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FAR Part 31 (Cost Principles): what it covers and who it binds

Source last checked: 1 August 2026 · the text we hold is the version published under FAC number 2026-01, effective 13 March 2026

The FAR is being rewritten under Executive Order 14275. Agencies may be operating under class deviations that differ from the codified text quoted here.

This page is about a single US regulation. It does not describe EU or UK procurement rules, and we make no claim here about how costs are treated under them. Everything below is quoted or paraphrased from the published text of FAR Part 31 — Contract Cost Principles and Procedures, section by section.

Who does FAR Part 31 bind?

It binds contractors on US Government contracts priced or settled on the basis of cost, and it sorts them by organisation type before it says anything about money. FAR 31.100 describes the subpart as setting out “the applicability of the cost principles and procedures in succeeding subparts of this part to various types of contracts and subcontracts”, and 31.101 explains why: the principles are “grouped basically by organizational type” so that, as far as practicable, all organisations of similar types doing similar work follow the same rules.

That grouping is the first thing to get right, because reading the wrong subpart means reading rules that were never written for you.

Source for every row: FAR 31.103, 31.104, 31.105, 31.107 and 31.108, with 31.302, 31.602 and 31.702 naming the Uniform Guidance appendices.

When does it apply to a fixed-price contract?

In two situations only, and neither of them turns the contract into a cost-reimbursement contract. FAR 31.102 is explicit:

The applicable subparts of part 31 shall be used in the pricing of fixed-price contracts, subcontracts, and modifications to contracts and subcontracts whenever (a) cost analysis is performed, or (b) a fixed-price contract clause requires the determination or negotiation of costs. However, application of cost principles to fixed-price contracts and subcontracts shall not be construed as a requirement to negotiate agreements on individual elements of cost in arriving at agreement on the total price. The final price accepted by the parties reflects agreement only on the total price.

FAR 31.102, Fixed-price contracts

The practical reading: a buyer performing cost analysis on your fixed-price proposal may challenge an individual cost line as unallowable, but agreement is still reached on one number. You are not signing up to have every line item ruled on.

What makes a cost allowable?

Four tests, all of which have to pass. FAR 31.204(a) states that costs are allowable to the extent they are reasonable, allocable, and determined to be allowable under 31.201, 31.202, 31.203 and 31.205 — and adds that these criteria apply to all of the selected items that follow, “even if particular guidance is provided for certain items for emphasis or clarity”.

FAR 31.201-2 layers on the accounting requirements: a cost is allowable only when it complies with all of the requirements listed there, which include the standards promulgated by the CAS Board where applicable, otherwise generally accepted accounting principles and practices appropriate to the circumstances, and any limitations set out in the subpart. It also puts the paperwork burden squarely on you. Under 31.201-2(d) the contractor is responsible for maintaining records adequate to demonstrate that claimed costs were incurred, are allocable, and comply with the cost principles — and “the contracting officer may disallow all or part of a claimed cost that is inadequately supported”.

One consequence is easy to miss: under 31.201-2(c), where your accounting practices are inconsistent with subpart 31.2, the costs resulting from those practices are unallowable to the extent they exceed what consistent practices would have produced. The inconsistency itself creates the disallowance.

Reasonable — and who has to prove it

You do, from the moment the cost is questioned. This is the sentence to know by heart:

A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer’s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.

FAR 31.201-3(a), Determining reasonableness

FAR 31.201-3(b) then lists what reasonableness depends on: whether the cost is of a type generally recognised as ordinary and necessary; generally accepted sound business practices, arm’s-length bargaining, and Federal and State law; the contractor’s responsibilities to the Government, other customers, owners, employees and the public; and any significant deviations from the contractor’s established practices.

That last item is the one that catches people. A cost can be modest, defensible and still challenged, simply because you have never charged anything like it before.

Allocable — three ways a cost attaches to a contract

A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or another equitable relationship. FAR 31.201-4 gives three qualifying routes: the cost is incurred specifically for the contract; it benefits both the contract and other work and can be distributed in reasonable proportion to the benefits received; or it is necessary to the overall operation of the business even though a direct relationship to any particular cost objective cannot be shown.

The direct-versus-indirect line is drawn by consistency, not by category. FAR 31.202(a) prohibits charging a cost directly to a final cost objective if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool; 31.203(b) states the mirror-image rule for indirect costs. Small amounts get an escape hatch: 31.202(b) lets you treat a direct cost of minor dollar value as indirect, provided the treatment is applied consistently to all final cost objectives and produces substantially the same results.

Two regimes, not one: 31.2 against 31.3, 31.6 and 31.7

Subpart 31.2 writes its own rules; the other three delegate. This is the structural fact that the section numbering hides, and it changes where you go to answer a question.

