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Which costs are unallowable under FAR Part 31?

Source last checked: 1 August 2026 · US federal contracting · 9 min read

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

Everything on this page is cited to FAR Part 31, Contract Cost Principles and Procedures, at the subsection given. Where a rule has an exception, the exception is stated, because a list of unallowable items without its exceptions is the fastest way to price a bid wrong.

What "unallowable" actually means here

It means the cost cannot be recovered from the Government, and that you have a positive duty to keep it out of what you submit — not merely a duty not to argue for it.

FAR 31.001 defines an expressly unallowable cost as "a particular item or type of cost which, under the express provisions of an applicable law, regulation, or contract, is specifically named and stated to be unallowable" (FAR Part 31, 31.001 Definitions). The exclusion duty sits one subsection over:

Costs that are expressly unallowable or mutually agreed to be unallowable, including mutually agreed to be unallowable directly associated costs, shall be identified and excluded from any billing, claim, or proposal applicable to a Government contract.
— FAR Part 31, 31.201-6 Accounting for unallowable costs

Note the two verbs. Identified and excluded. A contractor who simply never claims an unallowable cost, but cannot show where in the ledger it sits, has met half the requirement. FAR 31.201-6(c)(1) points to the practices in 48 CFR 9904.405 for how that identification is to be done.

The items FAR 31.205 makes unallowable outright

These are the ones with no reasonableness argument available: the subsection names the cost and states it is unallowable. Every row below is from FAR Part 31, at the subsection shown.

Advertising is the item most often got wrong, because the subsection is written the other way round. FAR 31.205-1(d) does not list unallowable advertising; it states that the only allowable advertising costs are those specifically required by contract, those exclusively for acquiring scarce items or disposing of contract scrap, those promoting products normally sold to the U.S. Government where there is a significant export-promotion effort, and recruitment advertising allowable under 31.205-34. Everything else falls under 31.205-1(f): promotional material, souvenirs, imprinted clothing, mementos, memberships in civic and community organizations, and trade shows without that export effort.

Three tests a cost has to pass before the list even matters

A cost that appears nowhere in 31.205 can still be disallowed, because 31.205 is a list of selected items and not a definition of allowability.

FAR 31.201-2(a) makes a cost allowable only when it complies with all of the stated requirements, including CAS or otherwise generally accepted accounting principles, and any limitations in the subpart. Two of those requirements do most of the work:

• Reasonable. A cost is reasonable if in nature and amount it does not exceed what a prudent person would incur in competitive business. FAR 31.201-3(a) states that no presumption of reasonableness attaches to a contractor's incurrence of a cost, and that once the contracting officer challenges a specific cost, the burden of proof is on the contractor.
• Allocable. Under FAR 31.201-4, a cost is allocable if it is chargeable to cost objectives on the basis of relative benefits received: incurred specifically for the contract, benefiting the contract and other work in reasonable proportion, or necessary to the overall operation of the business.

Two further traps sit in the same subpart. FAR 31.201-2(c) makes costs unallowable to the extent that accounting practices inconsistent with subpart 31.2 produced an amount higher than consistent practices would have. FAR 31.201-2(d) puts the documentation burden on the contractor and lets the contracting officer disallow any claimed cost that is inadequately supported.

And FAR 31.204(d) closes the gap explicitly: 31.205 does not cover every element of cost, and failure to include an item does not imply it is either allowable or unallowable. Where more than one subsection is relevant, the cost is apportioned; where it cannot be apportioned, the subsection that best captures its essential nature governs.

Directly associated costs: the rule that catches the second line

When an unallowable cost is incurred, any cost generated solely as a result of it is unallowable too — and this is where most incurred-cost findings actually come from.

FAR 31.001 defines a directly associated cost as "any cost which is generated solely as a result of the incurrence of another cost, and which would not have been incurred had the other cost not been incurred". FAR 31.201-6(a) then makes the association automatic: when an unallowable cost is incurred, its directly associated costs are also unallowable.

The materiality gate matters. Under FAR 31.201-6(e)(2), salary expense of employees who participate in activities generating unallowable costs is a directly associated cost to the extent of the time spent, provided the cost is material. Time outside normal working hours is not counted unless the employee engages so frequently that it reads as part of their regular duties. Under 31.201-6(e)(3), directly associated costs made unallowable by a selected item in 31.205 are unallowable only if material — except where allowing them would be contrary to public policy.

