What is an allowable cost under FAR Part 31?

FAR Part 31 establishes the cost principles that determine which costs the government will pay. Understanding what is and is not allowable is essential to preparing a defensible T4C settlement proposal.

The four allowability criteria (FAR 31.201-2): For a cost to be allowable, it must be: (1) reasonable — a prudent businessperson would have incurred this cost under similar circumstances; (2) allocable — the cost is assignable to your government contract based on benefits received; (3) compliant with GAAP and CAS where applicable; (4) not expressly prohibited by FAR 31.205 or your contract terms.

FAR 31.205 — Selected Costs (the unallowable list): Costs that are always unallowable include: entertainment and hospitality (31.205-14); advertising, except recruitment advertising for contract positions (31.205-1); bad debts (31.205-3); contributions and donations (31.205-8); fines, penalties, and mischarging costs (31.205-15); lobbying and political activity (31.205-22); executive compensation above the statutory benchmark cap (31.205-6(p)); and goodwill (31.205-49).

What auditors look for: DCAA and TCOs specifically scrutinize costs that touch these categories — entertainment mixed with business development, owner compensation that exceeds market benchmarks, and costs allocated to the contract that primarily benefit other parts of the business.

If in doubt, disclose: If you are uncertain whether a cost is allowable, include it as a separate line with a note that it is subject to TCO review. Do not silently include questionable costs — that creates certification risk. Do not silently exclude them if they are actually allowable — that costs you money.

RELATED GUIDES

• → Recoverable costs in a T4C settlement
• → Overhead rates in T4C settlements
• → FAR 49.207 contractor certification