FAR 31.201-2—Determining allowability.
Plain-English Summary
FAR 31.201-2 explains how to decide whether a cost is allowable on a Government contract. It covers the core allowability test—reasonableness, allocability, compliance with Cost Accounting Standards (CAS) when applicable, compliance with the contract terms, and compliance with any additional limits in FAR Subpart 31.2. It also explains how selected CAS measurement, assignment, and allocability rules are used in some cost principles, and clarifies that those selected standards apply only to the extent specifically incorporated unless the contract is CAS-covered. The section further addresses what happens when a contractor’s accounting practices conflict with FAR Part 31: the excess cost created by the inconsistent practice is unallowable. Finally, it places a recordkeeping burden on the contractor and gives the contracting officer authority to disallow inadequately supported costs. In practice, this section is the gateway rule for cost allowability determinations and is central to audits, incurred cost submissions, billing reviews, and cost disallowance decisions.
Key Rules
All five tests must be met
A cost is allowable only if it is reasonable, allocable, compliant with applicable CAS or GAAP/practices, consistent with the contract terms, and not barred by any specific limitation in FAR Subpart 31.2. Failing any one of these requirements makes the cost unallowable.
Reasonableness is required
The cost must be of a type and amount that a prudent person in the conduct of competitive business would incur. Even if a cost is otherwise ordinary, it is not allowable if the amount or circumstances are not reasonable.
Allocability is required
The cost must be assignable to the contract in accordance with the applicable allocation rules. A cost that benefits multiple contracts or business activities must be allocated on a proper basis, and only the portion benefiting the Government contract may be charged to it.
CAS or GAAP applies as directed
If CAS applies, the contractor must follow the applicable CAS standards; otherwise, the contractor uses GAAP and accounting practices appropriate to the circumstances. Some FAR cost principles incorporate selected CAS rules for allowability purposes even when the contractor is not otherwise CAS-covered.
Contract terms can limit allowability
A cost that might otherwise be allowable under general cost principles can still be unallowable if the contract expressly restricts or excludes it. The contract itself is part of the allowability test.
Subpart 31.2 limitations still control
Specific FAR cost principles and limitations in Subpart 31.2 can make costs unallowable or cap the amount that may be charged. These special rules override general allowability concepts when they apply.
Inconsistent accounting practices create excess unallowable cost
If a contractor’s accounting practice conflicts with FAR Subpart 31.2, the amount charged above what would have resulted from a compliant practice is unallowable. The rule targets the excess caused by the inconsistency, not necessarily the entire cost item.
Supporting records are mandatory
The contractor must maintain adequate records and supporting documentation to show that claimed costs were incurred, allocable, and compliant with applicable cost principles and agency supplements. Without adequate support, the contracting officer may disallow all or part of the cost.
Responsibilities
Contractor
Determine whether each claimed cost meets all allowability requirements; use compliant accounting practices; allocate costs properly; maintain records and supporting documentation; and ensure claimed costs can be shown to have been incurred, allocable, and allowable under FAR Part 31 and any applicable agency supplements.
Contracting Officer
Review claimed costs for allowability and support; apply the FAR cost principles and contract terms; disallow all or part of any claimed cost that is inadequately supported or otherwise unallowable; and rely on the applicable CAS/GAAP framework when evaluating cost claims.
Agency
Apply any agency supplements that add to or clarify cost allowability requirements; ensure contracting and audit personnel use the correct cost principles and documentation standards; and support consistent enforcement of allowability rules across contracts.
CAS Board / CAS framework
Provide the applicable CAS standards when a contract is CAS-covered or when FAR cost principles specifically incorporate selected CAS measurement, assignment, or allocability rules for allowability determinations.
Practical Implications
A cost can fail allowability for more than one reason, so contractors should test every claimed cost against all five requirements before billing or submitting incurred cost data.
Documentation matters as much as the underlying expense: if the contractor cannot prove the cost was incurred and properly allocated, the contracting officer can disallow it even if the cost might otherwise be allowable.
Contract terms can be stricter than the general FAR rule, so teams should check the contract, clauses, and any agency supplement before assuming a cost is chargeable.
Accounting method consistency is critical; using a noncompliant practice can create an excess amount that becomes unallowable even if the underlying expense type is normally permissible.
This section is a common audit and dispute point because it ties together accounting treatment, contract interpretation, and cost principle compliance in one allowability standard.
Official Regulatory Text
(a) A cost is allowable only when the cost complies with all of the following requirements: (1) Reasonableness. (2) Allocability. (3) Standards promulgated by the CAS Board, if applicable, otherwise, generally accepted accounting principles and practices appropriate to the circumstances. (4) Terms of the contract. (5) Any limitations set forth in this subpart. (b) Certain cost principles in this subpart incorporate the measurement, assignment, and allocability rules of selected CAS and limit the allowability of costs to the amounts determined using the criteria in those selected standards. Only those CAS or portions of standards specifically made applicable by the cost principles in this subpart are mandatory unless the contract is CAS-covered (see part 30 ). Business units that are not otherwise subject to these standards under a CAS clause are subject to the selected standards only for the purpose of determining allowability of costs on Government contracts. Including the selected standards in the cost principles does not subject the business unit to any other CAS rules and regulations. The applicability of the CAS rules and regulations is determined by the CAS clause, if any, in the contract and the requirements of the standards themselves. (c) When contractor accounting practices are inconsistent with this subpart 31.2 , costs resulting from such inconsistent practices in excess of the amount that would have resulted from using practices consistent with this subpart are unallowable. (d) A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported.