FAR 31.201—General.

Composition of total cost.

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.

Determining allowability.

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.

Determining reasonableness.

FAR 31.201-3 explains how to decide whether a cost is reasonable for government contract cost allowability purposes. It covers the core reasonableness standard, the special scrutiny applied to firms or divisions without effective competitive restraints, the rule that no presumption of reasonableness attaches to contractor-incurred costs, and the burden-shifting rule that places proof on the contractor once a cost is challenged. It also identifies the main factors used to judge reasonableness: whether the cost is ordinary and necessary for the business or contract, whether it aligns with sound business practices and arm’s-length bargaining, whether it complies with Federal and State laws and regulations, whether it reflects the contractor’s responsibilities to the Government and other stakeholders, and whether it departs significantly from the contractor’s established practices. In practice, this section is a central audit and negotiation standard: it gives contracting officers a basis to question excessive, unusual, or poorly supported costs, and it tells contractors what evidence they need to keep to defend their pricing and incurred costs. The rule matters both before award, when evaluating proposed costs, and after award, when reviewing incurred costs, because reasonableness is a threshold requirement for allowability.

Determining allocability.

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.

Credits.

FAR 31.201-5 explains how contractors must treat credits that relate to costs claimed under the cost principles. It covers income, rebates, allowances, and other credits that are connected to an otherwise allowable cost, and it requires that the Government receive the applicable portion of those credits either as a reduction of cost or as a cash refund. In practice, this means a contractor cannot keep a benefit that offsets a Government-reimbursed expense; the benefit must flow back to the Government to the extent it relates to the reimbursable cost. The rule applies broadly to many kinds of cost offsets, including vendor rebates, purchase discounts, insurance recoveries, refunds, and similar credits, so long as they relate to an allowable cost. The section also points readers to FAR 31.205-6(j)(3) for special rules on pension-related refunds and asset reversions, which are handled under a separate, more specific framework. The purpose of the rule is to prevent double recovery and ensure the Government pays only net allowable cost, not gross cost minus a benefit retained by the contractor.

Accounting for unallowable costs.

FAR 31.201-6 explains how contractors must identify, segregate, and exclude unallowable costs from Government contract billings, claims, and proposals, and how to treat the costs that are directly associated with those unallowable costs. It covers expressly unallowable costs, mutually agreed unallowable costs, costs made unallowable by a contracting officer’s written decision, and the related concept of directly associated costs. The section also addresses accounting practices for unallowable costs under CAS 9904.405, the use of statistical sampling, the effect of penalty provisions under 42.709, advance agreements under FAR 31.109, burden of proof when sampling is challenged, and how to handle directly associated costs in cost pools. It further explains how to judge materiality, including treatment of salary costs tied to proscribed activities and when directly associated costs become unallowable under selected cost principles in 31.205. In practice, this rule is a compliance and cost-accounting control requirement: contractors must have systems that prevent unallowable costs from being billed or proposed and that can withstand audit and contracting officer review.

Construction and architect-engineer contracts.

FAR 31.201-7 is a cross-reference provision that tells readers where to find the cost principles and procedures that apply to construction contracts, construction subcontracts, and architect-engineer (A-E) contracts related to construction projects. It does not itself establish the detailed cost rules; instead, it points to FAR 31.105 for the specific principles and procedures used to evaluate and determine allowable costs in these contract types, and it points to FAR 31.000 and 31.100 for the rules on when Part 31 applies. In practice, this section matters because construction and A-E work often involve cost allowability issues that are different from other service or supply contracts, so contractors and contracting officers must use the correct FAR subpart rather than relying on general cost principles alone. The section helps ensure that cost evaluations are made under the specialized framework intended for construction-related work, including both prime contracts and subcontracts. It also reinforces that applicability is not automatic; users must first confirm whether Part 31 applies under the general applicability provisions before applying the construction-specific guidance. For contractors, this means careful contract-type analysis before preparing proposals, billing, or indirect cost submissions. For contracting officers, it means using the correct regulatory source when reviewing proposed or incurred costs on construction and A-E efforts.