FAR Part 31 Unallowable Costs — Identification, Segregation, and Removal from Indirect Pools
Identifying and segregating costs that are expressly unallowable under FAR Part 31 — removing them from indirect cost pools before computing rates that are charged to government contracts.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Unallowable Cost — Entertainment (FAR 31.205-14 — Removed from G&A Pool) | Expense (+) | 285,000.00 | - |
| Unallowable Cost — Lobbying (FAR 31.205-22) | Expense (+) | 450,000.00 | - |
| Unallowable Cost — Advertising (FAR 31.205-1 — Non-Recruiting) | Expense (+) | 185,000.00 | - |
| G&A Pool — Reduced by Unallowable Costs (Before Rate Computation) | Expense (-) | - | 920,000.00 |
💡 Accountant's Note
FAR Part 31 defines ALLOWABLE costs (those the government will reimburse or include in negotiated prices) and specifically identifies UNALLOWABLE cost categories that must be REMOVED from any cost charged to government contracts. Key unallowable cost categories: (1) ENTERTAINMENT (FAR 31.205-14): ALL entertainment costs including meals, sports tickets, concerts, parties — even if legitimately business-related. (2) LOBBYING (FAR 31.205-22): all costs of political influence, PAC contributions. (3) ADVERTISING (FAR 31.205-1): advertising that is not recruitment, not necessary for contract performance — brand advertising is unallowable. (4) EXECUTIVE COMPENSATION above specific caps (currently ~$680K/year per executive — FAR 31.205-6). (5) ALCOHOL (incidental to an event — even if client-facing). (6) INTEREST EXPENSE (FAR 31.205-20): interest on borrowings is unallowable (except for certain capital lease interest). (7) FINES AND PENALTIES. (8) IR&D and B&P beyond agreed limits. The contractor must establish 'unallowable cost accounting' — a system to identify and exclude these costs BEFORE they flow into indirect pools used to bill the government.
Practitioner & Systems Framework
💻 ERP Architecture
Defense contractor ERP systems have dedicated 'unallowable account codes' — costs coded to these accounts are automatically excluded from indirect pool totals used for billing. The accounts map to specific FAR Part 31 citations. Unallowable cost tracking must be continuous — not just at year-end. Examples: every expense report submission (entertainment meals, alcohol at conferences) must be flagged as unallowable by the accounting system. Executive compensation above the FAR cap creates a partial unallowable — the excess above the cap is segregated. Total unallowable costs are reported on the annual Incurred Cost Submission.
⚠️ Audit Flags
Unallowable cost identification is DCAA's highest-profile audit activity — finding unallowable costs charged to government contracts triggers recovery plus potential False Claims Act exposure. DCAA specifically tests: (1) Completeness of unallowable account coding (was every entertainment expense captured?), (2) Consistency with prior year practices, (3) Executive compensation above the cap (requires access to individual W-2 and compensation records), (4) IR&D and B&P costs classified as allowable but not properly described. Billing unallowable costs to the government — even accidentally — creates significant legal and financial risk.
📄 Required Documentation
Chart of accounts with unallowable account designations (mapped to FAR Part 31 citations), annual unallowable cost summary by FAR Part 31 category, expense report review procedures for entertainment identification, executive compensation analysis vs. FAR cap, IR&D/B&P unallowable determination, Incurred Cost Submission unallowable section, and DCAA audit findings history on unallowables.
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