FAR 31.205-20 provides that interest is unallowable on Federal Government contracts, no matter how it is calculated or presented in your financial books and records. This means you cannot propose, bill, or claim your interest expense.
Does This Mean All of My Banking Fees are Unallowable?
No, not entirely. FAR 31.205-27(a)(3) – part of the Organization costs principle – provides an exclusion from unallowability for “administrative costs of short-term borrowings for working capital … whether or not additional capital is raised.” This should allow you to include the administrative costs (i.e., banking fees) related to your operating lines of credit and short-term bank loans.
What About DCAA Auditors? They Question Everything.
Even DCAA’s Selected Areas of Cost Chapter 35 – Interest and Other Financial Costs introduces their guidance by stating, “Generally, interest expenses and other financial costs are expressly unallowable.” However, both Section 35-2 Related Cost Principles and 35-3 General Audit Guidelines clearly state the exception under FAR 31.205-27(a)(3) for administrative costs of short-term borrowings. That is not to say an auditor will not question first and review their own guidance later – no reason to let advice get in the way of a good audit finding.
How Does the Government Justify Not Allowing Such a Reasonable Cost Incurred by Almost Every Company?
What they take away with one hand, they give back, at least partially, with the other hand. FAR 31.205-10 makes cost of money, “an imputed cost that is not a form of interest on borrowings,” allowable. FAR 31.205-10(c) goes on to state, “Actual interest cost in lieu of the calculated imputed cost of money is unallowable.” So, play by the Government’s rules or get nothing.
Cost of money is allowable, provided-
(1) It is measured, assigned, and allocated to contracts in accordance with 48 CFR9904.414 or measured and added to the cost of capital assets under construction in accordance with 48 CFR9904.417, as applicable;
(2) The requirements of 31.205-52, which limit the allowability of cost of money, are followed; and
(3) The estimated facilities capital cost of money is specifically identified and proposed in cost proposals relating to the contract under which the cost is to be claimed.
Even a Small Business Trying to Get a Normal Business Expense Recovered Must Understand Cost Accounting Standards
In this case, it is not as bad as you might think. Granted, CAS 414 and 417 are very long-winded and can be a little confusing – that said – if you follow the instructions in the included forms, it is really not that bad.
What is Cost of Money?
Cost of money is an imputed amount based on the average net book value of your tangible capital assets and of those intangible capital assets that are subject to amortization times the rates determined by the Secretary of the Treasury, pursuant to Public Law 92-41. This amount is then recovered over the same base used to recover the deprecation and amortization of the tangible and intangible capital assets. The imputed amount must be a separate and standalone rate that is applied in your proposals, billing, and incurred cost claims – the imputed amount cannot simply be included in the existing indirect expense pools.
When interest rates are up, contractors must ensure they are not leaving money on the table. Follow the instructions of CAS Board Cost of Money Form (CASB CMF) within CAS 414 to calculate the imputed amount of cost of money and rates. Ensure you include the cost of money in your cost proposals to ensure you can bill and claim the costs after the award.
Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations and supporting contractors with the development of cost of money rates. We would be happy to be part of your team.