Although there are many types of Unallowable Costs, there are certain types that are Declared Expressly Unallowable by Federal statute or regulations. These type carry with them a higher incidence of fines, penalties, and interest if they are not excluded, or if they are included but not specifically identified, from billings, claims, proposals, or other types of data submitted to the government where the date could be used in decision making of any kind by the government.
It is therefore important to periodically screen your cost activity to ensure you are excluding, or specifically identifying these these types of costs within your entire financial operating process. This "self-governance" also provides a level of protection in that you are doing what a firm can reasonably be expected to do in minimizing fraudulent charges to the government.
How do you screen? Begin by selecting several transactions within your systems and test that certain types of unallowable costs you are aware of are properly identified, segregated, and excluded. Test the handling of the unallowable costs throughout the system including the General Ledger, several invoices/billings, your Indirect Rate calculations, maybe a proposal or two in process or a recently won/loss proposal, and if applicable any claims that may have been submitted. Remember, you do not have to do this all at once! As time permits I would recommend you schedule this activity as part of other functions for the appropriate staff.
I would also periodically meet with appropriate staff and review/discuss/confirm thier understanding of the FAR Part 31 requirements as it pertains to unallowable costs.
Don't forget to document this effort and file accordingly. This shows "self-govenance" and will provide you and your management with a comfort level that you are complying with requirements "To The Best Of Your Ability"! After all, with all the rules, regulations, changes, and interpretations, who among us can be perfect?
And please remember to check your Contract Terms/Language Thoroughly or any Advance Agreements that are in place! Go back and have someone brief the contracts in their entirety to confirm you are following ALL aspects of the contract for allowability.
As a reminder, the following are examples of costs declared Expressly Unallowable. They can be referenced for you to select from when performing your screening under "self-governance". You notice how I like the term "self-governance"! It just feels and sounds good and comforting....smile.
- Costs for contingencies
- Entertainment expenses
- Fines and penalties
- Costs of organizing or reorganizing a business enterprise (be careful here so that you do not exclude costs that are really allowable. Review this cost principle closely because it can be interpreted all kinds of ways.)
- Losses on other contracts
- Certain types of advertising and business meetings
- Bad debts
- Federal income taxes (but not always state income taxes)
A detailed description of these and other items and the criteria for a determination of allowability can be viewed in FAR Part 31-205.