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FAR 31 Cost Allowability Test

Walk a federal-contract cost through the FAR 31.201-2 four-part test (reasonable, allocable, CAS or GAAP, contract terms) and the FAR 31.205 enumerated principles. Get a likely-allowable, questioned, or likely-unallowable verdict with the controlling citation.

FAR 31.201-2 four-part test

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Part 1: Reasonable · FAR 31.201-3

Is the cost reasonable?

A cost is reasonable if a prudent person in the conduct of competitive business would incur it. Test against ordinary business practice, sound business practice, federal and state laws, and arms-length terms with affiliates.

Answers so far

  • FAR 31.201-3Reasonable:—
  • FAR 31.201-4Allocable:—
  • 48 CFR 9904 / GAAPCAS / GAAP:—
  • Contract clauses, ceilings, limitationsContract terms:—
  • FAR 31.205Enumerated principles:—

Educational tool. The FAR 31.201-2 four-part test is the framework. Determining whether a specific cost is actually allowable requires a contracting-officer determination on a record. Use this to structure the analysis, not as a substitute for one.

What this calculator computes

The FAR 31.201-2 four-part test is the structural backbone of cost allowability under federal contracts. A cost qualifies for reimbursement, or for inclusion in an indirect cost pool that is reimbursed, only if it satisfies all four parts: reasonable, allocable, compliant with Cost Accounting Standards or generally accepted accounting principles, and consistent with the terms of the contract. Failing any one part disqualifies the cost.

The reasonableness test under FAR 31.201-3 asks whether a prudent person in the conduct of competitive business would incur the cost. The standard is competitive market practice, not internal preference. The allocability test under FAR 31.201-4 has three branches: a cost is allocable if it is incurred specifically for the contract, OR benefits both the contract and other work in measurable proportion, OR is necessary to overall operations even when a direct relationship cannot be shown.

The Cost Accounting Standards branch matters for CAS-covered contracts under 48 CFR 9904. The contractor must apply its disclosed accounting practices consistently. For non-CAS contracts the test is generally accepted accounting principles. Inconsistent treatment of like cost objectives is the most common failure here. The contract-terms branch sweeps in any specific clause that limits or prohibits a cost: ceiling rates, limitation of cost or funds, specific exclusions in section H of the schedule.

FAR 31.205 layers on top of the four-part test. It enumerates roughly fifty cost categories with explicit allowability rules. Some are expressly unallowable on their face: entertainment under 31.205-13, alcoholic beverages under 31.205-51, lobbying under 31.205-22, fines and penalties under 31.205-15. Others have detailed conditional rules: travel under 31.205-46 is allowable but only up to Federal Travel Regulation per diem; compensation under 31.205-6 has the statutory executive compensation cap.

FAR 31.201-6 requires that unallowable costs be identified and segregated in the books so they cannot be billed or rolled into any indirect rate. Directly associated costs (otherwise-allowable costs incurred only because of an unallowable activity, such as airfare to a lobbying meeting) must also be segregated. DCAA tests segregation under DCAA Contract Audit Manual chapter 7 on every incurred-cost audit.

How to use this

Use the wizard above for a single cost. Apply the same logic to a category for policy decisions:

  1. 1. Identify the cost objective

    Decide first whether the cost is direct (charged to a specific contract) or indirect (charged to a pool allocated across contracts). The four-part test runs the same way in both cases, but the consequences of getting it wrong differ.

  2. 2. Run FAR 31.201-2 in order

    Reasonable, then allocable, then CAS or GAAP, then contract terms. The order matters because failing early stops the analysis. A cost that is unreasonable does not need to be tested for allocability.

  3. 3. Cross-check FAR 31.205

    Even a cost that passes all four parts of the four-part test is unallowable if it falls within an expressly unallowable category in FAR 31.205. Expressly unallowable trumps the four-part test.

  4. 4. Document the determination

    Keep a memo describing the cost, the four-part analysis, and the FAR 31.205 cross-check. DCAA incurred-cost audits ask for this on sampled costs. A clean trail compresses audit cycle time and reduces questioned-cost dollars.

Frequently asked

What are the four parts of the FAR 31.201-2 allowability test?
A cost is allowable only if it is reasonable (FAR 31.201-3), allocable to the contract (FAR 31.201-4), compliant with Cost Accounting Standards or generally accepted accounting principles where applicable, and consistent with the terms of the contract. All four must be true. Failing any one disqualifies the cost.
What is the difference between expressly unallowable and directly associated unallowable costs?
Expressly unallowable costs are listed in FAR 31.205 (entertainment, lobbying, alcohol, fines, etc.) and are unallowable on their face. Directly associated unallowable costs are otherwise-allowable costs that exist only because of an unallowable activity, such as travel to a lobbying meeting. Both must be excluded from the indirect cost pool.
Do unallowable costs need to be segregated in the accounting system?
Yes. FAR 31.201-6 requires unallowable costs to be identified and segregated in the books so they cannot be billed or claimed in any indirect rate. The DCAA Contract Audit Manual chapter 7 walks the auditor through testing for proper segregation. Failure here is the most common audit finding.
What are the most common expressly unallowable categories?
FAR 31.205-1 advertising (most), 31.205-6 compensation above the statutory cap, 31.205-13 entertainment, 31.205-14 gifts, 31.205-15 fines and penalties, 31.205-20 interest, 31.205-22 lobbying, 31.205-27 organization costs, 31.205-46 travel beyond Federal Travel Regulation per diem caps, and 31.205-51 alcoholic beverages.
Is this calculator a substitute for a contracting officer determination?
No. The contracting officer makes the final allowability determination on a written record under FAR 42.801 and related sections. This calculator structures the analysis under the FAR 31 framework so the contractor can self-assess before a DCAA audit raises the question.

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