FAR Cost Principles Guide

Version: January 2017 Thru FAC 2005-95

FAR Cost Principles Guide (Chronology of Cost Principle Revisions Issued in Federal Acquisition

Circulars (FACs) Since 1984)

TABLE OF CONTENTS

FAR Section Title FAR 31.201-1 -- Composition of Total Costs FAR 31.201-2 -- Determining Allowability FAR 31.201-3 -- Determining Reasonableness FAR 31.201-4 -- Determining Allocability FAR 31.201-5 ? Credits FAR 31.201-6 -- Accounting for Unallowable Costs FAR 31.201-7 -- Construction and Architect-Engineer Contracts FAR 31.202 -- Direct Costs FAR 31.203 -- Indirect Costs FAR 31.204 -- Application of Principles and Procedures FAR 31.205-1 -- Public Relations and Advertising Costs FAR 31.205-2 -- Automatic Data Processing Equipment Leasing Costs FAR 31.205-3 -- Bad Debts FAR 31.205-4 ? Bonding Costs FAR 31.205-5 -- Civil Defense Costs FAR 31.205-6 -- Compensation for Personal Services FAR 31.205-7 -- Contingencies FAR 31.205-8 -- Contributions or Donations FAR 31.205-9 -- Reserved FAR 31.205-10 -- Cost of Money FAR 31.205-11 ? Depreciation FAR 31.205-12 -- Economic Planning Costs FAR 31.205-13 -- Employee Morale, Health, Welfare, Food Service,

And Dormitory Costs and Credits FAR 31.205-14 -- Entertainment Costs FAR 31.205-15 -- Fines and Penalties, and Mischarging Costs FAR 31.205-16 -- Gains and Losses On Disposition or Impairment Of

Depreciable Property Or Other Capital Assets FAR 31.205-17 -- Idle Facilities and Idle Capacity Costs FAR 31.205-18 -- Independent Research And Development and Bid

And Proposal Costs FAR 31.205-19 -- Insurance and Indemnification FAR 31.205-20 -- Interest and Other Financial Costs FAR 31.205-21 -- Labor Relations Costs FAR 31.205-22 -- Lobbying and Political Activity Costs FAR 31.205-23 -- Losses on Other Contracts

Page No. 1 2 3 4 5 6 8 8 9 13 14 20 24 24 24 25 72 73 73 75 79 87 88

92 92 93

96 98

111 116 118 118 123

Index

Version: January 2017 Thru FAC 2005-95

FAR Cost Principles Guide (Chronology of Cost Principle Revisions Issued in Federal Acquisition

Circulars (FACs) Since 1984)

TABLE OF CONTENTS

FAR Section Title FAR 31.205-24 -- Reserved FAR 31.205-25 -- Manufacturing and Production Engineering Costs FAR 31.205-26 -- Material Costs FAR 31.205-27 -- Organization Costs FAR 31.205-28 -- Other Business Expenses FAR 31.205-29 -- Plant Protection Costs FAR 31.205-30 -- Patent Costs FAR 31.205-31 -- Plant Reconversion Costs FAR 31.205-32 -- Precontract Costs FAR 31.205-33 -- Professional and Consultant Service Costs FAR 31.205-34 -- Recruitment Costs FAR 31.205-35 -- Relocation Costs FAR 31.205-36 -- Rental Costs FAR 31.205-37 -- Royalties and Other Costs For Use Of Patents FAR 31.205-38 -- Selling Costs FAR 31.205-39 -- Service and Warranty Costs FAR 31.205-40 -- Special Tooling and Special Test Equipment Costs FAR 31.205-41 ? Taxes FAR 31.205-42 -- Termination Costs FAR 31.205-43 -- Trade, business, Technical And Professional

Activity Costs FAR 31.205-44 -- Training and Educational Costs FAR 31.205-45 -- Transportation Costs FAR 31.205-46 -- Travel Costs FAR 31.205-47 ? Costs Related to Legal and Other Proceedings FAR 31.205-48 -- Deferred Research And Development Costs FAR 31.205-49 ? Goodwill FAR 31.205-50 -- Executive lobbying Costs FAR 31.205-51 -- Costs of Alcoholic Beverages FAR 31.205-52 -- Asset Valuations Resulting From Business

Combinations

Page No. 123 124 125 129 130 130 130 131 131 132 138 139 145 146 147 153 153 154 156 159

160 164 165 172 181 181 182 182 182

Index

Version: January 2017 Thru FAC 2005-95

FAR Cost Principles Guide (Chronology of Cost Principle Revisions Issued in Federal Acquisition

Circulars (FACs) Since 1984)

FAR 31.201-1 -- Composition of Total Costs

1984 FAR (Effective 1 April 1984)

The total cost of a contract is the sum of the allowable direct and indirect costs allocable to the contract, incurred or to be incurred, less any allocable credits, plus any allocable cost of money pursuant to 31.205-10. In ascertaining what constitutes a cost, any generally accepted method of determining or estimating costs that is equitable and is consistently applied may be used, including standard costs properly adjusted for applicable variances. See 31.201-2(b) and (c) for Cost Accounting Standards (CAS) requirements.

