The Federal Acquisition Regulation (FAR) Part 31 exists to help government contractors determine which costs are reimbursable and how these costs should be accounted for. This is a document every contractor needs to be familiar with since charging for costs not covered under FAR Part 31 could result in penalties, and failing to report every reimbursable cost could considerably reduce a contractor’s profit margin.
The purpose of Federal Acquisition Regulation (FAR) Part 31 is to establish cost principles and procedures. These guidelines help maintain consistency between the accounting methods used by different contractors and need to be followed so that government agencies can easily review costs and approve the reimbursement of qualifying expenses.
What kind of costs are reimbursable under FAR Part 31?
Costs have to meet a few requirements to be considered as reimbursable:
- Costs should be reasonable. It is your responsibility to make sure you purchase the needed materials and equipment at a reasonable price and do not overpay another contractor if you decide to subcontract part of the project.
- Allocability is another important factor to take into consideration. Allocability is the term used to refer to a cost that is relevant to a job. In other words, an expense is reimbursable only if you can prove that it is necessary and beneficial to the project you are working on.
- Costs need to be recorded and submitted according to the cost accounting standards (CAS). If you are not familiar with these standards, read more HERE.
- Costs need to respect the terms of the contract and cannot correspond to expenses listed as unallowable in FAR Part 31. Unallowable costs can fall into two categories:
- Expressly Unallowable Costs. These are costs that are unallowable under any and all circumstances, no exceptions. Examples of these include: Interest Expense, Donations or Contributions, Entertainment, Contingencies, Bad Debts, Fines & Penalties, Goodwill, Losses on Contracts, Organization/Re-Organization Costs, Alcohol, Promotion, Personal Use, Profit Distribution, First Class Airfare, Legal Costs, and Travel Costs in Excess of Federal Travel Per Diem Rates. See the FAR 31.2 for more details on these items and more.
- Circumstantial Unallowable Costs: These costs are either allowable or unallowable depending on the special and unique circumstances that embody numerous exceptions and special rules.
This is only a high level overview of FAR Part 31 and you definitely need to familiarize yourself with this document as well as with cost accounting standards (CAS) government contractors have to follow before you submit your costs for reimbursement purposes. This is crucial since penalties could be applied or the reimbursement process delayed if you did not follow guidelines when submitting your costs. Contact us to learn more about our accounting software designed to meet the unique needs of government contractors and how this tool could help you follow accounting guidelines as well as accurately track reimbursable costs.