FAR Cost Principles Series (Part 2, Allowability, Reasonableness, and Allocability)

Posted on February 7, 2013 by Marty Herbert

As a former DCAA auditor, it was a primary goal for my position to find and report unallowable costs. Recently, I have been hearing a lot more from the community in terms of making FAR 31.2 easier to understand. This is pat 2 in the series. Part 1 on total costs is here.

Part 2 – FAR 31.201-2, 3, and 4

Allowability

Determining allowability (FAR 31.201-2) is simple if you know how. Again, though, the FAR defines the concept with a term not even discussed until further down the regulation. Quite simply, costs are allowable as long as:

The cost is not unallowable, (we will talk about these another time)

The cost is outlined in the terms of the contract,

The cost is in compliance with cost standards, GAAP, and other business promulgations,

The cost is allocable, and

The cost is reasonable.

But wait, we haven’t even talked about Reasonableness and Allocabiliity yet, not to mention that pesky “limitations in this subpart” idea (FAR 31.205 is interesting to say the least). It seems to me, they could have just as easily said “

See also everything else in this section and the cost accounting standards.

” The definition of allowable costs is part and parcel of everything else throughout FAR 31.2. This is the reason I decided on this series of discussions.

Reasonableness

Determining reasonableness (FAR 31.201-3) always seemed very subjective to me. What is reasonable to one person may not be to another. This is FAR Costsspecifically true when crossing regional boundaries, or even within a metropolitan area. The Washington DC metro area is quite vast and sprawling. From the foothills of the Appalachians to the Atlantic coast going west to east makes for a wide variety of “reasonable” costs on certain items. One of the simplest examples (on a micro and macro level) of reasonableness is gas. A $0.50 swing from one place to another within the “region” is the norm. Direct and indirect costs are under added scrutiny based on location of business and the reasonable assessment of the person looking at the cost. It is a tough one to deal with and a tightrope to walk.

FAR CostsAt some level, when I think of reasonableness, I think about the theory of relativity. Depending on where you are standing, a cost can be relative to the circumstances around it.

Allocability

Determining allocability (FAR 31.201-4) can be a head-scratcher unless you know what allocable means in the first place. It is at this point that I want to interject that according to Microsoft and Google, “allocable” is not a real word (try typing it out in Word or in the Chrome browser and see if the little red line doesn’t show up under it). Allocable means assignable, chargeable, or distributable (also not a word). The government is concerned mainly with the cost specifically related to the contract. That relationship can be direct or indirect, as long as the distribution of indirect costs is done in reasonable proportion to the benefit from the allocable cost. Last, the cost can be allocable if it is related to the overall operation of the business (the catch-all category of G&A). At some level, all costs can be allocable in some way to a final cost objective (usually a contract). If these costs are related to government contracts, the cost can be allowable in terms of allocability, but other considerations need to be made.

I guess the next topic really becomes Direct and Indirect costs since I have mentioned them so much…