When does FAR 31.201-2 apply?

Is the cost being charged to a flexibly-priced or cost-reimbursable government contract? If yes, every cost must pass the four-part test. This is non-negotiable and applies regardless of how small the cost is. Is there a specific FAR 31.205 cost principle that addresses this category of cost? If yes, the specific principle controls (e.g., travel under 31.205-46, compensation under 31.205-6). The 31.201-2 gateway test still applies on top of the specific principle. Can the contractor produce contemporaneous documentation showing reasonableness, allocability, and conformance? If not, the cost is treated as unallowable. The burden of proof is on the contractor and DCAA does not have to prove a negative.

What are the most common contractor pitfalls under FAR 31.201-2?

Reconstructing documentation after an audit notice: Contemporaneous records are the standard. After-the-fact memos describing the business purpose of meals, travel, or consulting are heavily discounted by DCAA and ASBCA panels. Build the documentation discipline in real time. Treating "the executive approved it" as evidence of reasonableness: Internal approval is not the reasonableness test. The test is whether a prudent business person would incur the cost in the conduct of competitive business. Approval workflows complement, but do not replace, a market-based reasonableness rationale. Ignoring CAS or GAAP consistency on a single cost: A cost that is allowable in isolation but inconsistently treated (sometimes direct, sometimes indirect) violates CAS 402 and falls under 31.201-2. Consistency is itself a cost-principle requirement. Charging costs to a contract before the contract is in effect: Pre-contract costs are governed by FAR 31.205-32 and require specific written authorization. Charging routine pre-award costs to a later contract without that authorization is a recurring DCAA finding.

What audit-flag patterns are associated with FAR 31.201-2?

Auditors and contracting officers commonly flag: Costs charged with no purpose or business-reason documentation in the accounting record; Inconsistent direct/indirect treatment of similar costs across contracts; Missing receipts or invoices for charges over the contractor's own documentation thresholds; Costs charged to government work that exceed published commercial benchmark ranges without explanation; Accounting system that cannot segregate unallowable costs from allowable ones.

FAR

FAR 31.201-2 — Determining allowability

The four-part allowability test. A cost is allowable only if it is reasonable, allocable, compliant with CAS or GAAP as applicable, and not excluded by the terms of the contract or by a specific cost principle.

Citation: 48 C.F.R. § 31.201-2 · Live text on acquisition.gov · eCFR

What this clause does

FAR 31.201-2 is the gateway cost principle in Subpart 31.2. Every cost charged to a federal contract must clear all four prongs of the allowability test. The first prong, reasonableness, is defined further at FAR 31.201-3 and asks whether a prudent person in the conduct of competitive business would incur the cost. The second prong, allocability, is defined at FAR 31.201-4 and turns on whether the cost benefits the contract or relates to it through a measurable causal-beneficial relationship. The third prong is conformance with CAS for CAS-covered contractors, and with GAAP otherwise, applied consistently. The fourth prong is the absence of a specific exclusion in the contract or in a particular cost principle (such as the unallowability of entertainment under 31.205-14 or alcohol under 31.205-51).

The burden of proof on allowability rests on the contractor. The clause is explicit: when the contractor is unable to demonstrate allowability, the cost is unallowable. DCAA audit findings repeatedly invoke this burden when contemporaneous documentation is missing. A receipt, a contract reference, a written purpose, and a cost-objective allocation are the standard evidence package.

31.201-2 also requires the contractor to maintain records adequate to demonstrate that costs claimed comply with the cost principles. This is an accounting-system requirement, not just a documentation rule. Inadequate accounting systems often surface as a 31.201-2 finding even when individual costs would be allowable in isolation.

Does this clause apply to my contract?

Three tests resolve applicability. Read each in order; the first "no" usually means the clause does not flow.

1.Is the cost being charged to a flexibly-priced or cost-reimbursable government contract?
If yes, every cost must pass the four-part test. This is non-negotiable and applies regardless of how small the cost is.
2.Is there a specific FAR 31.205 cost principle that addresses this category of cost?
If yes, the specific principle controls (e.g., travel under 31.205-46, compensation under 31.205-6). The 31.201-2 gateway test still applies on top of the specific principle.
3.Can the contractor produce contemporaneous documentation showing reasonableness, allocability, and conformance?
If not, the cost is treated as unallowable. The burden of proof is on the contractor and DCAA does not have to prove a negative.

Common contractor pitfalls

Patterns that produce questioned costs, back-wage liability, or False Claims Act exposure under this clause.

