Wednesday, April 8, 2015

Allowablility of Costs Not Specifically Mentioned in FAR

Some Government contractors believe that if a particular cost is not specifically mentioned in a FAR Part 31 cost principle, or is mentioned but not specifically prohibited by those cost principles, they are allowable costs under a contract. That is not the case. FAR 31.204, Application of Principles and Procedures, contains a provision that states "Failure to include any item of cost does not imply that it is either allowable or unallowable." The determination of allowability, in the absence of specific coverage for a particular cost, shall be based on the principles and standards in FAR Part 31 and the treatment of similar or related selected items.

Application of this principle however requires matters of judgment, interpolation, and persuasiveness which many in the Government contracting community are ill-equipped to promote - especially given the relative inexperience of audit and contract administration staffs. Far too many in the acquisition corp, to contractors' delight, take the easy road, reasoning that if a cost is not specifically prohibited, it must be allowable (presuming that the cost also meets the "reasonableness" test).

Sometimes more than one cost principle applies to a contractor cost. A contractor's website might be a good example. Websites can be used for advertising (unallowable), public relations (probably unallowable), employee information (allowable), selling (probably allowable), supplier information (allowable), or dissemination of financial information like 10K reports (allowable). When a cost is subject to one or more cost principles, it should be apportioned among the various principles for allowability considerations and determinations. Where a cost cannot be apportioned, the determination of allowability shall be based on the guidance contained in the subsection that most specifically deals with, or best captures the essential nature of the cost issue. Here again, judgment is required and one would expect that the parties (i.e. the contractor and the Government) might have differing opinions. In the case of websites, is it primarily advertising or primarily some other form of allowable activity?

Contractors should not take the position that costs not addressed in FAR are automatically allowable. Such costs should be evaluated in consonance with these provisions found in FAR 31.204.

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