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FAR and DFARS › FAR Part 31: Contract Cost Principles and Procedures › Subpart 31.2

FAR 31.201-3 Determining reasonableness.

The codified text (eCFR, as of 2026-10-02). Under the Revolutionary FAR Overhaul ↗, agencies follow class deviations with new text for many parts while the formal rules go through the Federal Register: check the solicitation and your contract's clauses, which rule.

In plain English

This section explains how to determine whether a cost is reasonable for government contracting purposes. A cost is reasonable if it does not exceed what a prudent person would incur in competitive business, and the contractor bears the burden of proving reasonableness if a cost is challenged. Reasonableness depends on factors like whether the cost is ordinary and necessary, sound business practices, the contractor's responsibilities, and any deviations from its own practices.

Applies to: Contractors incurring costs under government contracts

What it requires

  • Establish that a challenged cost is reasonable, if the contracting officer or representative challenges it after an initial review of the facts

Key terms: reasonable · prudent person · competitive business · burden of proof · arm's length bargaining

Written by AI from this section's text. A guide, not legal advice: the text below rules.

The text

(a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer's representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.

(b) What is reasonable depends upon a variety of considerations and circumstances, including—

(1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor's business or the contract performance;

(2) Generally accepted sound business practices, arm's length bargaining, and Federal and State laws and regulations;

(3) The contractor's responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and

(4) Any significant deviations from the contractor's established practices.

Sections that refer to it

  • 31.205-6 Compensation for personal services.

← 31.201-2 Determining allowability. · 31.201-4 Determining allocability. →

Rule changes for FAR Part 31

Source: eCFR, 48 CFR chapters 1 and 2 (GPO GovInfo bulk data) ↗. Plain words for the terms: glossary.

FAR 31.201-3 Determining reasonableness · SpendQuery