More on Unallowable Costs…Directly Associated Costs - FAR 31.205 - Selected Cost Series #3

In our blog on Selected Cost, we addressed the 10 Expressly Unallowable Costs and re-list them here with their corresponding FAR 31.205-X reference:

1. Costs of Alcoholic Beverages (51) 

2. Bad Debts (3)

3. Contributions or donations (8)

4. Entertainment Costs (14)

5. Fines, Penalties, and mischarging costs (15)

6. Interest and other financial costs (20)

7. Lobbying and political activity costs (22)

8. Losses on other contracts (23)

9. Organizational costs (27)

10. Goodwill (49)

But there’s more!!!!  Here’s the thing that Government contractors need to remember:

Directly associated costs are the often-neglected component of unallowable costs.  FAR 31.205-6 informs us that “A directly associated cost is any cost that is generated solely as a result of incurring another cost, and that would not have been incurred had the other cost not been incurred. When an unallowable cost is incurred, its directly associated costs are also unallowable.”

Example 1: The cost of Alcoholic Beverages is expressly unallowable, therefore, the tax on that cost is directly associated and unallowable.

Example 2: Lobbying and political activity costs are expressly unallowable.  Therefore, any expense incurred related to that cost would also be unallowable (i.e., any travel expenses to attend a related event).

There are many directly associated costs which may occur as a result of incurring costs which are sometimes allowable and sometimes unallowable.  We’ll address some of those in a later Compliance Clip. But when costs are unallowable, keep in mind the concept of “directly associated cost”, as they must be identified and excluded from any billing, claim, or proposal applicable to a Government contract.

Implications for Contractors

Identifying directly associated costs is not only essential for compliance but also has significant financial implications for contractors. Here are some key considerations:

Contract Pricing: Failure to identify and segregate directly associated costs can lead to inaccuracies in contract pricing. 

Contract Billing: Overstating allowable costs might result in a contractor over-billing the government, leading to potential penalties, contract disputes, and reputation damage.

Indirect Rate Impact: Inclusion of directly associated costs in the indirect cost pool distorts the allocation of overhead costs, leading to higher indirect rates. Consequently, this may negatively affect the contractor's competitiveness in future bids and proposals.

Audit Risks: Government auditors are vigilant in reviewing costs billed to contracts. If a contractor fails to segregate directly associated costs correctly, it can raise suspicion during audits, triggering further investigations and potential sanctions.

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