31.205-20
Interest and other financial costs
Interest and most financial costs related to borrowing or raising capital are unallowable on government contracts, with limited exceptions for certain tax authority interest.
Overview
FAR 31.205-20 establishes that interest on borrowings, bond discounts, costs associated with financing and refinancing capital, legal and professional fees for preparing prospectuses, and costs related to issuing stock rights are generally unallowable costs in government contracts. This means contractors cannot charge these expenses to the government. An exception exists for interest assessed by State or local taxing authorities, but only under the specific conditions outlined in FAR 31.205-41(a)(3). Contractors should also reference FAR 31.205-28 for related guidance on other financing costs.
Key Rules
- Unallowable Financial Costs
- Interest, bond discounts, and most financing/refinancing costs cannot be charged to government contracts.
- Unallowable Legal/Professional Fees
- Fees for preparing prospectuses and issuing stock rights are not reimbursable.
- Exception for Tax Authority Interest
- Interest assessed by State or local taxing authorities may be allowable if it meets the criteria in FAR 31.205-41(a)(3).
Responsibilities
- Contracting Officers: Must ensure that unallowable financial costs are excluded from contract pricing and reimbursement.
- Contractors: Must identify, segregate, and exclude these unallowable costs from any billing or cost proposals to the government.
- Agencies: Should review cost submissions for compliance and enforce disallowance of these costs.
Practical Implications
- This rule prevents the government from subsidizing a contractor’s financing or capital-raising activities.
- Contractors must be diligent in cost accounting to avoid including unallowable financial costs in proposals or invoices.
- Common pitfalls include inadvertently including interest or related fees in indirect cost pools or failing to recognize exceptions for tax authority interest.