The version-pinning row is the one with teeth. For an educational institution, a State or tribal government or a nonprofit, the applicable cost rules are frozen at the contract date — so two contracts signed a year apart can be governed by two different editions of the same guidance.

The statutory list at 31.603(b) is worth reading even if you are a commercial contractor, because it shows what Congress hard-coded rather than left to the FAR Council: entertainment, lobbying, fraud-defence costs where the contractor is found liable or pleads nolo contendere, fines and penalties, social and country club memberships, contributions or donations regardless of recipient, advertising designed to promote the contractor, promotional items and memorabilia, air travel above standard commercial fare, golden parachute payments, and insurance covering the contractor’s own defects in materials or workmanship.

A worked example: one dinner, and the costs it drags with it

Take a client dinner charged by a commercial contractor to a cost-reimbursement contract. It fails at the first hurdle, and then it keeps failing outward.

1. The cost itself. FAR 31.205-14 makes costs of amusement, diversions and social activities unallowable, along with “any directly associated costs such as tickets to shows or sports events, meals, lodging, rentals, transportation, and gratuities”.
2. No second bite. The same section adds that “costs made specifically unallowable under this cost principle are not allowable under any other cost principle”. Re-labelling the dinner as a business development cost does not rescue it.
3. Directly associated costs follow it out. FAR 31.201-6(a) defines a directly associated cost as any cost generated solely as a result of incurring another cost, which would not have been incurred otherwise — and states that when an unallowable cost is incurred, its directly associated costs are also unallowable.
4. Including salary. Under 31.201-6(e), salary expenses of employees who participate in activities generating unallowable costs are treated as directly associated costs to the extent of the time spent on the proscribed activity, provided those costs are material.
5. But the base does not shrink. FAR 31.201-6(d) says that if a directly associated cost sits in a cost pool allocated over a base that includes the unallowable cost it is associated with, it stays in the pool: the unallowable costs attract their allocable share, so no further action is needed. Only in other cases must the directly associated cost be purged.

Point five is where most intuitions break. FAR 31.203(d) is blunt about it: once a base has been accepted, “the contractor shall not fragment the base by removing individual elements”, and all items properly includable shall bear a pro rata share of indirect costs “irrespective of their acceptance as Government contract costs”. Unallowable does not mean invisible. It means excluded from the billing, claim or proposal under 31.201-6(a), while still carrying its share of overhead.

What Part 31 does not cover

More than its length suggests. The exclusions are written into the scope sections, and each one sends you somewhere else.

• Subpart 31.2 does not reach educational institutions, construction and architect-engineer contracts, State and local governments, or nonprofit organisations — 31.103 carves all four out by name.
• The construction rules do not reach personal property. FAR 31.105(a) covers construction management, construction, alteration or repair of buildings, bridges, roads and other real property, plus related architect-engineer contracts, and then states plainly: “It does not include contracts for vessels, aircraft, or other kinds of personal property.”
• Subpart 31.6 does not reach every public body. Under 31.107(a) it applies to all programmes involving contracts with State, local and federally recognized Indian tribal governments, except publicly financed educational institutions subject to subpart 31.3, and publicly owned hospitals and other providers of medical care subject to requirements set by the sponsoring Government agencies. Other exceptions require OMB approval under 31.107(b).
• Subpart 31.7 does not reach every nonprofit. FAR 31.108 excludes educational institutions, State and local governments, and nonprofits exempted under 2 CFR part 200, appendix VIII — and routes that last group to subpart 31.2, the commercial rules.
• Section 31.205 does not list every cost. FAR 31.204(d) says so directly: it “does not cover every element of cost”, and failure to include an item “does not imply that it is either allowable or unallowable”. Where two subsections are relevant, the cost is apportioned between them; where it cannot be apportioned, the subsection that best captures its essential nature decides.
• An advance agreement does not override the part. FAR 31.109(c) states that the contracting officer is not authorized to agree to a treatment of costs inconsistent with part 31, and offers the example that an advance agreement may not make interest allowable notwithstanding 31.205-20.

Advance agreements: useful, optional, and limited

They exist because the general rules do not resolve every case in advance. FAR 31.109(a) acknowledges that reasonableness, allocability and allowability “may be difficult to determine” across varying accounting systems, and recommends that contracting officers and contractors seek advance agreement on the treatment of special or unusual costs. It then says the quiet part out loud: an advance agreement is not an absolute requirement, and its absence “will not, in itself, affect the reasonableness, allocability or the allowability” of a cost.

