What are FAR Part 31 Unallowable Costs?

Definition

FAR Part 31 Unallowable Costs are costs that federal acquisition rules do not permit a contractor to charge to the Government under an applicable contract. FAR Part 31 establishes cost principles for determining whether costs are allowable, and specific sections identify categories that are expressly unallowable or subject to conditions. Examples can include certain fines and penalties, lobbying and political activity costs, selected organization expenses, and costs associated with improper charging of Government contracts.

Unallowable does not necessarily mean that a contractor cannot incur the expense for its commercial business. The key accounting requirement is to identify the cost correctly and exclude it from applicable Government billings, claims, and proposals when required.

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How Unallowable Costs Are Determined

Cost allowability is evaluated using the applicable FAR cost principle, contract terms, and the nature of the underlying transaction. A cost that falls within a selected-cost provision must be evaluated under the requirements of that provision rather than simply being treated according to its financial-accounting classification.

FAR Part 31 also recognizes that one transaction can involve more than one relevant cost principle. When a cost can be apportioned, each portion is evaluated under the applicable guidance. When it cannot be apportioned, the provision that most specifically addresses the essential nature of the cost is used.

This distinction matters because an expense may be recorded in the contractor's general ledger while still requiring separate treatment for Government contract costing and billing.

Common Examples of Unallowable Costs

FAR Part 31 contains numerous selected-cost provisions, so contractors should evaluate the specific facts rather than rely on a broad category name alone. Common examples include:

  • Fines and penalties: Costs resulting from violations of laws and regulations are generally unallowable, subject to specified exceptions.
  • Mischarging costs: Costs caused by improper charging or recording of Government contract costs can be unallowable, including certain costs incurred to identify or correct the mischarging.
  • Lobbying and political activity: Certain expenditures associated with influencing elections, legislation, or political activities are expressly unallowable.
  • Organization costs: Certain expenses related to corporate organization, reorganization, mergers and acquisitions, and raising capital are unallowable.
  • Selected advertising and public relations: Certain promotional activities are unallowable unless they satisfy specific FAR conditions.

Accounting and Segregation Requirements

Contractors need accounting procedures that distinguish allowable costs from expressly unallowable costs and from directly associated costs. Under FAR 31.201-6, expressly unallowable or mutually agreed unallowable costs must be identified and excluded from applicable Government contract billings, claims, and proposals.

Directly associated costs also require attention. These are costs generated solely because an unallowable cost was incurred. For example, employee time devoted to an activity that generates an unallowable cost may require separate treatment when the applicable materiality criteria are met.

A practical control structure can use separate account classifications, transaction-level flags, project and charge-code controls, approval workflows, and reconciliation procedures. This creates a traceable connection between the source transaction, accounting entry, cost classification, and Government contract submission.

Relationship With Procurement and ERP Records

Unallowable-cost controls should connect with upstream procurement records because requisitions, purchase order approvals, sourcing decisions, and contract-related spend can establish the business purpose of a transaction. Strong procurement controls also help finance teams maintain spend visibility and determine whether costs belong to a particular Government contract, an indirect cost pool, or another business activity.

The Manual Purchase Order Process vs Automated: Cut 80% Costs can be evaluated in the broader context of purchase-order controls, approval routing, documentation, and consistent transaction records. These records provide useful evidence when finance teams review whether an expenditure has an appropriate contractual and accounting classification.

ERP architecture also matters when contractors maintain multiple systems or migrate financial processes. The principles discussed in How Hyperbots Helped Avoid Millions in ERP Migration Costs are relevant to the broader need for controlled ERP integration, data continuity, and consistent finance workflows when Government contract accounting processes are extended or migrated.

Amortization Of Contract Costs addresses the accounting treatment of qualifying costs associated with obtaining or fulfilling contracts. Its treatment differs from FAR allowability, so a cost can require separate analysis for financial reporting and Government contract costing.

Incremental Costs Of Obtaining A Contract focuses on costs that arise specifically from obtaining a contract and may have different financial-reporting treatment from the FAR allowability analysis applied to Government contract costs.

Fair Value Less Costs To Sell is another accounting measurement concept rather than a FAR unallowability category. Keeping these concepts distinct helps finance teams avoid applying a financial-reporting classification as though it automatically determines Government contract allowability.

Best Practices for Managing Unallowable Costs

Effective management starts before a transaction reaches a billing or proposal. Finance and contracts teams can maintain a documented FAR cost matrix, map relevant cost categories to the chart of accounts, and establish review procedures for selected-cost areas.

  • Maintain clear account and project classifications for expressly unallowable costs.
  • Document the business purpose and supporting evidence for material transactions.
  • Review directly associated costs when an underlying transaction is identified as unallowable.
  • Reconcile unallowable-cost accounts before Government billings, claims, and proposals are prepared.
  • Coordinate accounting, contracts, procurement, and project teams when classification depends on contract terms.
  • Retain an audit trail connecting source documents, approvals, accounting entries, and cost submissions.

Summary

FAR Part 31 Unallowable Costs are expenses that must be excluded from applicable Government contract billings, claims, or proposals when FAR provisions designate them as unallowable. Accurate treatment depends on identifying the relevant cost principle, separating unallowable and directly associated costs, maintaining supporting records, and connecting accounting data with procurement, contract, and ERP processes. A disciplined classification and reconciliation process helps contractors produce reliable Government contract cost information and support accurate financial reporting.

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