What Does it Mean to be “Selected”? FAR 31.205 - Selected Cost Series #1

If one is selected for an award…WOW!  Great!  --- If one is selected for an audit…UGH!  Not so Great!

When it comes to the Federal Acquisition Regulations (FAR), Selected Costs represent categories for consideration of allowability.  Some are great – Allowable, having the ability to be reimbursed under Federal Contracts.  Some are UGH, not so great – Unallowable, and the costs will never be recouped through Federal Contracts.

The FAR 31.205 Selected Cost topic outlines principles related to the allowability and allocability of specific costs that are commonly incurred by a business during the execution of government contracts. These selected costs are often subject to detailed scrutiny to ensure that they are reasonable, allocable to the contract, and comply with applicable regulations and contract terms. 

Fun fact: DCAA (Defense Contract Audit Agency) used to address these topics in Chapter 7 of their Contract Audit Manual (CAM) but has since created their “Selected Area of Cost Guidebook: FAR 31.205 Cost Principles”.  Not only are the FAR 31.205 costs addressed in this document, but DCAA has included other specific areas of cost, resulting in 75 chapters (each containing a topic of ‘selected’ cost). Seventy Five (75) versus the Forty Six (46) identified in FAR!  (Here’s the FAR [out] math: There are 52 subsections of FAR 31.205, but 6/52 are reserved, resulting in 46 cost categories addressed).

We’re going to explore the family of selected costs outlined in FAR throughout this series, and later, some insight on the DCAA Guidebook.  But let’s start off with the basics:

We have three main categories (a fourth to consider deserves its own blog and will be forthcoming 😊):

1. Allowable – Costs, which, if allocable to a cost objective and reasonable, may be legitimately claimed as a cost under a Federal contract.

2. Expressly Unallowable – Costs which are never allowed, directly or indirectly, under a Federal Contract and must be removed from claimed costs.  (These costs may also be subject to penalties)

3. Sometimes Allowable/Sometimes Unallowable – In other words, “It Depends” – Costs which may be considered allowable or unallowable, dependent upon the situation under which the costs were incurred.

Let’s eliminate a few, right off the bat…the less confusing costs…. those to which we don’t have to give any thought.

10 Expressly Unallowable Costs (Titles 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 mis-charging 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)

Remember them however you like...(maybe an acronym like ABC-EFILLOG)?

Understanding and adhering to the FAR 31.205 Selected Cost topic is crucial for both government contractors and contracting officers to ensure the fair and efficient administration of government contracts:

For Government Contractors:

• Contractors need to meticulously review their cost accounting practices to ensure compliance with FAR 31.205.

• They must differentiate between direct and indirect costs and properly allocate costs to each contract.

• Contractors should identify and exclude unallowable costs to avoid potential penalties or disallowances.

For Contracting Officers:

• Contracting officers must assess contractors' cost proposals to determine the allowability of selected costs.

• They need to ensure that contractors' cost accounting practices are consistent and adhere to the principles outlined in FAR 31.205.

• Contracting officers play a critical role in reviewing and negotiating cost elements to ensure that taxpayers' funds are used appropriately.

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