Federal Government Contractor Guidance

Identifying Unallowable Costs

Because of Federal Law and Regulations, certain types of costs are not subject to reimbursement under a contract.

The government is also not allowed to negotiate a contract based on cost and pricing data that includes unallowable costs.Costs that are unallowable per the Federal Acquisition Regulation (FAR) Cost Principles or mutually agreed to be unallowable (as contracted) and all directly associated costs must be identified and excluded from billings, claims, and proposals related to a Government contract. An adequate accounting system must have a means of identifying unallowable costs in the general ledger and excluding these costs from all contract billings and claims.

Expressly Unallowable Costs are subject to penalty if included in a claim or billing.  Expressly unallowable cost "means a particular item or type of cost which, under the express provisions of an applicable law, regulation, or contract, is specifically named and stated to be unallowable."

The FAR Cost Principles addresses the allowability of many types of costs, but not all costs. The cost principles also make certain cost allowable under special or unique circumstances. There may exist exceptions or particular situations where a cost is allowable or unallowable.

Ways to handle unallowable cost:

• Set up the chart of accounts to collect unallowable costs by category (name);
• Brief the contract to determine if a special provision makes a particular cost unallowable;
• Institute Policies and Procedures that identify unallowable costs and the specific procedure to remove the cost from billings;
• Train staff so they understand what constitutes an unallowable cost.

Kline & Company is available to discuss questions you may have as to the allowability of expenses and recommend how to identify and segregate unallowable expenses.

This article was authored by Mac Young of Kline & Company for the purpose of providing guidance to our existing and potential clients.

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