FAC 90-23 (Effective 27 February 1995)

(a) The total cost of a contract is the sum of the direct and indirect costs allocable to the contract, incurred or to be incurred, less any allocable credits, plus any allocable cost of money pursuant to 31.205-10. In ascertaining what constitutes a cost, any generally accepted method of determining or estimating costs that is equitable and is consistently applied may be used, including standard costs properly adjusted for applicable variances. See 31.201-2(b) and (c) for Cost Accounting Standards (CAS) requirements.

(b) While the total cost of a contract includes all costs properly allocable to the contract, the allowable costs to the Government are limited to those allocable costs which are allowable pursuant to Part 31 and applicable agency supplements.

FAC 2001-22 (Effective May 5, 2004)

Revise paragraph (a) to read as follows:

(a) The total cost, including standard costs properly adjusted for applicable variances of a contract, is the sum of the direct and indirect costs allocable to the contract, incurred or to be incurred, plus any allocable cost of money pursuant to 31.205?10, less any allocable credits. In ascertaining what constitutes a cost, any generally accepted method of determining or estimating costs that is equitable and is consistently applied may be used.

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Version: January 2017 Thru FAC 2005-95

FAR Cost Principles Guide (Chronology of Cost Principle Revisions Issued in Federal Acquisition

Circulars (FACs) Since 1984)

FAR 31.201-2 -- Determining Allowability

1984 FAR (Effective 1 April 1984)

(a) The factors to be considered in determining whether a cost is allowable include the following:

(1) Reasonableness. (2) Allocability. (3) Standards promulgated by the CAS Board, if applicable; otherwise, generally accepted accounting principles and practices appropriate to the particular circumstances. (4) Terms of the contract. (5) Any limitations set forth in this subpart.

(b) Certain cost principles in this subpart incorporate the measurement, assignment, and allowability rules of selected CAS and limit the Allowability of costs to the amounts determined using the criteria in those selected standards. Only those CAS or portions of standards specifically made applicable by the cost principles in this subpart are mandatory unless the contract is CAS covered (see Part 30). Business units that are not otherwise subject to these standards under a CAS clause are subject to the selected standards only for the purpose of determining Allowability of costs on Government contracts. Including the selected standards in the cost principles does not subject the business unit to any other CAS rules and regulations. The applicability of the CAS rules and regulations is determined by the CAS clause, if any, in the contract and the requirements of the standards themselves.

(c) When contractor accounting practices are inconsistent with this subpart 31.2, costs resulting from such inconsistent practices shall not be allowed in excess of the amount that would have resulted from using practices consistent with this subpart.

FAC 90-12 (Effective 31 August 1992)

Revise second sentence of paragraph (b) to read as follows:

Only those CAS or portions of standards specifically made applicable by the cost principles in this subpart are mandatory unless the contract is CAS covered (see 48 CFR 9903).

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Version: January 2017 Thru FAC 2005-95

FAR Cost Principles Guide (Chronology of Cost Principle Revisions Issued in Federal Acquisition

Circulars (FACs) Since 1984)

FAC 90-39 (Effective 19 August 1996)

Add paragraph (d) as follows:

(d) A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost which is inadequately supported.

FAC 2001-22 (Effective May 5, 2004)

Revise paragraph (a) and (c) to read as follows:

(a) A cost is allowable only when the cost complies with all of the following requirements: (1) Reasonableness. (2) Allocability. (3) Standards promulgated by the CAS Board, if applicable; otherwise, generally accepted accounting principles and practices appropriate to the circumstances. (4) Terms of the contract. (5) Any limitations set forth in this subpart.

(c) When contractor accounting practices are inconsistent with this subpart 31.2, costs resulting from such inconsistent practices in excess of the amount that would have resulted from using practices consistent with this subpart are unallowable.

Revise paragraph (d) replacing the word "which" with the word "that."

