FAR 31.202—Direct costs.
Plain-English Summary
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.
Key Rules
No double allocation
A cost cannot be charged directly to a final cost objective if costs incurred for the same purpose in like circumstances are already included in an indirect cost pool allocated to that or any other final cost objective. The rule prevents the same type of expense from being recovered twice through different allocation methods.
Direct costs go to the contract
Costs that are directly attributable to the contract must be charged directly to that contract. If the cost is specifically identifiable with the contract, it should not be buried in an indirect pool or spread across other objectives.
Other final objectives stay separate
Costs specifically identified with other final cost objectives are direct costs of those objectives and may not be charged to the contract either directly or indirectly. This preserves proper segregation among contracts, jobs, or other final cost objectives.
Minor-dollar exception
For practicality, a contractor may treat a direct cost of minor dollar amount as an indirect cost. This is allowed only when the treatment is administratively sensible and does not distort the allocation of costs.
Consistency is required
The minor-dollar indirect treatment must be applied consistently to all final cost objectives. A contractor cannot selectively treat the same kind of cost differently depending on which contract benefits.
Substantially same results
The alternative accounting treatment must produce substantially the same results as direct charging. If the indirect treatment materially changes who bears the cost, it does not qualify for the exception.
Responsibilities
Contractor
Classify costs correctly as direct or indirect, avoid charging the same cost type both directly and through an indirect pool, and ensure costs specifically identified to one final cost objective are not shifted to another. If using the minor-dollar exception, apply it consistently across all final cost objectives and verify that it produces substantially the same allocation outcome as direct charging.
Contracting Officer
Review cost proposals, billing practices, and cost representations for consistency with FAR cost principles, and challenge cost treatments that appear to double-count, misallocate, or selectively classify direct costs as indirect. Ensure contract pricing and reimbursement are based on proper cost classification.
Auditor or DCAA
Test whether the contractor’s accounting system and cost allocations comply with the direct/indirect distinction, including whether minor-dollar costs are treated consistently and whether indirect pools contain costs that should have been charged directly. Identify unallowable or improperly allocated costs for adjustment.
Agency
Use the rule to support fair and equitable cost allocation across contracts and other final cost objectives, and rely on it when evaluating incurred costs, provisional billing, and final indirect rates.
Practical Implications
This section is a common audit focus because improper direct/indirect classification can change contract cost, billing, and indirect rates.
Contractors should maintain written policies for minor-dollar costs and apply them uniformly; ad hoc treatment is a red flag.
A cost that is clearly identifiable to one contract should not be spread across overhead just because it is small or administratively inconvenient.
If a contractor includes a cost type in an indirect pool, it generally cannot also charge the same type of cost directly in like circumstances.
The key test is not just whether a cost is traceable, but whether the contractor’s treatment is consistent and produces materially equivalent results across all final cost objectives.
Official Regulatory Text
(a) No final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool to be allocated to that or any other final cost objective. Direct costs of the contract shall be charged directly to the contract. All costs specifically identified with other final cost objectives of the contractor are direct costs of those cost objectives and are not to be charged to the contract directly or indirectly. (b) For reasons of practicality, the contractor may treat any direct cost of a minor dollar amount as an indirect cost if the accounting treatment- (1) Is consistently applied to all final cost objectives; and (2) Produces substantially the same results as treating the cost as a direct cost.