Unallowable Costs

Reasonable allocable and allowable costs


Each proposed cost is equivalent to what would be paid in an unrelated-party transaction. Also, the need for the goods and/or services is reasonably necessary for the work. See the Federal Acquisition Regulations (FAR) 31.201-3 for a detailed description.


Each proposed cost is, directly or indirectly, allocable to the work. If the labor, materials, and other direct costs are necessary to perform the particular award, they are allocable by definition. If facilities, administrative, and other company-wide items are required to be in place, in order to perform the award, the allocated expenses are (indirectly) allocable. By contrast, any expense that benefits one or more other sales contracts – but not the one proposed – is excluded. For example, an annex facility with special tooling and heavy equipment, used only for another sales contract, may not be allocated (even in part) to a proposal for unrelated work.
See FAR 31.201-4 for a definition.


FAR Part 31 directs the proposer to applicable codification of allowable and unallowable costs, based upon the type of organization from which the proposal is submitted. OMB Circulars cover organizations that are not commercial, for-profit companies. FAR 31.205 covers other, for-profit companies. Small businesses are not exempt. 

Our experience anticipates many potentially questioned costs; we recommend specific wording to avoid misunderstanding of descriptions during audit, cost analysis, or negotiations. For example (if applicable), advertising might be re-worded as employment postings. Our templates help exclude unallowable costs. For example, travel (by trip) uses per diem rates, competitive transportation costs, and sufficient detail.

Some unallowable expenses, that might be considered allowable, depending upon the proposal wording, include:

  • Allowable public relations, shown not to be advertising
  • Employee bonuses, which are not subjective
  • In-house cafeteria food services, in certain circumstances
  • Idle facilities in a proposal for a Termination for Convenience
  • Premiums for life insurance, depending upon beneficiary
  • Pre-contract costs, which will be incurred prior to formal award

We work with clients to minimize questioned costs, maximize negotiated prices, and render any audit or analysis painless. Our goal is no surprises.