31.203 Indirect costs
Source: FAR 31.203 on acquisition.gov
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.
(a) For contracts subject to full CAS coverage, allocation of indirect costs shall be based on the applicable provisions. For all other contracts, the applicable CAS provisions in paragraphs (b) through (h) of this section apply.
(b) After direct costs have been determined and charged directly to the contract or other work, indirect costs are those remaining to be allocated to intermediate or two or more final cost objectives. No final cost objective shall have allocated to it as an indirect cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included as a direct cost of that or any other final cost objective.
(c) The contractor shall accumulate indirect costs by logical cost groupings with due consideration of the reasons for incurring such costs. The contractor shall determine each grouping so as to permit use of an allocation base that is common to all cost objectives to which the grouping is to be allocated. The base selected shall allocate the grouping on the basis of the benefits accruing to intermediate and final cost objectives. When substantially the same results can be achieved through less precise methods, the number and composition of cost groupings should be governed by practical considerations and should not unduly complicate the allocation.
(d) Once an appropriate base for allocating indirect costs has been accepted, the contractor shall not fragment the base by removing individual elements. All items properly includable in an indirect cost base shall bear a pro rata share of indirect costs irrespective of their acceptance as Government contract costs. For example, when a cost input base is used for the allocation of G&A costs, the contractor shall include in the base all items that would properly be part of the cost input base, whether allowable or unallowable, and these items shall bear their pro rata share of G&A costs.
(e) The method of allocating indirect costs may require revision when there is a significant change in the nature of the business, the extent of subcontracting, fixed-asset improvement programs, inventories, the volume of sales and production, manufacturing processes, the contractor’s products, or other relevant circumstances.
(f) Separate cost groupings for costs allocable to offsite locations may be necessary to permit equitable distribution of costs on the basis of the benefits accruing to the several cost objectives.
(g) A base period for allocating indirect costs is the cost accounting period during which such costs are incurred and accumulated for allocation to work performed in that period.
(1) For contracts subject to full or modified CAS coverage, the contractor shall follow the criteria and guidance in 48 CFR9904.406 for selecting the cost accounting periods to be used in allocating indirect costs.
(2) For contracts other than those subject to paragraph (g)(1) of this section, the base period for allocating indirect costs shall be the contractor’s fiscal year used for financial reporting purposes in accordance with generally accepted accounting principles. The fiscal year will normally be 12 months, but a different period may be appropriate (e.g., when a change in fiscal year occurs due to a business combination or other circumstances).
(h) Special care should be exercised in applying the principles of paragraphs (c), (d), and (e) of this section when Government-owned contractor-operated (GOCO) plants are involved. The distribution of corporate, division or branch office G&A expenses to such plants operating with little or no dependence on corporate administrative activities may require more precise cost groupings, detailed accounts screening, and carefully developed distribution bases.
(i) Indirect costs that meet the definition of "excessive pass-through charge" in 52.215-23, are unallowable.