When does FAR 31.203 apply?

Does the contract include FAR 52.216-7 (Allowable Cost and Payment) or any cost-reimbursable terms? If yes, FAR 31.203 governs how indirect costs flow to that contract. Cost-reimbursable contracts pay actual indirect costs, capped at provisional or actual rates. The pool definition is the contract-compliance backbone. Is the contract a fixed-price contract requiring certified cost or pricing data? If yes, FAR 31.203 governs the cost-buildup that supported the negotiated price. DCAA can request the rate basis years after award if there is a defective-pricing question. Are indirect costs being charged across multiple final cost objectives (contracts) and government and commercial work? This is when pool definition matters most. Allocation must follow CAS or FAR 31.203 logic. A G&A pool that lumps commercial selling expense with allowable G&A will not survive review.

What are the most common contractor pitfalls under FAR 31.203?

Pool definition that mixes allowable and unallowable costs: Selling and marketing costs (FAR 31.205-1, 31.205-38) are partly allowable; entertainment (31.205-14) is unallowable. Lumping unallowable costs into an allowable pool inflates the rate and is a top DCAA finding. Maintain segregated unallowable accounts. Allocating G&A on direct labor when total cost input is the right base: CAS 410 (and FAR 31.203 by extension) governs G&A allocation. Direct-labor base distorts when material or subcontract costs are large. Total cost input or value-added base is more defensible for material-heavy work. Provisional rates that diverge sharply from actuals at year-end: Big swings between provisional and actual rates raise questions about both the provisional submission and the underlying cost accounting. Reconcile monthly: variance flagged early is variance the contracting officer will accept. Treating IR&D as direct on a specific contract: Independent Research & Development (FAR 31.205-18) is by definition not specifically required by a contract. Charging IR&D direct to a contract converts it from allowable indirect to questioned direct.

What audit-flag patterns are associated with FAR 31.203?

Auditors and contracting officers commonly flag: Indirect rate variance >10% provisional vs. actual without documented cause; Pool composition change with no corresponding change in cost structure; Unallowable cost categories (entertainment, alcohol, lobbying, fines) appearing in allowable pools; Single G&A pool for firms with both government and substantial commercial work; Lack of documented Indirect Cost Submission package matching DCAA ICE schedule format.

FAR

FAR 31.203 — Indirect costs

The federal cost principle that defines what an indirect cost is, how it must be grouped into pools, and how it must be allocated to final cost objectives consistent with FAR 31.201-4 (allocability).

Citation: 48 C.F.R. § 31.203 · Live text on acquisition.gov · eCFR

What this clause does

FAR 31.203 governs indirect-cost accounting on every cost-reimbursable, T&M, and incentive-type federal contract. It applies to commercial firms when a contract or subcontract requires submission of certified cost or pricing data, or when cost-reimbursable terms are used. The clause sits inside Subpart 31.2, which contains the cost principles for commercial firms (Subpart 31.6 covers state and local government, 31.7 covers nonprofits).

The core requirement: indirect costs must be accumulated in logical groupings (pools) and allocated to final cost objectives using bases that have a causal-beneficial relationship to the costs in the pool. The number and composition of pools depends on the firm. Common structures include a two-pool (overhead + G&A), three-pool (fringe + overhead + G&A), or four-pool (fringe + site overhead + home office overhead + G&A) layout. Cost Accounting Standard 418 governs allocation of direct and indirect costs for CAS-covered contractors.

A contractor cannot simply allocate a fixed percentage to all contracts. The allocation method has to reflect the way the costs are actually incurred. Pool changes mid-year are heavily scrutinized: a change must reflect a genuine change in the cost structure, not a reallocation to chase favorable rate outcomes on specific contracts.

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.Does the contract include FAR 52.216-7 (Allowable Cost and Payment) or any cost-reimbursable terms?
If yes, FAR 31.203 governs how indirect costs flow to that contract. Cost-reimbursable contracts pay actual indirect costs, capped at provisional or actual rates. The pool definition is the contract-compliance backbone.
2.Is the contract a fixed-price contract requiring certified cost or pricing data?
If yes, FAR 31.203 governs the cost-buildup that supported the negotiated price. DCAA can request the rate basis years after award if there is a defective-pricing question.
3.Are indirect costs being charged across multiple final cost objectives (contracts) and government and commercial work?
This is when pool definition matters most. Allocation must follow CAS or FAR 31.203 logic. A G&A pool that lumps commercial selling expense with allowable G&A will not survive review.

