Most contractors doing business with the Federal Government are subject to the FAR Part 31 cost principles among which FAR 31.201-6 requires contractors to identify and exclude unallowable costs from any billing, claim, or proposal applicable to a Government contract. How contractors go about doing this varies widely. The most efficient way to identify and exclude unallowable costs is to make a determination at the time the expense is first recorded and drop it in the appropriate “bucket”; allowable or unallowable. That method assumes that (i) contractors have someone reasonably familiar with FAR Part 31 in their accounting departments to make those determinations and (ii) that their accounting systems are set up to record and segregate unallowable costs. More common among small contractors is the ritual of “scrubbing” records for potentially unallowable costs at the time a submission is made. So, for example, contractors submitting annual incurred cost submission will follow due diligence to identify and exclude unallowable costs from its indirect cost expense pools.
Source: PNWC’s Government Contracting Update: Costs Related to Extraordinary Reviews of Incurred Costs
