Can a Company Reimburse Unallowable Costs? FAR 31.205 - Selected Cost Series #4

FAR 31.205 addresses unallowable cost.  Many, if not all “unallowable costs”, however, are incurred as part of running a business.  As such, they may very well be advantageous to the company and therefore reimbursable to employees.  Some advantages include:

• Flexibility and innovation – Ability to manage financial affairs, invest in research and development, employee training and advanced technologies, leading to innovation and improved services. The ability to explore new avenues without immediate concerns about government reimbursement fosters an environment of creativity and experimentation, ultimately benefiting both the company and its customers.

• Strengthening Competitive Advantage - Creating an atmosphere of competition where firms can differentiate themselves through added value and efficiency. Businesses that prioritize internal improvements will likely possess a competitive edge, attracting more lucrative private contracts and boosting their overall performance.

• Enhanced Talent Retention and Attraction – Costs considered unallowable may enable companies to offer more attractive benefits and professional development opportunities to their employees. The ability to invest in training and development without immediate cost constraints enhances job satisfaction and employee retention. Additionally, this fosters a desirable workplace culture that can attract top talent, further boosting the company's capabilities.

While companies may not directly or indirectly claim unallowable costs on government contracts, there can still be indirect benefits to the projects undertaken. Investments in areas like employee well-being and company infrastructure lead to a more engaged and efficient workforce, ultimately resulting in higher-quality products and services delivered to the government. However, if they’re unallowable or don’t directly benefit a product or service provided to the Government, you can safely assume they’re not considered reimbursable.  

 IF IN DOUBT, THROW IT OUT!

For example:

1. A sales rep is on a business trip and takes a customer to dinner, this is quite a normal business practice.  However, when entertaining a potential new customer, the entertainment associated with this process is expressly unallowable.  As such, even though the cost may not be claimed as a direct cost on a contract, or related indirect cost applied to contract costs, it may be paid and reimbursed to the employee who incurred the cost for the purpose of enhancing the company’s business.

2. An employee is traveling for work on a contract.  The cost of the travel is outlined in the contract as necessary.  Therefore, the trip is allowable.  However, the employee books a hotel in excess of per diem or a step up in class of the vehicle or airfare.  Depending on the company’s policy, the employee may be eligible for reimbursement.  So, the company may pay the costs in excess of those allowed by the Government, but the company must remove those excess costs from any claim to the Federal Government.

One thing that is important to remember when it comes to reimbursement of costs to employees when they are categorized as unallowable for reimbursement by the Government is that documenting the practice in company policies and procedures are absolutely necessary.  The policies provide:

a) Clarity on the procedures,

b) Consistency in reimbursement processes, 

c) Policy compliance guidance, and 

d) Compliance with Federal Regulations.

deClermont Consulting can help identify and segregate costs which must not be claimed under Federal Contracts. www.deClermontConsulting.com