FAR 31.201-6(d) adds a piece of arithmetic that surprises people: if the directly associated cost sits in a pool allocated over a base that already includes the unallowable cost, it stays in the pool, because the unallowable cost attracts its own allocable share. Only in other cases must it be purged.

A worked example: six lines in one G&A pool

Nothing below is in FAR Part 31 as an example. It is our application of the subsections above to lines that turn up routinely in an indirect cost proposal. No amounts are given, because the verdict does not depend on them — except where materiality is flagged.

Only one of those six is an obvious entertainment line. That is the point: the golf day is the cost people remember to strip, and the manager's hours, the interest and the collection fee are the ones that stay in.

Legal costs are not one rule but several

Legal costs are neither broadly allowable nor broadly unallowable, and FAR 31.205-47 sorts them by what the proceeding was and how it ended.

Under 31.205-47(b), costs of a proceeding brought by a government, by a whistleblower under 41 U.S.C. 4712 or 10 U.S.C. 4701, or by a third party under the False Claims Act are unallowable where the result is a criminal conviction, a civil or administrative finding of liability involving fraud or similar misconduct, a monetary penalty, an ordered corrective action, debarment or suspension, or termination for default. Disposition by consent or compromise that could have led to any of those counts as well, under 31.205-47(b)(4).

Separately, 31.205-47(f) makes costs unallowable when incurred in connection with defending against Government claims or prosecuting claims against the Government, organization and reorganization, patent infringement litigation unless the contract provides otherwise, and protests of Federal solicitations or awards — including defending against a protest, unless that defence was at the cognizant contracting officer's written request.

Where costs are not made unallowable by 31.205-47(b), 31.205-47(e)(3) still caps them: the percentage of costs allowed "shall not exceed 80 percent". And under 31.205-47(g), costs that may be unallowable under this subsection must be segregated and accounted for separately, with the contracting officer generally withholding payment while the proceeding is pending.

Who FAR Part 31 binds, and who it does not

Subpart 31.2, which contains every selected item above, applies to commercial organizations. It is not the cost regime for universities, for state and local government bodies, or for most nonprofits — and using it for them gives confidently wrong answers.

FAR 31.103 defines the commercial-organization category as contracts negotiated on a cost basis with organizations other than educational institutions, construction and architect-engineer contracts, State and local governments, and nonprofit organizations. The routing is:

There is a second boundary, on contract type. FAR 31.102 applies the cost principles to fixed-price contracts only where cost analysis is performed or a fixed-price clause requires costs to be determined or negotiated — and it adds that this is not a requirement to negotiate agreement on individual elements of cost. The final price reflects agreement on the total price only. So a firm-fixed-price award made without cost analysis does not put your G&A pool under 31.205.

Two more limits worth knowing. Under FAR 31.201-2(b), only the CAS or portions of standards specifically made applicable by the cost principles are mandatory unless the contract is CAS-covered; including them in the cost principles does not otherwise subject a business unit to CAS. And under FAR 31.101, individual deviations from the cost principles require advance approval of the agency head or designee, with class deviations approved by the Civilian Agency Acquisition Council, NASA's Deputy Chief Acquisition Officer, or, for the Department of Defense, the Principal Director, Defense Pricing and Contracting.

How this compares with the grant side: FAR Part 31 against 2 CFR 200

They agree more often than they differ, but the lists are not the same document and one does not substitute for the other. FAR Part 31 governs contract costs; 2 CFR Part 200, the Uniform Guidance, governs costs on Federal awards. If you hold both a contract and a grant, you are working to two lists at once.

The structural difference is worth more than the item-by-item one. The Uniform Guidance carries a set of items that only make sense for grant recipients — alumni activities, commencement and convocation costs, audit services under the Single Audit Act — while FAR Part 31 carries items that only make sense for contractors, such as precontract costs and plant reconversion. Reading across from one to the other is where the confident wrong answers come from. Uniform Guidance citations here are to the source PDF at the page shown, last checked 1 August 2026.

What this page does not cover

Three things, deliberately, because getting them wrong is expensive.

