Accounting for Unallowable Costs

Small businesses (as defined by the SBA) are exempt from Cost Accounting Standards (CAS).  That statutory exemption leads many small businesses to assume that they do not have to concern themselves with CAS. That assumption would be a mistake. You see, many of the 19 promulgated CAS Standards have been incorporated into the Federal Acquisition Regulations (FAR) in whole or in part. And, small businesses are not exempt from FAR. One of the CAS standards that has been incorporated into FAR in whole is CAS 405, Accounting for Unallowable Costs.

FAR 31.201-6(c) states "The practices for accounting for and presentation of unallowable costs will be those as described in 48 CRF 9904.405 (i.e. CAS 405), Accounting for Unallowable Costs." In order to fully understand the accounting requirements, it is necessary to understand the requirements of CAS 405.

The fundamental requirement of FAR and CAS with respect to unallowable costs is that they be identified and excluded from any billing, claim, or proposal applicable to a Government contract. The accounting for unallowable costs requires far more effort. Essentially, the CAS accounting requirements state that the costs must remain "visible" and avilable to the Government.

1. The detail and depth of records required as backup support for proposals, billings, or claims shall be that which is adequate to establish and maintain visibility of identified unallowable costs, their accounting status in terms of their allocability to contract cost objectives, and the cost accounting treatment which has been accorded such costs.
2. The visibility requirement may be satisfied by any form of cost identification which is adequate for purposes of contract cost determination and verification.
3. Specific identification of unallowable cost is not required in circumstances where, based upon considerations of materiality, the Government and the contractor reach agreement on an alternate method that satisfies the purpose of the Standard.

To read more about the accounting requirements for unallowable costs, go here and scroll down to section containing CAS 405.