracting Officers: Ensure contractors’ indirect cost allocation methods comply with FAR and CAS, and review for excessive pass-through charges.
- Contractors: Properly group, accumulate, and allocate indirect costs; maintain integrity of allocation bases; revise methods as needed; and avoid unallowable charges.
- Agencies: Oversee compliance, especially for GOCO plants and when significant business changes occur.
Practical Implications
- Ensures fair and consistent allocation of indirect costs across contracts.
- Prevents double-charging costs as both direct and indirect.
- Requires contractors to maintain robust accounting systems and adapt to business changes.
- Noncompliance can result in disallowed costs or audit findings.