FAR 31.205-15 Fines, Penalties, and Mischarging Explained
When pricing federal projects or managing job expenditures, contractors must navigate strict federal cost principles. Understanding what expenses can never be billed to the government is essential for trade subcontractors and general contractors alike. Under FAR 31.205-15, the federal government establishes clear, restrictive boundaries regarding the allowability of fines, statutory penalties, and expenses associated with mischarging costs. Separating the regulatory myths from the plain facts helps contractors maintain clean accounting practices and avoid improper billing.
Myth: Fines and Regulatory Penalties Can Be Absorbed Into Contract Costs
A common misconception among contractors is that penalties incurred during performanceāsuch as citations under local ordinances or state safety regulationsācan be incorporated into indirect cost pools or treated as unavoidable project expenses. Estimators sometimes wonder if unexpected jobsite citations can be accounted for when reviewing general conditions estimating costs.
The regulatory fact is explicit: under FAR 31.205-15(a), costs of fines and penalties resulting from violations of, or failure of the contractor to comply with, Federal, State, local, or foreign laws and regulations are unallowable. Whether a violation stems from a local building code failure, a state administrative rule, a federal regulation, or a foreign jurisdiction's legal requirement, the contractor must bear those costs directly. The government will not reimburse penalties that arise from a contractor's noncompliance.
Myth: Penalties Are Unallowable Without Any Exceptions
Because the cost principle starts with a broad prohibition, many assume that under no circumstances could a fine or penalty ever be charged to a federal contract. While the exclusion is severe, the text provides two very narrow conditions where allowability exists.
According to the regulation, costs of fines and penalties are unallowable except when incurred as a result of compliance with specific terms and conditions of the contract or written instructions from the contracting officer. If a contractor violates a regulation solely because they strictly executed a mandatory specification written into the contract terms, or because they acted under direct, formal written instructions from the contracting officer, the resulting penalty costs are not automatically excluded by this subsection. Outside of those two documented scenarios, fines remain strictly unallowable.
Myth: When Mischarging Occurs, Only the Disallowed Charge Itself Is Excluded
Another frequent misunderstanding involves the cost of correcting billing errors. Contractors sometimes assume that if an improper cost is discovered, the only financial consequence is removing that single incorrect charge from the invoice, while treating internal reviews, audits, and investigations as normal administrative overhead. This distinction becomes particularly crucial when managing contract billing under different structures, as explored in our guide on lump sum vs unit price vs cost plus contracts.
The fact is that the federal rule bars the surrounding investigative expenses as well. FAR 31.205-15(b) specifies that costs incurred in connection with, or related to, the mischarging of costs on Government contracts are unallowable when caused by, or resulting from, alteration or destruction of records, or other false or improper charging or recording of costs. Furthermore, the regulation makes clear that unallowable expenses include those incurred to measure or otherwise determine the magnitude of the improper charging. You cannot bill the government for the administrative effort or internal audits required to determine how much was mischarged.
Myth: Contractors Can Bill for Reconstructing and Correcting Damaged Records
Contractors occasionally believe that if company records are altered, mishandled, or found to contain improper cost allocations, the staff hours spent sorting out the files can be charged to contract administration or overhead. They view record reconstruction as standard back-office upkeep.
In reality, the government explicitly bars these remedial activities when tied to improper charging. FAR 31.205-15(b) establishes that costs incurred to remedy or correct the mischargingāsuch as costs to rescreen and reconstruct recordsāare completely unallowable. If files were altered, destroyed, falsely recorded, or improperly charged, any labor or consultant expenses dedicated to sifting through records, re-verifying documents, and rebuilding ledgers must be paid out of the contractor's own pocket.
Summary: Unallowable Mischarging and Penalty Items
To avoid compliance issues and billing disputes, contractors must segregate the following unallowable categories from all federal cost submissions:
- Fines and penalties resulting from violations of Federal, State, local, or foreign laws and regulations.
- Fines resulting from failure to comply with applicable laws, unless mandated by specific contract terms or written contracting officer direction.
- Costs incurred in connection with or related to mischarging caused by record alteration or destruction.
- Costs stemming from false or improper charging or recording of costs.
- Expenses incurred to assess, measure, or determine the overall magnitude of improper charging.
- Remedial expenses dedicated to correcting mischarging, including the costs to rescreen records.
- Administrative and operational costs incurred to reconstruct records following improper charging.
Sources
- Acquisition.GOV: 31.205-15 Fines, penalties, and mischarging costs.
Published October 31, 2026. No affiliate links on this page. Facts come from the sources linked above; check them for updates.