31.205-3
Bad debts
Bad debts and any directly associated costs are unallowable and must not be charged to government contracts.
Overview
FAR 31.205-3 addresses the treatment of bad debts in government contract cost accounting. It explicitly states that bad debts—including both actual and estimated losses from uncollectible accounts receivable, as well as any directly associated costs such as collection and legal fees—are unallowable costs. This means contractors cannot charge these losses or related expenses to government contracts, regardless of the circumstances leading to the debt. The regulation ensures that the government does not bear the financial risk of a contractor’s uncollected receivables or related recovery efforts.
Key Rules
- Unallowable Bad Debts
- Losses from uncollectible accounts receivable and other claims cannot be charged to government contracts.
- Associated Costs
- Costs directly related to bad debts, such as collection and legal costs, are also unallowable.
Responsibilities
- Contracting Officers: Must ensure that contractors do not include bad debts or related costs in their cost submissions or billings.
- Contractors: Must exclude all bad debt losses and associated costs from contract cost proposals, incurred cost submissions, and billings.
- Agencies: Should review cost submissions for compliance and disallow any bad debt-related costs.
Practical Implications
- This rule prevents contractors from shifting the financial burden of uncollected receivables to the government.
- Contractors must have accounting systems in place to identify and segregate unallowable bad debt costs.
- Common pitfalls include inadvertently including collection or legal costs related to bad debts in allowable cost pools.