Understanding Allowable vs. Unallowable Costs in Government Contracts
When it comes to federal contracting, cost classification matters—especially when preparing invoices or incurred cost submissions. One of the most important concepts to master is understanding allowable vs. unallowable costs in government contracts.
Under FAR Part 31, allowable costs are those that are reasonable, allocable to the contract, and conform to any limitations in the contract terms. Examples of allowable costs include direct labor, materials, subcontractor expenses, and certain overhead costs.
Unallowable costs, on the other hand, are expenses that the government will not reimburse, even if they are real business expenses. These include items such as:
- Entertainment
- Alcohol
- Lobbying expenses
- Fines and penalties
- Personal use of company assets
Properly identifying and segregating these costs in your accounting system is essential. Including unallowable costs in a government invoice can result in penalties, questioned costs, or failed audits.
To stay compliant, contractors must implement internal controls that flag unallowable costs and prevent them from being billed to the government. Documentation, policies, and a well-structured chart of accounts are key to achieving this.
At N5 Specialized Accounting Services & Support, we help contractors build compliant systems that clearly distinguish allowable and unallowable expenses—ensuring accurate billing and successful audits.