FAR 31.201-3 -- Determining Reasonableness

1984 FAR (Effective 1 April 1984)

A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. What is reasonable depends upon a variety of considerations and circumstances involving both the nature and amount of the cost in question. In determining the reasonableness of a specific cost, the contracting officer shall consider-

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Version: January 2017 Thru FAC 2005-95

FAR Cost Principles Guide (Chronology of Cost Principle Revisions Issued in Federal Acquisition

Circulars (FACs) Since 1984)

(a) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor's business or the contract performance;

(b) The restraints or requirements imposed by such factors as generally accepted sound business practices, arms-length bargaining, Federal and State laws and regulations, and contract terms and specifications;

(c) The action that a prudent business person, considering responsibilities to the owners of the business, employees, customers, the Government, and the public at large, would take under the circumstances; and

(d) Any significant deviations from the established practices of the contractor that may unjustifiably increase the contract costs.

FAC 84-26 (Effective 30 July 1987)

(a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer's representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.

(b) What is reasonable depends upon a variety of considerations and circumstances, including-

(1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor's business or the contract performance;

(2) Generally accepted sound business practices, arm's length bargaining, and Federal and State laws and regulations;

(3) The contractor's responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and

(4) Any significant deviations from the contractor's established practices.

FAR 31.201-4 -- Determining Allocability

1984 FAR (Effective 1 April 1984)

A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. Subject to the foregoing, a cost is allocable to a Government contract if it-

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Version: January 2017 Thru FAC 2005-95

FAR Cost Principles Guide (Chronology of Cost Principle Revisions Issued in Federal Acquisition

Circulars (FACs) Since 1984)

(a) Is incurred specifically for the contract; (b) Benefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefits received; or (c) Is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown.

FAR 31.201-5 -- Credits 1984 FAR (Effective 1 April 1984) The applicable portion of any income, rebate, allowance, or other credit relating to any allowable cost and received by or accruing to the contractor shall be credited to the Government either as a cost reduction or by cash refund. FAC 84-51 (Effective 20 September 1989) The applicable portion of any income, rebate, allowance, or other credit relating to any allowable cost and received by or accruing to the contractor shall be credited to the Government either as a cost reduction or by cash refund. See 31.205-6(j)(4) for rules related to refund or credit to the Government upon termination of an overfunded defined benefit pension plan. FAC 97-9 (Effective 29 December 1998)

Revise the last sentence to read as follows: See 31.205-6(j)(4) for rules governing refund or credit to the Government associated with pension adjustments and asset reversions. FAR 2005-19 (Effective August 17, 2007)

Amend the last sentence to read as follows: See 31.205-6(j)(3) for rules governing refund or credit to the Government associated with pension adjustments and asset reversions.

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Version: January 2017 Thru FAC 2005-95

FAR Cost Principles Guide (Chronology of Cost Principle Revisions Issued in Federal Acquisition

Circulars (FACs) Since 1984)

FAR 31.201-6 -- Accounting for Unallowable Costs

1984 FAR (Effective 1 April 1984)

(a) Costs that are expressly unallowable or mutually agreed to be unallowable, including mutually agreed to be unallowable directly associated costs, shall be identified and excluded from any billing, claim, or proposal applicable to a Government contract. A directly associated cost is any cost which is generated solely as a result of incurring another cost, and which would not have been incurred had the other cost not been incurred. When an unallowable cost is incurred, its directly associated costs are also unallowable.

(b) Costs which specifically become designated as unallowable or as unallowable directly associated costs of unallowable costs as a result of a written decision furnished by a contracting officer shall be identified if included in or used in computing any billing, claim, or proposal applicable to a Government contract. This identification requirement applies also to any costs incurred for the same purpose under like circumstances as the costs specifically identified as unallowable under either this paragraph or paragraph (a) above.

(c) The detail and depth of records required as backup support for proposals, billings, or claims shall be that which is adequate to establish and maintain visibility of identified unallowable costs, including directly associated costs. Unallowable costs involved in determining rates used for standard costs, or for indirect cost proposals or billing, need be identified only at the time rates are proposed, established, revised, or adjusted. These requirements may be satisfied by any form of cost identification which is adequate for purposes of contract cost determination and verification.

(d) If a directly associated cost is included in a cost pool which is allocated over a base that includes the unallowable cost with which it is associated, the directly associated cost shall remain in the cost pool. Since the unallowable costs will attract their allocable share of costs from the cost pool, no further action is required to assure disallowance of the directly associated costs. In all other cases, the directly associated costs, if material in amount, must be purged from the cost pool as unallowable costs.

(e) (1) In determining the materiality of a directly associated cost, consideration should be given to the significance of (i) the actual dollar amount, (ii) the cumulative effect of all directly associated costs in a cost pool, or (iii) the ultimate effect on the cost of Government contracts.

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