FAR 31.201-1—Composition of total cost.
Plain-English Summary
FAR 31.201-1 explains how to build the "total cost" of a contract for cost-reimbursement and other cost-based pricing purposes. It covers the basic composition of total cost, including direct costs, indirect costs, costs incurred or to be incurred, standard costs when properly adjusted for variances, allocable cost of money under FAR 31.205-10, and the deduction of allocable credits. It also recognizes that contractors may use any generally accepted method of determining or estimating costs if the method is equitable and consistently applied, which gives flexibility in cost accounting and estimating practices. Finally, it draws an important distinction between total cost and allowable cost: a cost may be part of total contract cost and still be unallowable to the Government under FAR Part 31 or applicable agency supplements. In practice, this section is the starting point for understanding what goes into a contract’s cost buildup and why a contractor’s full cost picture is broader than the amount the Government will reimburse.
Key Rules
Total cost includes all allocable costs
The total cost of a contract is the sum of direct and indirect costs that are allocable to the contract, whether already incurred or expected to be incurred. This means the cost buildup is not limited to actual historical spending; it also includes properly estimated future costs tied to the contract.
Standard costs are allowed if adjusted
A contractor may use standard costs in determining total cost, but only if they are properly adjusted for applicable variances. This prevents standard-cost systems from overstating or understating contract cost by requiring reconciliation to actual experience.
Cost of money may be included
Allocable cost of money under FAR 31.205-10 is part of total cost when applicable. This recognizes the financing component of capital tied up in contract performance, subject to the specific rules governing cost of money.
Credits reduce total cost
Any allocable credits must be deducted from total cost. Credits include offsets such as rebates, refunds, recoveries, or other amounts that reduce the net cost attributable to the contract.
Reasonable estimating methods may be used
Any generally accepted method of determining or estimating costs may be used if it is equitable and consistently applied. This gives flexibility, but the method must be fair, supportable, and used consistently across similar situations.
Allowable cost is narrower than total cost
Even if a cost is properly allocable to the contract, the Government may reimburse only those costs that are allowable under FAR Part 31 and applicable agency supplements. In other words, allocability alone does not make a cost payable.
Responsibilities
Contractor
Identify and accumulate all direct and indirect costs allocable to the contract, include properly adjusted standard costs and any applicable cost of money, and subtract allocable credits. The contractor must also use estimating and cost-determination methods that are equitable and consistently applied, while ensuring claimed costs are allowable under FAR Part 31 and any applicable agency supplements.
Contracting Officer
Review proposed or claimed costs to distinguish between total cost and allowable cost, and ensure only allowable allocable costs are accepted for payment or pricing. The contracting officer should also evaluate whether the contractor’s cost methods are equitable, consistently applied, and supported by adequate records.
Agency
Apply FAR Part 31 and any agency-specific supplements when determining allowability, and enforce cost principles consistently across contracts. Agencies may also issue supplemental rules that further limit or clarify what costs are reimbursable.
Auditors/Cost Analysts
Examine whether costs are properly allocated, whether standard cost variances are correctly adjusted, whether credits are captured, and whether claimed costs are allowable. They also assess whether the contractor’s estimating and accounting methods are consistently applied and supported.
Practical Implications
A cost can be part of the contract’s total cost and still be unreimbursable if it is unallowable under FAR Part 31, so contractors must separate allocability from allowability in their accounting and billing systems.
Standard-cost systems require disciplined variance analysis; failing to adjust for variances can distort contract cost and create billing or pricing errors.
Credits are easy to miss in practice, especially rebates, refunds, and recoveries that arrive after costs are recorded, but they must be applied to reduce allocable cost.
Consistency matters: if a contractor uses one estimating method for one proposal or contract and a different method for another without a sound basis, the Government may question the cost buildup.
For contracting officers, the key risk is accepting a cost estimate or incurred-cost submission that looks complete on allocability but includes unallowable items or omits required offsets and adjustments.
Official Regulatory Text
(a) The total cost, including standard costs properly adjusted for applicable variances, of a contract is the sum of the direct and indirect costs allocable to the contract, incurred or to be incurred, plus any allocable cost of money pursuant to 31.205-10 , less any allocable credits. In ascertaining what constitutes a cost, any generally accepted method of determining or estimating costs that is equitable and is consistently applied may be used. (b) While the total cost of a contract includes all costs properly allocable to the contract, the allowable costs to the Government are limited to those allocable costs which are allowable pursuant to part 31 and applicable agency supplements.