Apportioning Costs Before Making Allowability Determinations

Transactions and activities must be reviewed to ascertain whether the related costs are allowable under Government contracts. Most contractors have at least a passing familiarity with the cost principles of FAR 31.205 addressing the allowability of costs under Government contracts. While these principles address most of the costs likely to be incurred by companies, they do not cover every possible situation. Some costs or activities do not fit nicely into these "buckets". That is why FAR cautions that the omission of any particular item from the FAR cost principles "...does not imply that it is either allowable or unallowable." The determination of allowability shall be based on basic principles and standards in FAR Part 31 and the treatment of similar or related cost principles.

Some transactions have allowable and unallowable components. Travel is a common example where purpose of the trip often covers allowable activities (meeting with the PCO) and unallowable activities (lobbying a legislator). Another example is the company website we discussed earlier this week that serves both allowable (employee information) and unallowable (advertising) purposes. When more than one subsection in 31.205 is relevant to a particular cost or activity, FAR 31.204(d) requires that the cost be apportioned among the applicable subsections, and the determination of allowability of each portion shall be based on the guidance contained in the applicable subsection.

FAR also states that when a cost, to which more than one cost principle is relevant, cannot be apportioned, the determination of allowability shall be based on the gidance contained in the subsectin that most specifically deals with, or best captures the essential nature of the cost at issue.

When apportioning costs between allowable and unallowable activities, it is often necessary to exercise judgment and make assumptions. Obviously, the less subjective, the easier it will be to defend your position when questioned by an auditor. Therefore, when using apportioning techniques, be sure the "split" is based on clear, concise, logical, defensible, and adequate supporting detail and rationale.