This short video and article provide insights into FAR Part 31 – the Cost Principles. We explain what FAR Part 31 cost principles are, when they apply, and why they are important. We also discuss what contracts are subject to the cost principles, how they cannot apply to only some of your contracts and not others, and the impact on your accounting system to accommodate the cost principles.
Our topic today is FAR Part 31, the cost principles, what they are, and when do they apply. In most cases, contractors must ensure they comply with contract clauses incorporated into the contracts they sign with the federal government. Those contract clauses are provided in FAR Part 52. Some of the contract clauses in FAR Part 52 make other parts of the FAR contractual requirements.
This is the case with FAR Part 31, Contract Cost Principles and Procedures. FAR Part 31 is often referred to simply as the cost principles. Cost principles and procedures were put in place to create relative consistency in the allowability and allocability of costs to federal government contracts.
At a high level, FAR Part 31 requires contract-level accounting. This means you have to be able to calculate the costs of the actual contracts or projects. The allocation includes both allowable and unallowable costs to both your commercial and government contracts.
The FAR lays out in FAR Part 31 how to determine cost is allowable, allocable, and reasonable, sets the expectations on accounting for unallowable costs, and the difference between what a direct cost and an indirect cost is, at least from the perspective of what the government sees, how to apply the cost principles and procedures, and a list of specifically unallowable costs. Cost principles are important to any contractor that's looking to get a government contract other than commercial FAR Part 12 or fixed price based on full and open competition. In those cases, the contract doesn't require the application of the FAR cost principles.
The FAR cost principles are the rules of the game on how to contract with the federal government. Additionally, contractors with fixed-price contracts that plan to receive progress payments based on cost will need to have an accounting system that complies with the FAR Part 31 requirements. You must also be careful of fixed-price contracts awarded with full and open competition because the government loves to change its mind.
So, the federal government decides that the scope of work needs to change. They put a contract clause called the changes clause in your contract. It requires you to modify your scope of work and present a proposal with the adds and deletes to them.
In that case, they will apply the cost principles, so you must be prepared. Let's take a little deeper dive into the contracts subject to the cost principles. The cost principles apply to pretty much any reimbursable or redeterminable contract.
And there are numerous contract clauses that place that requirement on the contract. FAR 52-216 is a section of clauses that highlight the type of contract the government is awarding you. And numerous clauses in that section require the application of FAR Part 31.
For example, FAR 52-216-7, the allowable cost of payments clause, clearly sets the expectation of the requirement for FAR Part 31. T&M contracts also have the same requirements for the material section of the contract. It also allows FAR Part 31 to be applied to how you calculate the T&M or the T side, the labor rate, and applies to labor hour contracts as well.
Termination clauses all, pretty much across the board, require the application of the cost principles. So, you'll get awarded a fixed-price contract with full and open competition. It includes a termination for convenience clause for the government.
The government decides it doesn't want the final effort anymore. They come in and start the termination process, and now the cost principles will apply. Additionally, when you're pricing contracts with the federal government, if the federal government has to do what they call cost analysis, which is laid out in FAR Part 15, it clearly states when they have to do it.
They include a contract clause in the solicitation, which is 52-215-20. The requirement for certified cost or pricing data or data other than certified cost or pricing data. It has a clear requirement for the information you provide the federal government to meet the expectations of FAR Table 15-2.
In Section 1A, in the eight underneath that section, there is a requirement that the cost principles be applied to the cost presented to the federal government. Okay, our number one question. Can I apply the cost principles to only some of my contracts and not others? The answer is no.
For government contract cost accounting, all commercial and government contracts have to be treated the same. Your commercial contracts have to use the same set of rules that you use to allocate and assign contract costs within your accounting system to government contracts, especially when dealing with direct versus indirect.
No contract, government or non-government, shall have allocated to it as a direct cost, any cost, if other costs incurred for the same purpose in like circumstances have been included as an indirect cost allocated to that or any other contract. That's a lot of government speak, but it's very clear you can't charge something both direct and indirect. The same applies to indirect costs.
No contract shall have allocated to it as an indirect cost, any cost, if other costs incurred for the same purpose in like circumstances, there are those words again, have been included as a direct cost to that or any other contract. The federal government uses the term double counting when referring to this same purpose, such as circumstances, when it comes to direct versus indirect. A contract ends up paying for the effort that a contractor is incurring both directly and then sharing in an allocation of that same type of effort that's going to all contracts.
They don't want that to happen, and that's a double count. For example, the contractor gets a request for a proposal for a government program, highlighting in the scope of work that it needs a program manager. The contractor currently has all of their program managers charging their time indirect to a labor account in one of the indirect pools.
Even though the government request for proposal shows the program manager is direct, the contractor cannot have a program manager charge the government contract directly and then allocate all other program managers indirectly. Do I need a special accounting system to accommodate these cost principles? The official government answer is no. However, that's really not the case.
Most GAAP-based electronic accounting systems focus on collecting and presenting the cost of goods sold in total or by product line, not by contract. To fulfill the FAR Part 31 cost accounting expectations, you need an accounting system that supports job cost project-level accounting. In other words, you get all costs, even your indirect costs, for the individual contracts.
The government has kindly laid out the expectations of an acceptable accounting system based on FAR Part 31 in Standard Form 1408. The form summarizes the requirements from FAR Part 31. Some are clear and tie back very cleanly to FAR Part 31, such as proper segregation of direct versus indirect costs.
Others, like the requirement to have a timekeeping system that identifies employee hours by contract, are the government's extrapolation of numerous requirements within FAR Part 31 and the government auditor's expectations of what they need to see an accounting system that complies with FAR Part 31. Are there other regulations that specify cost principles? Yes. Almost every federal agency has a supplement to the FAR.
Many of these supplements have additional cost principles specifying what's allowable and unallowable beyond what's in FAR Part 31. Most additional allowable requirements relate to specific costs only applicable to that agency's contracts. For example, for DoD, they've added in the DFARS, which is their supplement, 232.205-71, a cost principle that makes the cost of rework and corrective actions because the contractor used counterfeit electronic parts an unallowable cost unless the contractor meets certain very specific requirements.
The intent is that an agency can make additional costs unallowable, which some of them do. And with DoD, you have to consider not only DoD and the DFARS, but each branch of services has its own cost principles that you've got to think about. An additional cost principle can make some costs unallowable, but they cannot make a FAR Part 31 unallowable cost allowable.
Here's a list of some of the additional FAR 52 contract clauses incorporating FAR Part 31. Well, I hope this was informative and helpful and gives you a little insight into FAR Part 31 how it can impact you. Redstone Government Consulting is available to assist.
If you have questions, please feel free to reach out to us. We're here to help you through some of the trying times when you have to comply with FAR Part 31.
John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama Certified Public Accountant