Category:Cost Allowability

31.000 Scope of Part

This part contains cost principles and procedures for-

• (a) The pricing of contracts, subcontracts, and modifications to contracts and subcontracts whenever cost analysis is performed (see 15.404-1(c)); and

• (b) The determination, negotiation, or allowance of costs when required by a contract clause.

31.201-2 Determining Allowability

(a) A cost is allowable only when the cost complies with all of the following requirements:

• (1) Reasonableness.

• (2) Allocability.

• (3) Standards promulgated by the CAS Board, if applicable, otherwise, generally accepted accounting principles and practices appropriate to the circumstances.

• (4) Terms of the contract.

• (5) Any limitations set forth in this subpart.

31.201-3 Determining Reasonableness

(a) 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. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer’s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.

(b) What is reasonable depends upon a variety of considerations and circumstances, including-

• (1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor’s business or the contract performance;

• (2) Generally accepted sound business practices, arm’s-length bargaining, and Federal and State laws and regulations;

• (3) The contractor’s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and

• (4) Any significant deviations from the contractor’s established practices.

31.201-4 Determining Allocability

A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. Subject to the foregoing, 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, although a direct relationship to any particular cost objective cannot be shown.