The Core Allowability Framework
A practical starting point is to evaluate a cost against several connected requirements. Under FAR 31.201-2, allowability considers reasonableness, allocability, applicable Cost Accounting Standards or appropriate accounting practices, contract terms, and limitations in Part 31.
- Reasonableness: The nature and amount of the cost should be appropriate in the circumstances of contract performance.
- Allocability: The cost should be assignable to a contract or other cost objective based on the benefits received or another equitable relationship.
- Consistency: Applicable accounting practices and standards should be followed consistently.
- Contract terms: Specific contract provisions can affect whether a particular cost may be claimed.
- Cost limitations: Individual FAR provisions can establish additional conditions or limits for particular categories of expense.
These principles mean that recording an expense in the general ledger does not automatically make the amount allowable under a government contract.
Direct and Indirect Cost Treatment
FAR Part 31 distinguishes between costs that can be directly associated with a contract and indirect costs that benefit multiple cost objectives. Direct costs may include labor, materials, or subcontractor expenses specifically incurred for contract performance. Indirect costs can include expenses that support multiple contracts or the broader business and therefore require an appropriate allocation method.
For example, suppose a contractor incurs $120,000 of engineering labor directly supporting Contract A and $60,000 of facility costs benefiting several contracts. The $120,000 may be identified directly with Contract A when the applicable requirements are satisfied, while the $60,000 requires an appropriate allocation methodology rather than simply being assigned to one contract.
A sound cost structure should preserve the distinction between direct costs, indirect pools, allocation bases, and credits so that project reporting and government cost submissions remain traceable.
Accounting Records and Cost Documentation
Contractors are responsible for maintaining accounting records and supporting documentation that demonstrate claimed costs were incurred, properly allocated, and handled according to applicable cost principles. Documentation can include invoices, payroll records, timekeeping data, purchase records, allocation calculations, contracts, approvals, and other transaction-level evidence.
Finance teams should establish consistent cost codes and project dimensions so transactions can be traced from source documents into the general ledger and contract cost reports. Period-end procedures should also identify accruals, adjustments, credits, and corrections before contract costs are reported.
Systems supporting procurement should connect requisitions, approvals, sourcing records, purchase orders, and receiving information with the appropriate project and accounting dimensions. A digital purchase order process can strengthen the connection between authorized spending and subsequent cost records.
Procurement and Payment Controls
Procurement controls are closely connected to cost accounting because purchasing decisions create commitments and eventually generate transactions that enter contract cost records. A Purchase Order Inventory Management System can connect purchase orders with vendor information, inventory activity, compliance processes, and cost-control workflows.
Payment controls should also distinguish authorized obligations from actual cash disbursements. Finance teams can review supplier terms, approvals, payment methods, and timing when determining how transactions move from procurement through accounts payable and into contract accounting. A controlled vendor payment process can support this visibility.
Duplicaton Check capabilities can identify duplicate purchase requests using inventory information and existing purchase-request data across cost centers, supporting cleaner procurement records before transactions progress into accounting.
Payment Timing and Financial Management
Payment timing can affect cash management without changing the underlying cost classification. Early Payments Recommendations can evaluate early-payment discounts, vendor terms, and cost of capital to support payment timing decisions while maintaining defined approval and processing workflows.
Finance teams may also use AR Automation Software for receivables workflows such as collection follow-ups and payment-to-invoice matching. Although accounts receivable is separate from FAR cost allowability, disciplined receivables processes contribute to broader cash-flow visibility and financial control.
Unlimited Access can support finance organizations that need broad user availability, automated onboarding, role-based configurations, and continuous system access across accounting and operational workflows.
Related Accounting Concepts
Generally Accepted Accounting Principles provide a broader framework for financial accounting and reporting. FAR Part 31 can require appropriate accounting practices or applicable Cost Accounting Standards when determining cost allowability, so financial reporting practices and government contract cost requirements should be evaluated in their respective contexts.
Generally Accepted Accounting Principles GAAP is another terminology entry used to describe generally accepted accounting principles in financial reporting. Government contract cost accounting can involve additional requirements beyond the presentation objectives of general-purpose financial statements.
Current Cost describes a measurement approach based on the cost of acquiring or replacing an asset or resource under current conditions. Understanding cost measurement concepts can help finance teams distinguish financial reporting measurements from contract-specific cost requirements.
Best Practices for FAR Part 31 Cost Principles
- Map contract requirements to appropriate project, cost, and general-ledger dimensions before transactions are incurred.
- Maintain documentation that supports the occurrence, classification, allocation, and amount of each significant claimed cost.
- Separate direct costs, indirect cost pools, allocation bases, and applicable credits in the accounting structure.
- Review contract-specific provisions alongside the relevant FAR cost principle before including costs in government claims.
- Reconcile project accounting records with procurement, payroll, accounts payable, and supporting documentation.
- Maintain consistent accounting practices and documented procedures across reporting periods and contracts.
Summary
FAR Part 31 Cost Principles provide a structured framework for evaluating and accounting for costs associated with applicable federal contracts and subcontracts. The core concepts of reasonableness, allocability, applicable accounting standards, contract terms, documentation, and cost classification help contractors maintain traceable financial records and support reliable government contract cost reporting.