FAR 31.201-2 Cost Allowability: Comparison Guide for Bidders
When trade subcontractors and general contractors submit costs on federal construction projects, every item claimed must clear explicit regulatory benchmarks. Under federal procurement rules, not all incurred expenses can be billed to the government. Understanding how the regulations distinguish allowable costs from unallowable items ensures your pricing stands up to scrutiny during federal contract adjustments.
Allowable Costs vs. Unallowable Costs: The Baseline Rules
Under Acquisition.GOV FAR 31.201-2 Determining allowability, a cost does not become allowable simply because a contractor spent the funds during performance. Instead, an allowable cost is one that strictly satisfies all statutory and regulatory criteria established in the federal acquisition framework. If an item fails even one test, it cannot be reimbursed as an allowable cost.
By contrast, an unallowable cost is any expenditure that violates contract provisions, departs from applicable accounting rules, or exceeds specific regulatory ceilings. When compiling proposals for extra work or reviewing pricing change orders, estimators must measure every line item against the five mandatory tests of allowability rather than assuming incurred trade expenses are automatically recoverable.
The Five Allowability Tests Compared
According to Acquisition.GOV FAR 31.201-2, a cost is allowable only when it satisfies all of the following requirements:
- Reasonableness: The nature and amount of the expense must be appropriate and justifiable.
- Allocability: The cost must be assignable or chargeable to the specific contract under established cost principles.
- Accounting Standards: The expense must conform to standards promulgated by the Cost Accounting Standards (CAS) Board if applicable, or otherwise comply with generally accepted accounting principles and practices appropriate to the circumstances.
- Terms of the Contract: The cost must align with the specific clauses, terms, and agreements written into the contract itself.
- Subpart 31.2 Limitations: The item must comply with any specific cost limitations set forth in subpart 31.2.
CAS-Covered Contracts vs. Standard Commercial Accounting
A key area of comparison for trade contractors is how Cost Accounting Standards apply compared to general commercial accounting practices. Full CAS coverage is governed by part 30. When a contract includes a formal CAS clause, the contractor must follow the specific standards mandated by that clause.
However, many small contractors and business units are not otherwise subject to full CAS coverage. FAR 31.201-2 explains how these entities are treated:
- Selected CAS Standards in Cost Principles: Certain cost principles in subpart 31.2 incorporate the measurement, assignment, and allocability rules of selected CAS. In those instances, allowability is limited to the amounts determined using the criteria in those selected standards.
- Non-CAS Business Units: Business units not otherwise subject to CAS under a contract clause are subject to selected standards only for determining the allowability of costs on government contracts.
- Limited Exposure: Incorporating selected standards into the cost principles does not subject an exempt business unit to any other CAS rules and regulations.
- Default to GAAP: When CAS Board standards are not applicable, contractor costs are measured against generally accepted accounting principles and practices appropriate to the circumstances.
Consistent vs. Inconsistent Contractor Accounting Practices
FAR 31.201-2 draws a strict line between consistent internal accounting and practices that depart from federal rules. Estimators preparing proposals for adjustments or definitizing change orders must maintain standard cost-allocation methods across all accounting periods.
When a contractor's accounting practices are inconsistent with subpart 31.2, the regulations enforce an automatic financial penalty: any costs resulting from those inconsistent practices that exceed the amount that would have resulted from consistent practices are completely unallowable. Contractors cannot alter accounting treatments to increase cost recovery on federal modifications.
Adequately Supported Costs vs. Inadequately Supported Claims
The final operational distinction in FAR 31.201-2 centers on documentation. The regulation places the entire burden of recordkeeping squarely on the contractor. A contractor is responsible for accounting for costs appropriately and maintaining records, including supporting documentation, adequate to demonstrate that claimed costs have been incurred, are allocable to the contract, and comply with subpart 31.2 principles and agency supplements.
In contrast, when records are incomplete or missing, the contracting officer possesses explicit authority to disallow all or part of any claimed cost that is inadequately supported. To protect contract revenue, estimators and project managers must preserve every source record proving that incurred expenses meet every test of allowability.
Sources
31.201-2 Determining allowability. | Acquisition.GOV
Published October 31, 2026. No affiliate links on this page. Facts come from the sources linked above; check them for updates.