FAR 31.205-20 Breakdown: Interest and Financing Costs on Federal Work
When compiling cost proposals, change order pricing, or incurred cost submissions, construction contractors must separate allowable expenses from unallowable expenses. Under FAR 31.205-20 Interest and other financial costs, the federal government establishes strict principles regarding financing expenses. Estimators and project managers frequently question whether line-of-credit interest, loan fees, or related borrowing charges incurred while funding jobsite operations can be included in direct costs or overhead pools. Understanding how the regulation defines and treats these expenditures ensures cost proposals remain fully compliant.
The Principle Behind Unallowable Borrowings
The fundamental mandate within FAR 31.205-20 designates interest on borrowings, however represented, as an unallowable cost. In commercial construction, contractors frequently rely on lines of credit, short-term commercial notes, or revolving bank facilities to handle payroll, purchase materials, and bridge gaps between pay applications. However, on federal work governed by cost principles, the method or description of the debt instrument does not alter the outcome. Because the text explicitly states "however represented," any finance charge, carrying charge, or interest fee stemming from borrowed money cannot be allocated to a federal contract as an allowable cost.
This limitation prevents contractors from passing company debt expenses, cash-flow financing fees, or bank borrowing expenses along to the government. When preparing cost-based pricing submissions, such as those evaluated under pricing change orders, estimators must ensure that finance charges are stripped from hourly rates, equipment rates, and indirect burden calculations.
Key Requirements Breakdown: Unallowable Financial Expenditures
FAR 31.205-20 itemizes several distinct financial activities and categories that cannot be reimbursed. Contractors must identify and isolate each of these cost types within their accounting structures:
- Interest on borrowings: Any interest charges arising from loans, lines of credit, notes, or credit facilities, regardless of representation or naming convention.
- Bond discounts: Discounts associated with issuing corporate bonds or related debt securities.
- Costs of financing and refinancing capital: All expenditures tied to establishing, maintaining, or restructuring capital, which the regulation defines specifically as net worth plus long-term liabilities.
- Legal and professional fees for prospectuses: Fees paid to legal counsel, accountants, or financial professionals in connection with preparing prospectuses.
- Stock rights costs: Expenses incurred in connection with preparing and issuing stock rights to investors or shareholders.
The regulation also includes a parenthetical note stating "but see 31.205-28" regarding specific organizational and reorganizing costs, reinforcing that corporate financial arrangements remain strictly controlled under federal cost accounting rules.
Defining Capital Under Federal Cost Principles
A critical detail within the key requirements breakdown is the parenthetical definition applied to capital. FAR 31.205-20 explicitly defines capital as net worth plus long-term liabilities. Any effort by a contractor to finance or refinance this capital base creates unallowable costs under federal standards.
This definition encompasses both equity and debt structures. Net worth represents the ownership equity of the enterprise, while long-term liabilities represent obligations that extend beyond immediate operating cycles. Whether a construction firm pays banking fees to restructure long-term debt, restructures balance sheet obligations, or expends funds issuing stock rights to raise equity, those transactional charges fall squarely into the unallowable category.
The Specific State and Local Tax Interest Exception
While the regulation enforces a broad prohibition against financing costs, it contains an explicit exception. FAR 31.205-20 provides that interest assessed by State or local taxing authorities under the conditions specified in 31.205-41(a)(3) is allowable.
This exception distinguishes general commercial borrowing from mandatory assessments levied by government tax bodies. If a State or local taxing entity assesses interest under the circumstances set forth in 31.205-41(a)(3), those particular interest charges escape the blanket unallowability rule. Outside of this narrowly defined tax assessment condition, general commercial interest—including line-of-credit fees, supplier carrying fees, and bank interest—remains unallowable without deviation.
Managing Cash Flow Without Claiming Line-of-Credit Interest
Because line-of-credit interest cannot be billed directly or included in indirect cost pools, contractors must structure their administrative processes to maintain liquidity through official procurement mechanisms. Rather than relying on private borrowing and attempting to pass financing interest to the government, contractors should understand formal contract financing options, such as those detailed in federal contract financing methods.
Maintaining prompt billing schedules, submitting clean payment requests, and securing appropriate contract terms allow contractors to preserve operating capital. Identifying unallowable items under FAC 2026-01, effective 03/13/2026, ensures that audit teams, contracting officers, and prime contractors do not reject pricing proposals due to improperly included financial charges.
Sources
FAR 31.205-20 Interest and other financial costs | Acquisition.GOV
Published October 31, 2026. No affiliate links on this page. Facts come from the sources linked above; check them for updates.