Common contractor pitfalls

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

Pool definition that mixes allowable and unallowable costs
Selling and marketing costs (FAR 31.205-1, 31.205-38) are partly allowable; entertainment (31.205-14) is unallowable. Lumping unallowable costs into an allowable pool inflates the rate and is a top DCAA finding. Maintain segregated unallowable accounts.
Allocating G&A on direct labor when total cost input is the right base
CAS 410 (and FAR 31.203 by extension) governs G&A allocation. Direct-labor base distorts when material or subcontract costs are large. Total cost input or value-added base is more defensible for material-heavy work.
Provisional rates that diverge sharply from actuals at year-end
Big swings between provisional and actual rates raise questions about both the provisional submission and the underlying cost accounting. Reconcile monthly: variance flagged early is variance the contracting officer will accept.
Treating IR&D as direct on a specific contract
Independent Research & Development (FAR 31.205-18) is by definition not specifically required by a contract. Charging IR&D direct to a contract converts it from allowable indirect to questioned direct.

Audit-flag patterns

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

Indirect rate variance >10% provisional vs. actual without documented cause
Pool composition change with no corresponding change in cost structure
Unallowable cost categories (entertainment, alcohol, lobbying, fines) appearing in allowable pools
Single G&A pool for firms with both government and substantial commercial work
Lack of documented Indirect Cost Submission package matching DCAA ICE schedule format

How FieldLedger helps

The FieldLedger Indirect Rate Engine handles pool definition, monthly cost allocation, and provisional vs. actual rate tracking under FAR 31.203 and CAS 418. The DCAA-ready exports follow the ICE schedule structure, so the year-end Incurred Cost Submission is mostly a matter of binding the pages together.

DCAA compliance →Indirect Rate Engine →DCAA readiness check →

Related clauses

Clauses that flow alongside or interact with FAR 31.203.

Frequently asked

What does FAR 31.203 require?: The federal cost principle that defines what an indirect cost is, how it must be grouped into pools, and how it must be allocated to final cost objectives consistent with FAR 31.201-4 (allocability).
When does FAR 31.203 apply?: Does the contract include FAR 52.216-7 (Allowable Cost and Payment) or any cost-reimbursable terms? If yes, FAR 31.203 governs how indirect costs flow to that contract. Cost-reimbursable contracts pay actual indirect costs, capped at provisional or actual rates. The pool definition is the contract-compliance backbone. Is the contract a fixed-price contract requiring certified cost or pricing data? If yes, FAR 31.203 governs the cost-buildup that supported the negotiated price. DCAA can request the rate basis years after award if there is a defective-pricing question. Are indirect costs being charged across multiple final cost objectives (contracts) and government and commercial work? This is when pool definition matters most. Allocation must follow CAS or FAR 31.203 logic. A G&A pool that lumps commercial selling expense with allowable G&A will not survive review.
What are the most common contractor pitfalls under FAR 31.203?: Pool definition that mixes allowable and unallowable costs: Selling and marketing costs (FAR 31.205-1, 31.205-38) are partly allowable; entertainment (31.205-14) is unallowable. Lumping unallowable costs into an allowable pool inflates the rate and is a top DCAA finding. Maintain segregated unallowable accounts. Allocating G&A on direct labor when total cost input is the right base: CAS 410 (and FAR 31.203 by extension) governs G&A allocation. Direct-labor base distorts when material or subcontract costs are large. Total cost input or value-added base is more defensible for material-heavy work. Provisional rates that diverge sharply from actuals at year-end: Big swings between provisional and actual rates raise questions about both the provisional submission and the underlying cost accounting. Reconcile monthly: variance flagged early is variance the contracting officer will accept. Treating IR&D as direct on a specific contract: Independent Research & Development (FAR 31.205-18) is by definition not specifically required by a contract. Charging IR&D direct to a contract converts it from allowable indirect to questioned direct.
What audit-flag patterns are associated with FAR 31.203?: Auditors and contracting officers commonly flag: Indirect rate variance >10% provisional vs. actual without documented cause; Pool composition change with no corresponding change in cost structure; Unallowable cost categories (entertainment, alcohol, lobbying, fines) appearing in allowable pools; Single G&A pool for firms with both government and substantial commercial work; Lack of documented Indirect Cost Submission package matching DCAA ICE schedule format.
How does FieldLedger help with FAR 31.203?: The FieldLedger Indirect Rate Engine handles pool definition, monthly cost allocation, and provisional vs. actual rate tracking under FAR 31.203 and CAS 418. The DCAA-ready exports follow the ICE schedule structure, so the year-end Incurred Cost Submission is mostly a matter of binding the pages together.

Sources

FAR clause text — acquisition.gov/far/31.203
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.