• Amounts and thresholds. Compensation caps, per diem ceilings and depreciation limits move. FAR 31.205-46(a)(2) ties lodging, meals and incidental expenses to the maximum per diem rates in the Federal Travel Regulation, the Joint Travel Regulation and the State Department Standardized Regulations in effect at the time of travel — look those up rather than carrying a number from a guide.
• Agency supplements. FAR 31.103 refers throughout to subpart 31.2 and agency supplements. DFARS and its civilian equivalents add and tighten cost principles, and nothing here reflects them.
• Penalty exposure. FAR 31.110(b) states only that penalties may be assessed if unallowable costs are included in final indirect cost settlement proposals, and points to FAR 42.709 for the administrative procedures. The mechanics and the amounts live there, not in Part 31.

Advance agreements are the standard way to remove doubt before the fact. FAR 31.201-6(c)(4) recommends one under 31.109 where statistical sampling is used to identify unallowable costs, and 31.205-46(a)(5) suggests one for travel per diem compliance.

Frequently asked questions

Are legal fees unallowable under FAR Part 31?

Not as a class. FAR 31.205-47(b) makes them unallowable where a government, whistleblower or False Claims Act proceeding ends in conviction, a fraud-related finding of liability, a monetary penalty, debarment, suspension or termination for default, or in a consent or compromise that could have led to any of those. FAR 31.205-47(f) separately bars costs of claims against the Government, organization and reorganization, patent infringement litigation and protests. Where costs survive both, 31.205-47(e)(3) caps the allowed percentage at 80 percent.

Is interest on a business loan allowable on a government contract?

No. FAR 31.205-20 makes interest on borrowings unallowable however represented, along with bond discounts, the costs of financing and refinancing capital, legal and professional fees for preparing prospectuses, and the costs of preparing and issuing stock rights. The one exception in that subsection is interest assessed by State or local taxing authorities under the conditions at 31.205-41(a)(3).

Can I charge a customer dinner to a government contract?

Not if it is a social occasion. FAR 31.205-14 makes costs of amusement, diversions and social activities unallowable together with directly associated costs, and it names meals, lodging, transportation, tickets and gratuities among them. The same subsection adds that costs made specifically unallowable under it are not allowable under any other cost principle, which closes the usual reclassification route.

What is a directly associated cost?

FAR 31.001 defines it as any cost generated solely as a result of incurring another cost, which would not have been incurred had the other cost not been incurred. FAR 31.201-6(a) makes directly associated costs unallowable whenever the cost they follow is unallowable. In practice the most common one is employee salary time, which 31.201-6(e)(2) treats as directly associated to the extent of time spent on the activity, subject to materiality.

Does FAR Part 31 apply to fixed-price contracts?

Only in defined circumstances. FAR 31.102 applies the cost principles to fixed-price contracts, subcontracts and modifications where cost analysis is performed, or where a fixed-price contract clause requires the determination or negotiation of costs. It also states that this does not create a requirement to negotiate agreement on individual elements of cost, since the final price accepted reflects agreement on the total price only.

What happens if unallowable costs end up in my indirect cost proposal?

FAR 31.110(b) states that penalties may be assessed if unallowable costs are included in final indirect cost settlement proposals, and refers to FAR 42.709 for the procedures and the related contract clause. FAR 31.110(a) also notes that certain contracts require certification of the proposed indirect cost rates for final payment, under the provisions at FAR 42.703-2.

Do the rules change if I am a university or a nonprofit?

Yes, and this is the most common misrouting. Subpart 31.2 covers commercial organizations. Educational institutions fall under subpart 31.3 per FAR 31.104, State, local and federally recognized Indian tribal governments under subpart 31.6 per FAR 31.107, and nonprofits under subpart 31.7 per FAR 31.108. Nonprofits exempted under 2 CFR part 200 appendix VIII come back to subpart 31.2.

Sources: FAR Part 31, Contract Cost Principles and Procedures, acquisition.gov, at the subsections cited above; 2 CFR Part 200, Uniform Guidance, govinfo.gov, at the pages cited above. Both sources last checked 1 August 2026. FAR subsection references are quoted from the source text; the worked example and the two-regime comparison are our own reading of it and are not in either document. Cost principles and agency supplements change; confirm against the official source before you rely on this.