FAR 31.2—Subpart 31.2

General.

Direct costs.

FAR 31.202 explains how contractors must classify and charge direct costs versus indirect costs under the cost principles. It covers three core subjects: the prohibition on double-charging the same type of cost as both direct and indirect, the requirement to charge contract-specific direct costs directly to the contract, and the rule that costs specifically identified with other final cost objectives must stay with those objectives rather than being shifted to the contract. It also provides a practical exception for minor-dollar direct costs, allowing a contractor to treat them as indirect costs when doing so is reasonable, consistently applied, and results in substantially the same outcome as direct charging. In practice, this section is about cost allocation integrity: it prevents selective charging, protects fairness among contracts and other final cost objectives, and supports accurate billing, incurred cost submissions, and cost allowability reviews. Contractors need a defensible accounting policy that matches their disclosed or established practices, while contracting officers and auditors use this rule to test whether a contractor’s cost treatment is consistent and equitable.

Indirect costs.

FAR 31.203 explains how contractors must identify, group, and allocate indirect costs to final cost objectives under the cost principles. It covers the basic distinction between direct and indirect costs, how indirect cost pools must be accumulated, how allocation bases must be selected and protected from improper fragmentation, when allocation methods must be revised, how offsite locations may require separate groupings, what base period to use for allocating indirect costs, special considerations for Government-owned contractor-operated (GOCO) plants, and the rule that indirect costs meeting the definition of an excessive pass-through charge are unallowable. The section also distinguishes between contracts subject to full CAS coverage and other contracts, directing full-CAS contracts to the applicable CAS rules and applying the FAR/CAS principles in paragraphs (b) through (h) to all others. In practice, this section is about making sure indirect costs are distributed fairly and consistently based on benefit received, not shifted selectively to favor one contract or another. It is central to contractor accounting system design, indirect rate development, proposal pricing, incurred cost submissions, and audit support because it governs both the structure of cost pools and the bases used to spread them.

Application of principles and procedures.

FAR 31.204 explains how to apply the cost principles in Subpart 31.2 when deciding whether a cost is allowable. It ties allowability back to the core tests in FAR 31.201 through 31.205—reasonableness, allocability, and specific allowability rules—and makes clear that those tests apply to all selected cost items, even when a particular item is discussed elsewhere for emphasis or clarity. The section also addresses how subcontract costs are treated in different subcontract structures, including cost-reimbursement, fixed-price incentive, price redeterminable, firm-fixed-price, and fixed-price with economic price adjustment provisions, and it extends certain rules to higher tiers above the first firm-fixed-price or FPEA subcontract. In addition, it states when payments under firm-fixed-price or FPEA subcontracts are allowable if subcontract cost analysis was performed and the price was negotiated under FAR 31.102. Finally, it clarifies that FAR 31.205 is not an exhaustive list of every possible cost element, and it provides a method for handling costs that fit more than one selected cost item by requiring apportionment when possible or use of the most specific or best-fitting subsection when apportionment is not possible. In practice, this section is the roadmap for analyzing allowability questions, especially for subcontract-related costs and mixed or ambiguous cost items.

Selected costs.