Allowability and Allocability of Costs

The concept of allowability of costs is derived primarily from the procurement regulations. For most federal agencies, FAR Part 31 contains the criteria for determining allowability, and many agencies supplement these basic criteria with FAR supplements that specify more precise rules for the respective agencies. A cost is considered allowable when it is reasonable and allocable and not prohibited by the provisions of FAR or contractual terms and conditions.

For many contractors, the standards promulgated by the CASB contained in 48 CFR Parts 9904 and 9905 provide the guidance for determining the allocability of costs to government contracts. FAR Part 31 also contains some basic guidance relating to allocability. Once the cost is determined to be allocable, the contract cost principles (FAR Part 31) provide the guidance for identifying which of these costs are eligible for reimbursement. Generally accepted accounting principles (GAAP) apply where FAR or CAS fail to address a specific element of cost.

A significant portion of the contract pricing under negotiated procurements is cost-based. Furthermore, the accounting method used in pricing negotiated contracts is full-absorption costing. Therefore, all allowable and allocable costs ordinarily should be identified in conformity with applicable procedures so that reimbursement may be obtained.

The government does not require contractors to restructure their accounting systems to accommodate the full absorption concept. Therefore, memorandum records may be used to make the allocations. For example, some companies do not include general and administrative (G&A) expenses in work-in-process inventory. Contractors are permitted to use memorandum records to make the allocation because those costs are allocable and allowable. However, the memorandum records are subject to audit and, therefore, should be reconcilable to the formal accounting records.

                                                                                                                            June 2012