Federal contracts: Unallowable costs explained

By Marcelle Green, Marketing Director, DCAA Resource Center
 
Certain expenses are legitimate costs of doing business, but the federal government won’t reimburse them as part of a federal contact.
 
Does your business advertise? Make donations or contributions to non-profit organizations? Pay interest on loans or other debts?
 
Chances are you do, and any businessperson would agree that these, along with many others, are legitimate costs of doing business.
 
But not to the federal government. Or, more precisely, these are costs the government will not reimburse for contracts that include costs as part of the price. (Most federal contracts do.)
 
According to the FAR (Federal Acquisition Regulations), there are a number of business expenses which must be shown in a company’s accounting system, but are specifically excluded from government reimbursement. Those costs, in general terms, are:
 
  • Advertising
  • Airfare Travel Costs in excess of the lowest available option
  • Alcohol
  • Automobile Costs for Personal Use
  • Debt Service
  • Donations and contributions
  • Entertainment
  • Goods and Services Cost for Personal Use
  • Lobbying
  • Personal Housing and Living Expenses
  • Public Relations
But it isn’t quite that simple. For example, FAR 31.205-1 disallows most advertising costs, except those specifically required by contract, or to acquire scarce items for contract performance or dispose of scrap or surplus materials acquired for contract performance. Companies can charge the government for attending trade shows to promote products normally sold to the government, but can’t deduct the costs of giveaways (swag), alcohol, or entertainment. (So much for using mojitos to break down sales resistance.)
 
Do you need to send an executive on an airplane as part of the contract? FAR 31.205-46 says only the lowest priced airfare during normal business hours is allowable. But, of course, there are circumstances when higher costs would be allowed: when such accommodations require circuitous routing, require travel during unreasonable hours, excessively prolong travel, result in increased cost that would offset transportation savings, are not reasonably adequate for the physical or medical needs of the traveler, or are not reasonably available to meet mission requirements.
 
This does not mean that a company is not allowed to incur these costs; it simply means the government is not willing to pay for them, either directly or indirectly, through government contracts. To manage these expenses, separate accounts must be set up to avoid charging them to contracts audited by the DCAA. When setting up a Chart of Accounts, companies must include a cost pool (or category) for unallowable costs.
 
Because contract provisions sometimes allow certain costs that are unallowable in the FAR, companies should check the contract carefully for any differences with the FAR. In addition, companies must have written policies that show which costs will be classified as unallowable, and how the company will set up its accounting system to avoid charging the government for unallowable expenses.
 
About the DCAA Resource Center
The DCAA Resource Center is an on-line resource for government contractors and the accounting firms and other consultants that service them. The center is the first comprehensive, unbiased resource for all things related to DCAA, and includes information about every aspect of government cost accounting and resources for both government contractors and accountants.

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