CAS 405 - Accounting for Unallowable Costs. The fundamental requirement of this Standard is very simple. Contractors must set up a process to identify unallowable costs and then to segregate those costs in their accounting system. That way, unallowable costs should not impact the price of negotiated contracts (where history is used to estimate costs) nor get billed to the Government.
Unallowable costs are those expressly unallowable under FAR Part 31 cost principles, FAR supplements, regulations, and contract terms. The definition also includes costs that are mutually agreed to be unallowable as well as directly associated costs. Directly associated costs are those that are generated solely as a result of another incurred cost and which would not have been incurred otherwise.
Unallowable costs that would normally be part of an indirect rate allocation base must remain in the base for rate computation purposes even though the cost cannot be charged to the Government.
The Standard requires that records by adequate to establish and maintain visibility of identified unallowable costs (including directly associated costs). The adequacy of records has been a source of contention over the years. Contractors often feel that if they do not claim the costs, then the auditor has no right to review the underlying support. Auditors on the other hand, argue that they need the source documents in order to ensure that contractors have identified and excluded all "directly associated" costs.
CAS 405 applies to both full and modified CAS-covered contracts. However, the essence of this Standard has been incorporated into FAR 31.201-6, Unallowable Costs, and is therefore applicable to all Government contractors.
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