FAR Part 31 (Contract Cost Principles and Procedures)

The most common mistake made with FAR Part 31 is treating “FAR Part 31 applies to this contract” as the end of the analysis. Part 31 is not a single set of cost rules — it is a router. Which cost principles actually decide allowability depends on what kind of organisation holds the contract, and Part 31 sends different contractors to different places.

The subpart that applies depends on who you are

Part 31 is organised by contractor type, and two of its seven subparts are empty:

• Subpart 31.1 — Applicability
• Subpart 31.2 — Contracts with Commercial Organizations (the subpart containing the 31.201 general principles and the 31.205 selected-cost rules)
• Subpart 31.3 — Contracts with Educational Institutions
• Subpart 31.4 — [Reserved]
• Subpart 31.5 — [Reserved]
• Subpart 31.6 — Contracts with State, Local, and Federally Recognized Indian Tribal Governments
• Subpart 31.7 — Contracts with Nonprofit Organizations

The consequence for a university is specific and often missed. Where a contract refers to subpart 31.3, FAR 31.303 directs the contracting officer to determine allowability in accordance with the OMB Uniform Guidance at 2 CFR part 200, subpart E and appendix III — the same cost principles the institution already applies to its grant portfolio — and adds that agencies are not expected to place additional restrictions on individual items of cost. So the tidy “FAR Part 31 for contracts, 2 CFR 200 for grants” split that most training decks teach is real at the instrument level but does not survive contact with subpart 31.3. Read the contract’s cost-principles clause to see which subpart it actually invokes before assuming the 31.205 selected-cost list is the operative rulebook. CASRAI’s guide to 2 CFR 200 Subpart E cost principles covers the destination those educational-institution contracts are routed to.

“FAR Part 31” and “48 CFR Part 31” are the same text

The Federal Acquisition Regulation is codified at Title 48 of the Code of Federal Regulations, so FAR Part 31 and 48 CFR Part 31 are two citation styles for one body of rules. A citation such as “48 CFR 31.201-2” and one to “FAR 31.201-2” point at the identical paragraph. Acquisition professionals use the FAR form; auditors, courts and institutional compliance policies frequently use the CFR form.

FAR 31.201-2: five requirements, not three

Beyond the familiar reasonableness and allocability tests, FAR 31.201-2(a) enumerates requirements that are easy to overlook: after reasonableness, allocability, and Cost Accounting Standards (or, where CAS does not apply, generally accepted accounting principles and practices appropriate to the circumstances), it also lists the terms of the contract and any limitations set out in subpart 31.2. A cost is allowable only when it complies with all of them, which means a cost can be perfectly reasonable, cleanly allocable, and still unallowable because a contract clause or a 31.205 limitation says so.

FAR 31.201-2(d) is the paragraph that decides most real disputes. The contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with the applicable cost principles. Where that support is inadequate, the contracting officer may disallow all or part of the claimed cost — the cost is not disallowed because it was improper, but because it could not be evidenced.

FAR 31.201-3: reasonableness and who carries the burden

A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Two features of 31.201-3 matter more than the definition itself: no presumption of reasonableness attaches to a contractor’s incurrence of a cost, and once the contracting officer challenges a specific cost, the burden of proof sits with the contractor to establish that it is reasonable. The factors in 31.201-3(b) ask whether the cost is ordinary and necessary for the business or contract performance; whether it reflects generally accepted sound business practices, arm’s-length bargaining, and applicable law and contract terms; the contractor’s responsibilities to the government, other customers, owners, employees, and the public at large; and any significant deviation from the contractor’s established practices.

FAR 31.201-4: the three allocability bases

A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or another equitable relationship. Subject to that, a cost is allocable to a government contract if it (a) is incurred specifically for the contract; (b) benefits both the contract and other work and can be distributed to them in reasonable proportion to the benefits received; or (c) is necessary to the overall operation of the business even though a direct relationship to any particular cost objective cannot be shown. Paragraph (b) is the shared-direct-cost case and paragraph (c) is the conceptual basis for pooled overhead — which is why an indirect cost rate (F&A rate) is an allocability mechanism rather than a discount or a markup.

FAR 31.201-6: unallowable costs must be walled off, not merely omitted

Costs that are expressly unallowable, or that have been mutually agreed to be unallowable, must be identified and excluded from any billing, claim, or proposal to the government. Directly associated costs — costs generated solely as a result of incurring an unallowable cost, which would not have been incurred otherwise — become unallowable along with the cost that triggered them. The accounting treatment must follow CAS 405 (48 CFR 9904.405), Accounting for Unallowable Costs, and 31.201-6 permits statistical sampling to identify unallowable costs where the conditions in that section are met, with an advance agreement recommended. In practice this means the accounting system itself must carry the exclusion — a manual scrub at invoicing time is what audit findings are made of. See unallowable cost for the parallel concept on the grants side.

Related terms

• Cost Accounting Standards (CAS) — the standards FAR 31.201-2(a) incorporates where CAS coverage applies.
• Cost Accounting Standards Disclosure Statement (DS-2) — the disclosed practices a CAS-covered contractor must then follow consistently.
• Unallowable Cost (2 CFR 200) — the grants-side counterpart to FAR 31.201-6.
• 2 CFR 200 Subpart E: The Cost Principles Governing Federal Grant Costs — where FAR 31.303 routes educational-institution contracts.
• DoD Indirect Cost Rate: ONR/DCAA Process — how rates on defence contracts get negotiated and audited.
• Indirect Cost Rate Mechanics for SBIR Government Contractors — the same principles applied by small-business contract holders.
• FAR 52.227-11 (Patent Rights — Ownership by the Contractor) — another FAR clause that reaches research contractors.