FAR Part 31: Contract Cost Principles and Procedures

In plain English

FAR Part 31 provides the cost principles and procedures used to determine allowable costs for pricing and administering Government contracts when cost analysis is performed. It applies to many contract types, including fixed-price contracts with cost analysis and cost-reimbursement contracts, and affects how contractors propose, bill, and defend costs. Understanding these rules is essential for contractors to ensure they only claim allowable, allocable, and reasonable costs.

Key rules

• A cost is allowable only if it is reasonable, allocable, complies with applicable Cost Accounting Standards or generally accepted accounting principles, and is not expressly unallowable. (31.201-2)
• A cost is reasonable if it does not exceed what a prudent person would incur in competitive business. (31.201-3)
• A cost is allocable if it is assignable to one or more cost objectives based on relative benefits received or other equitable relationship. (31.201-4)
• Income, rebates, allowances, or other credits relating to allowable costs must be credited to the Government. (31.201-5)
• Costs that are expressly unallowable or mutually agreed to be unallowable must be identified and excluded from billings, claims, and proposals. (31.201-6)
• No final cost objective may be charged as a direct cost if other costs for the same purpose in like circumstances have been included in an indirect cost pool. (31.202)
• Advance agreements may be used to clarify the allowability, allocability, or reasonableness of specific costs before they are incurred. (31.109)
• Certain costs are expressly unallowable, such as bad debts, contributions or donations, entertainment costs, fines and penalties, interest, lobbying and political activity costs, and alcoholic beverages. (31.205-3, 31.205-8, 31.205-14, 31.205-15)

Who does what

In practice

• When bidding, you must ensure that all proposed costs are allowable, reasonable, and allocable; unallowable costs cannot be included in your proposal.
• During performance, you must maintain accounting records that segregate unallowable costs and properly allocate indirect costs.
• If you have questions about the allowability of a specific cost, consider requesting an advance agreement from the contracting officer before incurring the cost.

Common pitfalls

• Including expressly unallowable costs (e.g., entertainment, fines, lobbying) in billings or proposals can lead to disallowance and potential penalties.
• Charging a cost as direct when similar costs are treated as indirect can result in mischarging and violate the direct/indirect cost consistency requirement.
• Failing to credit the Government for rebates or income related to allowable costs can result in overbilling and repayment obligations.

Written by AI from this part's codified text (2026-10-04); cited sections are checked against the part. A guide, not legal advice: the regulation text, the solicitation and your contract rule.