FAR Part 31: Contract Cost Principles and Procedures (Allowable vs Unallowable Costs in Federal Contracting)

FAR Part 31 is the U.S. government’s rulebook for deciding whether a contractor’s costs are allowable, allocable, and reasonable—and therefore eligible to be included in contract pricing, reimbursed during performance, or accepted in a settlement. If you work on cost-reimbursement contracts, time-and-materials/labor-hour contracts, or any negotiated action where the government performs cost analysis, FAR Part 31 becomes the backbone of how your costs are evaluated. In short: Part 31 is where federal contracting turns into cost logic, documentation discipline, and audit-ready accounting.

What FAR Part 31 covers

FAR Part 31 establishes cost principles and procedures used for:

• Pricing contracts, subcontracts, and modifications whenever cost analysis is performed
• Determining, negotiating, or allowing costs when a contract clause requires it (common in cost-type and certain other actions)

This matters because many contractors assume “fixed price means Part 31 doesn’t apply.” That’s not always true. Even in fixed-price environments, if the government is doing cost analysis (for example, evaluating proposed cost elements to determine price reasonableness), Part 31 can influence negotiation positions and what the government will accept as supportable.

The five tests for allowability (the core of Part 31)

A cost is generally allowable only if it passes five gates:

1. Reasonableness: A prudent business would incur it under similar circumstances
2. Allocability: The cost is properly chargeable to the contract based on benefits received
3. Accounting standards: Complies with Cost Accounting Standards (CAS) if applicable, otherwise generally accepted accounting principles/practices
4. Contract terms: The contract may impose tighter limits than the FAR baseline
5. Part 31 limitations: The FAR can explicitly cap or disallow certain costs, even if they’re normal in commercial business

This is why Part 31 isn’t just “accounting.” It’s contract strategy. If a cost fails one gate, it doesn’t matter how well it passes the other four.

Direct vs indirect costs: where teams make avoidable mistakes

FAR Part 31 reinforces the separation between:

• Direct costs (charged specifically to a contract)
• Indirect costs (pooled and allocated across contracts through indirect rates)

Bid teams often lose time and margin because they don’t pre-align their work breakdown structure, cost codes, and rate strategy with how costs will be defended later. If your technical approach implies certain staffing, equipment, travel, or subcontract reliance, your costing approach must mirror that story cleanly—otherwise you create a “proposal-to-performance mismatch” that becomes painful in audits, negotiations, and REAs.

Selected costs (31.205): the unallowable landmines

FAR 31.205 is a catalog of “selected costs” that are common negotiation and audit flashpoints. You do not need to memorize every sub-section, but you should build an internal habit: whenever a cost sounds like “business development,” “corporate image,” “client entertainment,” or “political influence,” assume it could be restricted or unallowable until proven otherwise.

Common examples that frequently become unallowable or tightly limited include:

• Lobbying and political activity
• Alcohol
• Entertainment
• Certain advertising/public relations categories
• Fines and penalties (context-dependent)

A best-practice approach is to maintain a dedicated unallowable cost identification and segregation workflow so these costs do not end up in proposals or billings where they trigger findings and repayment risk.

Construction and A/E contracts: why Part 31 matters more than you think

Construction-heavy contractors often face cost pressure from change scenarios, partial terminations, differing site conditions, and schedule impacts. Part 31 becomes highly relevant because cost support and cost segregation determine how quickly you can build credible, defensible submissions for:

• Equitable Adjustments (EAs)
• Requests for Equitable Adjustment (REAs)
• Termination settlements
• Negotiated modifications

In practice, clean Part 31 hygiene improves your recovery posture: you can prove what changed, what it cost, and why the government should pay.

FAR Part 31 readiness checklist (copy-paste)

• Identify if the opportunity involves cost-reimbursement, T&M/LH, or cost analysis during negotiation
• Establish a proposal cost discipline: assumptions, labor categories, indirect rates, subcontractor basis
• Set up cost segregation for potentially unallowable categories before you start spending
• Ensure costs pass the five allowability tests: reasonableness, allocability, accounting standards, contract terms, FAR limits
• Build documentation habits early: timesheets, vendor invoices, receiving logs, travel support, subcontract files
• Treat 31.205 as a pre-bid filter for any “grey area” expenses
• Align technical narrative and cost narrative so your pricing is defensible and consistent

Mini-template: Allowability Decision Note (internal)

• Cost description:
• Contract/CLIN impacted:
• Why necessary (reasonableness):
• How charged (direct/indirect + allocability basis):
• Standard followed (CAS/GAAP + company policy reference):
• Contract clause impacts:
• FAR 31.205 reference check:
• Decision: Allowable / Unallowable / Needs review
• Reviewer + date:

Sources

• https://www.acquisition.gov/far/part-31
• https://www.acquisition.gov/far/31.000
• https://www.acquisition.gov/far/31.201-2
• https://www.acquisition.gov/far/31.201-3
• https://www.acquisition.gov/far/31.201-4
• https://www.acquisition.gov/far/31.205
• https://www.acquisition.gov/far/31.205-22
• https://www.acquisition.gov/far/31.205-51
• https://www.ecfr.gov/current/title-48/chapter-1/subchapter-E/part-31
• https://www.law.cornell.edu/cfr/text/48/31.205-22