Legal and Claim-Related Costs: What FAR 31.205-47 Makes Unallowable

By QuickBidSetup Editorial Team · Published October 31, 2026 · Sources linked below

When disagreements arise on federal construction projects, prime contractors and trade subcontractors often face substantial expenses for legal counsel, claims consultants, and internal staff time. However, federal procurement regulations strictly limit which dispute expenditures can be recovered. Under 31.205-47 Costs related to legal and other proceedings, the government identifies specific categories of dispute and legal expenses as completely unallowable. Understanding these boundaries helps estimators and project managers avoid improperly billing unallowable costs in contract overhead or modification requests.

Defining Costs and Proceedings Under the Cost Principles

The reach of the regulation covers far more than courtroom attorney invoices. Under subsection (a), costs include clerical and administrative overhead, services provided by either inside or outside legal counsel, and the fees of accountants, specialized consultants, or outside experts hired to assist the contractor. Furthermore, the rule covers the time of corporate officers, directors, and payroll employees spent directly on the matter, regardless of whether those expenses occur before, during, or after formal proceedings commence.

The term proceeding is also broadly applied and explicitly includes formal investigations alongside judicial lawsuits and administrative hearings.

Direct Claims and Appeals Against the Federal Government

A primary trap for federal contractors involves attempting to pass through the expense of fighting the government. Paragraph (f)(1) establishes that costs are unallowable if incurred in connection with defending against Federal Government claims or appeals, or prosecuting claims or appeals against the Federal Government (referencing FAR 2.101). While ordinary contract administration and routine negotiation remain part of contract management, hiring attorneys and claim consultants to pursue or defend formal claims against the contracting agency cannot be billed to the government. When handling routine adjustments, contractors must distinguish standard contract administration, such as pricing change orders, from formal claim prosecution.

Bid Protests and Procurement Challenges

Filing a protest over a solicitation or an award decision is another area where legal cost recovery is barred. Under paragraph (f)(8), costs are unallowable when incurred for protests of Federal Government solicitations or contract awards. The prohibition also covers costs tied to defending against protests of solicitations or contract awards. The single exception stated in the rule occurs when defense costs are incurred pursuant to a written request directly from the cognizant contracting officer.

Disputes Between Joint Ventures, Teaming Partners, and Subcontractors

Prime contractors and subcontractors frequently work together through teaming agreements or joint venture entities. If a disagreement triggers litigation between these parties, the government will not subsidize the fight. Under paragraph (f)(5), legal, accounting, and consultant fees—along with directly associated costs—are unallowable when incurred in lawsuits or appeals between contractors or subcontractors arising from:

• Agreements or contracts concerning teaming arrangements, joint ventures, or similar shared-interest setups.
• Dual sourcing, coproduction, or related programs.

These inter-contractor dispute costs remain unallowable unless they occur due to compliance with specific subcontract terms, specific written contracting officer instructions, or an explicit written agreement from the contracting officer.

Government Enforcement, Fraud Allegations, and Whistleblower Actions

Paragraph (b) makes legal and defense costs unallowable when proceedings are brought by a Federal, State, local, or foreign government for failure to comply with a law or regulation (referencing 41 U.S.C. 4310 and 10 U.S.C. 3750), by employees filing whistleblower reprisal complaints under 41 U.S.C. 4712 or 10 U.S.C. 4701, or by third parties under the False Claims Act (31 U.S.C. 3730). These expenses become unallowable if the proceeding results in:

• A criminal conviction.
• A civil or administrative finding of liability involving fraud or similar misconduct, a monetary penalty, or an agency head corrective order under whistleblower statutes.
• A final executive agency decision to debar or suspend the contractor, rescind or void the contract, or terminate the contract for default due to statutory or regulatory noncompliance.
• A disposition by consent or compromise that could have produced any of these outcomes.

Under paragraph (e)(3), even in limited situations where defense costs are permitted after certain settlements, the reimbursable portion is capped and shall not exceed 80 percent of otherwise allowable legal costs.

Accounting and Cost Segregation Requirements

Contractors cannot commingle unallowable legal expenditures with standard indirect cost pools. Under paragraph (g) of 31.205-47 Costs related to legal and other proceedings, any costs that may be unallowable under the section—including directly associated costs—must be segregated and accounted for separately on the contractor's books. During ongoing proceedings, contracting officers generally withhold payment for these costs. While conditional payments may be allowed if adequate security or assurance is provided, the contractor must agree to repay all unallowable costs, plus interest, should the final disposition render them unallowable. When preparing claims, contractors must follow formal submission protocols, including rules on certifying a contract claim.

Sources

31.205-47 Costs related to legal and other proceedings. | Acquisition.GOV

Published October 31, 2026. No affiliate links on this page. Facts come from the sources linked above; check them for updates.