Where they help most, per 31.109(h), is on items that are large, judgemental and recurring: compensation for personal services, use charges for fully depreciated assets, independent research and development and bid and proposal costs, royalties, travel and relocation on mass personnel movements, idle facilities and idle capacity, severance pay on support service contracts, professional services, general and administrative allocations, construction plant and equipment, public relations and advertising, and statistical sampling methods. FAR 31.105(d)(1) singles out construction and architect-engineer contracts as the place where advance agreements matter most, because of “widely varying factors such as the nature, size, duration, and location of the construction project”.

They must be in writing, executed by both parties, incorporated into the applicable contracts, and carry a statement of applicability and duration (31.109(b)). They should be negotiated before the costs are incurred.

Frequently asked questions

Does FAR Part 31 apply to fixed-price contracts?

Yes, but only in two situations. FAR 31.102 says the applicable subparts of part 31 shall be used in pricing fixed-price contracts, subcontracts and modifications whenever cost analysis is performed, or a fixed-price contract clause requires the determination or negotiation of costs. It also says applying the cost principles is not a requirement to negotiate agreement on individual elements of cost; the final price accepted by the parties reflects agreement only on the total price.

Is FAR Part 31 the same thing as the Cost Accounting Standards?

No. FAR 31.201-2(b) says certain cost principles incorporate the measurement, assignment and allocability rules of selected CAS, and that only those standards or portions specifically made applicable by the cost principles are mandatory unless the contract is CAS-covered. Including selected standards in the cost principles does not subject the business unit to any other CAS rules. Whether CAS itself applies is decided by the CAS clause in the contract.

What makes a cost allowable under FAR Part 31?

FAR 31.204(a) states that costs are allowable to the extent they are reasonable, allocable, and determined to be allowable under 31.201, 31.202, 31.203 and 31.205. FAR 31.201-2 adds that a cost is allowable only when it complies with all of the requirements listed there, which include CAS where applicable, otherwise generally accepted accounting principles appropriate to the circumstances, and any limitations set out in the subpart.

If a cost is not listed in FAR 31.205, is it allowable?

You cannot tell from the omission alone. FAR 31.204(d) says section 31.205 does not cover every element of cost, and that failure to include any item of cost does not imply that it is either allowable or unallowable. Allowability is then decided on the principles and standards in the subpart and the treatment of similar or related selected items.

Do universities and nonprofits follow the same cost principles as companies?

No. Subpart 31.2 governs commercial organisations. Educational institutions fall under subpart 31.3, State, local and federally recognized Indian tribal governments under subpart 31.6, and nonprofit organisations under subpart 31.7. Those three subparts do not restate the rules; they direct the contracting officer to the OMB Uniform Guidance at 2 CFR part 200, subpart E and the relevant appendix, in effect on the date of the contract.

Can a contracting officer agree in advance that an otherwise unallowable cost is allowable?

No. FAR 31.109(c) states that the contracting officer is not authorized by 31.109 to agree to a treatment of costs inconsistent with part 31, and gives the example that an advance agreement may not provide that, notwithstanding 31.205-20, interest is allowable.

Do unallowable costs come out of the indirect cost allocation base?

No. FAR 31.203(d) says that once an appropriate base for allocating indirect costs has been accepted, the contractor shall not fragment the base by removing individual elements, and that all items properly includable in an indirect cost base shall bear a pro rata share irrespective of their acceptance as Government contract costs. Unallowable costs are excluded from the billing or claim, not from the base.

Who has to prove that a cost is reasonable?

The contractor. FAR 31.201-3(a) states that no presumption of reasonableness shall be attached to the incurrence of costs by a contractor, and that if an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer’s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.

What this page does not tell you

• The full text of the selected items at 31.205. There are dozens of them, from advertising to travel to termination costs, and each carries its own conditions. We have quoted the ones needed to show how the machinery works, not surveyed them.
• Agency supplements. FAR 31.103(a) contemplates them and 31.101 sets out who must approve deviations, but the supplements themselves — DFARS and the civilian agency equivalents — are separate documents we do not hold under this source.
• The Uniform Guidance itself. Subparts 31.3, 31.6 and 31.7 point to 2 CFR part 200. That text is not part of FAR Part 31 and is not quoted here.
• How any of it is applied in practice. Audit positions, board and court decisions, and negotiated outcomes are not in the regulation and are not in our source.

Source: FAR Part 31 — Contract Cost Principles and Procedures, acquisition.gov. The copy in the Scalebiz database is 197 indexed passages from that page, all fetched on 1 August 2026, and the page identifies itself as FAC number 2026-01, effective 13 March 2026. Section numbers and quoted wording above are taken from that copy. The FAR is amended through Federal Acquisition Circulars; confirm the current text against acquisition.gov before you rely on this, and read the clauses in your own contract, which control.