FAR 31.201-4—Determining allocability.
Plain-English Summary
FAR 31.201-4 explains when a cost is "allocable" to a Government contract, which is one of the core tests for allowability under the FAR cost principles. This section covers the basic definition of allocability, the three ways a cost can be allocable to a contract, and the idea that allocation must be based on relative benefits received or another equitable relationship. In practice, it tells contractors and contracting officers how to decide whether a cost belongs on a specific contract, whether it should be shared among multiple contracts or business activities, or whether it is an indirect or overhead-type cost needed for the overall business. The rule matters because even a cost that is otherwise allowable, reasonable, and properly documented still cannot be charged to a contract unless it is allocable under this standard. It is especially important in cost-reimbursement, flexibly priced, and other contracts where the Government pays based on actual cost buildup and where mischarging can lead to disallowance, repayment, penalties, or defective pricing and accounting issues. The section also helps distinguish direct costs from indirect costs and reinforces that allocation must be fair, supportable, and tied to the benefit received by the contract or other cost objectives.
Key Rules
Allocable means assignable by benefit
A cost is allocable only if it can be assigned or charged to one or more cost objectives based on the relative benefits received, or on another equitable relationship. The key question is whether the cost has a supportable connection to the contract or other work.
Direct contract costs
A cost is allocable to a Government contract if it was incurred specifically for that contract. These are typically direct costs, such as labor, materials, or subcontract effort purchased solely to perform the contract.
Shared costs must be proportioned
If a cost benefits both the contract and other work, it is allocable only if it can be distributed in reasonable proportion to the benefits received. This is the basis for allocating shared direct or indirect costs across multiple cost objectives.
Business-wide necessary costs
A cost may still be allocable even when it cannot be traced to a single contract if it is necessary to the overall operation of the business. These costs are generally treated as indirect costs and allocated through an appropriate indirect cost pool or base.
Equitable relationship required
Allocation is not arbitrary. The method used must reflect a fair and supportable relationship between the cost and the benefiting cost objectives, consistent with the contractor's accounting practices and the facts of the cost incurred.
Responsibilities
Contractor
Identify the proper cost objective for each cost, charge direct costs only when they were incurred specifically for the contract, and allocate shared or business-wide costs using a reasonable and supportable method tied to the benefits received. Maintain accounting records and supporting documentation that show why the cost is allocable.
Contracting Officer
Review claimed costs for allocability when evaluating invoices, incurred cost submissions, proposals, or cost claims, and question charges that are not clearly tied to the contract or that appear to be improperly distributed among contracts or indirect pools.
Auditor or DCAA
Examine the contractor's cost accounting practices, allocation bases, and supporting records to determine whether costs are assigned in a manner consistent with relative benefits received and the FAR allocability standard.
Agency
Apply allocability principles when negotiating, administering, and settling contract costs, and ensure that contract payments are based only on costs that are properly allocable to the Government contract.
Practical Implications
A cost can be allowable in principle but still unchargeable to a contract if it is not allocable, so allocability is a separate and essential test.
Contractors need consistent cost accounting practices; shifting costs to a contract because it has available funding or because another job is over budget is a common and serious error.
Shared costs should be allocated using a rational basis that matches the benefit pattern, not simply spread evenly unless that truly reflects the benefit received.
Business-wide costs that support the company as a whole usually belong in indirect cost pools, not on a single contract, unless the facts clearly support direct charging.
Poor allocability support can lead to disallowed costs, billing adjustments, audit findings, and potential False Claims Act or defective pricing exposure in serious cases.
Official Regulatory Text
A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. Subject to the foregoing, a cost is allocable to a Government contract if it- (a) Is incurred specifically for the contract; (b) Benefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefits received; or (c) Is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown.