Costs Not Covered by a FAR Cost Principle

The cost principles in FAR (Federal Acquisition Regulations) Part 31 do not cover every element of cost that may be incurred by a Government contractor. The absence of coverage of a particular cost category however does not mean the cost are automatically allowable, or even unallowable. Remember, a cost must also be reasonable and allocable to the contract and it must also comply with contract terms. There are a lot of situations where the Government will cap certain costs by inserting provisions in the contract. For example, DOE (Energy) likes to cap executive compensation and many Agencies will cap the amount of overtime that can be charged to their contract(s).

A good example of costs not specifically mentioned in the FAR cost principles is signing bonuses and retention pay. Both types of costs are common in the construction industry. Both types are generally going to be allowable provided they are also reasonable and allocable because they meet the "reasonableness" test in FAR 31.201-3. But every once in a while, an auditor will try to challenge the costs, especially when they see the word "bonus" in the description.

When a cost is not specifically covered by a cost principle, the determination of allowability is based on the principles and standards in FAR Part 31 and the treatment of similar or related selected items.

When ore than one subsection in FAR 31.205 is relevant to a cost, the cost shall 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. When a cost to which more than one subsection in 31.205 is relevant 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 at issue.

Take, for example, the cost of website development and maintenance. Those costs are not covered in a cost principle so it is necessary to look a little deeper to determine allowability. So you look at the purpose. Is it for advertising? Probably - that is certainly one of the purposes of a website. Advertising is generally unallowable. Is it to provide the public an address or contact information? Yes - that would be allowable. Is it to disseminate information to employees? Yes - that would also be allowable. Is it a vehicle to accept orders for products? Yes - but allowability would be governed by the selling cost principle (FAR 31.205-38). So since a company website serves both allowable and unallowable purposes, one would need to apportion the costs between allowable and unallowable.

Sometimes it's not so easy to determine whether a cost is allowable or unallowable - especially where some level of apportionment is required.

New Guidebook on Cost Principles from DCAA

The Defense Contract Audit Agency (DCAA) has eliminated Chapter 7, Audit Guidance on Selected Areas of Costs, from its Contract Audit Manual and replaced it with a new and greatly expanded guidebook on FAR Part 31 Cost Principles. DCAA writes:

This Guidebook addresses FAR 31.2 and other areas of cost audited. In this first edition of the guidebook, we have expanded what used to be included in Chapter 7 by adding 23 additional chapters to address FAR 31.2 cost principals that had not previously been included in CAM. Initially, many sections of the guidebook are a replica of what was in Chapter 7; however, we have rewritten and updated 13 areas of cost. We will be continuing to rewrite the other chapters in this guidebook and will publish them as completed.

The 13 updated chapters include:

1. Bonus and incentive compensation (Chapter 7)
2. Depreciation (Chapter 19)
3. IR&D/B&P (Chapter 33)
4. Legal (Chapter 41)
5. Royalties (Chapter 64)
6. Pensions (Chapter 53)
7. Manufacturing and production engineering (Chapter 45)
8. Joint ventures and teaming arrangements (Chapter 37)
9. Insurance (Chapter 34)
10. Idle facilities and idle capacity (Chapter 32)
11. Patents (Chapter 52)
12. Consultants (Chapter 58)
13. Alcoholic beverages (Chapter 2)

This new guide is definitely a work in process as many of the chapters state "This chapter is currently under construction.

The cost covered by the guide are listed in alphabetical order rather than FAR Part 31 order which may be easier or more cumbersome to navigate depending upon your familiarity with FAR. It appears that each FAR cost principle is covered as well as many other types of costs not specifically covered in the FAR.

We should note that this is intended to be guidance for the contract auditor and not the final word on what is allowable or not allowable. Many disputes have risen over DCAA's interpretation of FAR and the Government does not always prevail.

You can access DCAA's new guidebook directly by clicking here.