Reconstructing documentation after an audit notice
Contemporaneous records are the standard. After-the-fact memos describing the business purpose of meals, travel, or consulting are heavily discounted by DCAA and ASBCA panels. Build the documentation discipline in real time.
Treating "the executive approved it" as evidence of reasonableness
Internal approval is not the reasonableness test. The test is whether a prudent business person would incur the cost in the conduct of competitive business. Approval workflows complement, but do not replace, a market-based reasonableness rationale.
Ignoring CAS or GAAP consistency on a single cost
A cost that is allowable in isolation but inconsistently treated (sometimes direct, sometimes indirect) violates CAS 402 and falls under 31.201-2. Consistency is itself a cost-principle requirement.
Charging costs to a contract before the contract is in effect
Pre-contract costs are governed by FAR 31.205-32 and require specific written authorization. Charging routine pre-award costs to a later contract without that authorization is a recurring DCAA finding.

Audit-flag patterns

Specific signals that contracting officers, DCAA, and agency IGs use to surface noncompliance.

Costs charged with no purpose or business-reason documentation in the accounting record
Inconsistent direct/indirect treatment of similar costs across contracts
Missing receipts or invoices for charges over the contractor's own documentation thresholds
Costs charged to government work that exceed published commercial benchmark ranges without explanation
Accounting system that cannot segregate unallowable costs from allowable ones

How FieldLedger helps

FieldLedger's DCAA Compliance and Indirect Rate Engine apply the 31.201-2 four-part test at the transaction level. Unallowable account flagging, contemporaneous purpose capture on expense entries, and consistent direct/indirect mapping are built into the data model, so the audit-trail evidence exists by default.

DCAA compliance →Indirect Rate Engine →DCAA readiness check →

Related clauses

Clauses that flow alongside or interact with FAR 31.201-2.

Frequently asked

What does FAR 31.201-2 require?: The four-part allowability test. A cost is allowable only if it is reasonable, allocable, compliant with CAS or GAAP as applicable, and not excluded by the terms of the contract or by a specific cost principle.
When does FAR 31.201-2 apply?: Is the cost being charged to a flexibly-priced or cost-reimbursable government contract? If yes, every cost must pass the four-part test. This is non-negotiable and applies regardless of how small the cost is. Is there a specific FAR 31.205 cost principle that addresses this category of cost? If yes, the specific principle controls (e.g., travel under 31.205-46, compensation under 31.205-6). The 31.201-2 gateway test still applies on top of the specific principle. Can the contractor produce contemporaneous documentation showing reasonableness, allocability, and conformance? If not, the cost is treated as unallowable. The burden of proof is on the contractor and DCAA does not have to prove a negative.
What are the most common contractor pitfalls under FAR 31.201-2?: Reconstructing documentation after an audit notice: Contemporaneous records are the standard. After-the-fact memos describing the business purpose of meals, travel, or consulting are heavily discounted by DCAA and ASBCA panels. Build the documentation discipline in real time. Treating "the executive approved it" as evidence of reasonableness: Internal approval is not the reasonableness test. The test is whether a prudent business person would incur the cost in the conduct of competitive business. Approval workflows complement, but do not replace, a market-based reasonableness rationale. Ignoring CAS or GAAP consistency on a single cost: A cost that is allowable in isolation but inconsistently treated (sometimes direct, sometimes indirect) violates CAS 402 and falls under 31.201-2. Consistency is itself a cost-principle requirement. Charging costs to a contract before the contract is in effect: Pre-contract costs are governed by FAR 31.205-32 and require specific written authorization. Charging routine pre-award costs to a later contract without that authorization is a recurring DCAA finding.
What audit-flag patterns are associated with FAR 31.201-2?: Auditors and contracting officers commonly flag: Costs charged with no purpose or business-reason documentation in the accounting record; Inconsistent direct/indirect treatment of similar costs across contracts; Missing receipts or invoices for charges over the contractor's own documentation thresholds; Costs charged to government work that exceed published commercial benchmark ranges without explanation; Accounting system that cannot segregate unallowable costs from allowable ones.
How does FieldLedger help with FAR 31.201-2?: FieldLedger's DCAA Compliance and Indirect Rate Engine apply the 31.201-2 four-part test at the transaction level. Unallowable account flagging, contemporaneous purpose capture on expense entries, and consistent direct/indirect mapping are built into the data model, so the audit-trail evidence exists by default.

Sources

FAR clause text — acquisition.gov/far/31.201-2
Live regulatory text — eCFR (Title 48)
DCAA Contract Audit Manual — dcaa.mil/Guidance/CAM
Plain-English methodology — FieldLedger methodology

Snapshot date: 2026-05-08. Clause text is binding only as of the version incorporated into your specific contract — check acquisition.gov for the live regulatory text.