How do you handle unallowable costs under CAS 405 and FAR 31.2?

1 What are unallowable costs?

Unallowable costs are any costs that are not reasonable, allocable, or allowable under the terms of the contract, the applicable cost principles, or the cost accounting standards. Reasonable costs are those that are generally recognized as ordinary and necessary for the conduct of the business. Allocable costs are those that benefit or are caused by the contract and can be measured and assigned to it. Allowable costs are those that comply with the limitations and exclusions specified in the contract, the cost principles, or the cost accounting standards.

2 How do you identify unallowable costs?

The best way to identify unallowable costs is to consult the cost principles in FAR Part 31.2, which provide a list of specific costs that are either expressly unallowable or subject to conditions or limitations. Some examples of unallowable costs are advertising, bad debts, entertainment, fines and penalties, lobbying, and goodwill. However, this list is not exhaustive and you should also consider the nature and circumstances of each cost and the terms of the contract.

3 How do you treat unallowable costs?

Unallowable costs must be excluded from any billing, claim, or proposal to the government. They must also be segregated and identified in your accounting system and records. You cannot shift or hide unallowable costs by allocating them to other contracts or cost pools. You must also disclose any changes in your accounting practices that affect the treatment of unallowable costs in your cost accounting disclosure statement or in writing to the contracting officer.

4 What are the consequences of mischarging unallowable costs?

Mischarging unallowable costs can result in serious consequences, such as disallowance of costs, reduction of contract price, withholding of payments, termination of contract, suspension or debarment, civil or criminal penalties, or False Claims Act liability. The government can also impose interest on any overpayment of unallowable costs. Additionally, you may damage your reputation and credibility as a contractor and lose future business opportunities.

5 How do you avoid mischarging unallowable costs?

To avoid mischarging unallowable costs, you need to implement and maintain an effective internal control system that ensures compliance with the cost accounting standards and guidelines. You should also train your employees and subcontractors on the rules and requirements of unallowable costs and monitor their performance and invoices. Furthermore, you should review your contracts and proposals carefully and seek clarification or guidance from the contracting officer or your legal counsel if you have any doubts or questions.

6 How do you handle disputed or questionable costs?

Sometimes, you may encounter costs that are disputed or questionable as to their allowability, reasonableness, or allocability. In such cases, you should document your rationale and justification for including or excluding them in your billing, claim, or proposal and provide supporting evidence and references. You should also communicate and negotiate with the contracting officer or the auditor to resolve any issues or disagreements. If you cannot reach a satisfactory resolution, you may appeal to the appropriate authority or court.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?