Robert M. Craig
Director, The Claro Group
Jeffery M. Chiow
Associate, Rogers Joseph O’Donnell

Three Questions…
Direct
What is Cost?
Indirect
What is Cost Allocation?
Pools Allocation Base
What is Cost Allowability?
Reasonable Allowable Allocable
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Composition of Total Cost — FAR 31.201-1
► Costs incurred or estimated using any generally acceptable method that is applied consistently
Direct Costs
Cost s directly associated with production of a product or service
(aka “Variable Costs”)
+
Indirect Costs
Costs required to support production and/or normal business operations
(aka “Fixed Costs”)
+
Cost of Money
_
Applicable Credits
Proprietary to Claro, LLC. Not for distribution. For internal Client purposes only.

Typical Direct Costs
Material
Direct
Labor
Subcontracts
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Typical Indirect Costs
Utilities
Indirect
Labor
Rent
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Cost Accounting Allocation Standards
CAS
403
CAS
410
CAS
418
• Allocation of home office expenses to segments
• Direct allocation to maximum extent practical
• Residual expenses – 3-factor formula
• Allocation of business unit G&A to final cost objectives
• Allocation of direct and indirect costs
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Major Concepts – Indirect Cost Pooling
Homogeneous
Pools
Beneficial or
Causal
Relationships
• Homogeneous Indirect pools must contain costs with common links
• Base used to allocate those pooled cost must benefit from or demonstrate to have caused the indirect costs to be incurred
• Allocability — FAR 31.201-4
• Normally expressed as a percentage (i.e., “Pool Expenses” is the numerator and “Allocation Base” is the denominator)
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Typical Indirect Pools and Allocation Bases
Health
Insurance
Vacation Retirement
Direct Labor
Indirect
Labor
Utilities
Direct Labor
Rent
Human
Resources
Finance
Total Cost Input or
CEO
Value Added
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Full Absorption Costing
Direct Labor
Material /
Subcontracts
Overhead Selling
Product
Cost
General
Period
Cost
Administrative
Total
Project
Costs
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Allowable Cost Criteria — FAR 31.201-2
“A cost is allowable only when the cost complies with all of the following requirements”
Reasonable
CAS/GAAP
Compliant
Allocable
FAR 31.2 criteria and limitations
Complies with terms of the contract
Risks of double and treble damages, plus interest for failure to comply!
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Reasonableness — FAR 31.201-3
► Factors for determining reasonableness:
● Nature and amount incurred by prudent person in the conduct of competitive business
●
●
●
●
Recognized as ordinary and necessary
Accepted sound business practices, arm’s length bargaining, and Federal and state laws and regulations
Contractor’s responsibilities to customers, owners and employees
Significant deviations from contractor’s established practices
If challenged by the Government, the burden of proof is on the Contractor to prove a cost is reasonable
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FAR 31.205 - Unallowable Costs
Costs Government does not want to pay for!
►
►
Expressly Unallowable
● Not considered necessary for Government work
 Advertising
 Bad debts
● Matter of public policy
 Charitable contributions
 Alcohol
Allowable with limitations
● Travel
● Legal fees
Must be identified and excluded from all invoices and claims by contractor
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7 Expressly Unallowable Costs
FAR
31.205-3
31.205-8
31.205-14
31.205-15
31.205-20
31.205-49
31.205-51
Name
Bad Debts
Contributions or donations
Entertainment costs
Fines and penalties
Interest & other financial costs
Goodwill
Description
Uncollectible accounts receivables
Cash or property
Amusements, diversions & social activities
Violations of Government laws or regulations
Interest on “borrowings”
Price in excess of fair value of assets
Alcoholic beverages
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10 Cost Allowable with limitations
FAR
31.205-1
31.205-6
31.205-13
Name Items of note
Public Relations and Advertising
Compensation for
Personal Services
Employee Morale,
Health and Welfare
• Allowable costs:
• Recruiting
• Acquiring scarce items
• Disposing of scrap
• Communication with public, press
• Promote international sales
• Executive compensation limitation
• Must be reasonable based on:
• Size
• Industry
• Geographic area
• Bonuses must be based on an established plan
• Designed to:
• Improve working conditions
• employer-employee relations
• employee morale and performance
• Allowable costs can include:
• Company-sponsored sports teams
• Award dinners
• Recognition awards
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10 Cost Allowable with limitations
FAR
31.205-27
31.205-30
31.205-33
Name Items of note
Organization Costs • Unallowable costs:
• Planning and executing organization or reorganization
• Cost incurred in raising capital including
• Attorney fees
• Accountants
• Brokers
Patent Costs
Professional and
Consultant Costs
• Allowable costs if incurred based on
Government contract requirements are:
• Preparing disclosures and reports
• Searches related to invention disclosures
• Filing a U.S. patent application
• Costs unallowable if not required by a Contract
• Except general counseling services
• Generally allowable except for services to:
• Improperly obtain information or data
• Improperly influence contract awards
• Defend violation of any statute or regulation
• Defense or prosecution of claims against the
Government
• Services connected with patent infringement litigation (unless provided for in contract)
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10 Cost Allowable with limitations
FAR
31.205-34
31.205-35
Name Items of note
Recruitment Costs
DCAAM 7-2104-1a(2)
• Allowable costs:
• Help-wanted advertising
• Educational testing programs
• Travel costs for employees to recruit personnel
• Employment agency fees - not in excess of standard commercial rates
• Unallowable Costs:
• Advertising which does not describe specific positions or is not relevant to recruitment
• See DCAA Guidance
• Avoid to build backlog of resumes rather than recruiting for actual openings
Relocation Costs • Cost of Acquiring new residence limited to 5%
• Must be for benefit of Employer
• Must not exceed employee’s actual expenses
• Unallowable costs:
• Loss on sale of old residence
• Real estate fees and property insurance
• Mortgage insurance
• Property taxes
• Continuing mortgage payments on old residence
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10 Cost Allowable with limitations
FAR
31.205-46
31.205-47
Name
Travel Costs
Costs Related to
Legal and Other
Proceedings
Items of note
• Lodging and meals limited to daily maximum per diem rates
• Airfare limited to lowest coach fare available, including company-owned aircraft
• Costs incurred in connection with any proceeding brought by Federal, state, local or foreign Government for failure to comply with laws or regulations are unallowable if:
• The proceeding results in a criminal conviction
• The contractor if found liable
• The contractor is debarred or suspended
• A contract is voided, rescinded, or terminated for default
• Disposition by consent or compromise if the proceeding could have resulted in any of the above.
• Suits between contractors, employees and their employers and companies and their shareholders will require close attention for allowability determination
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Keys to Helping our Clients comply…
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Robert M. Craig
Director
The Claro Group
4922 Fairmont Ave., Suite 200
Bethesda, MD 20814
Rcraig@TheClaroGroup.com
(202) 800-7534
Jeffery M. Chiow
Associate
Rogers Joseph O’Donnell
750 Ninth Street, N.W., Suite 710
Washington, D.C. 20001
JChiow@rjo.com
(202) 777-8952