FAR 31.204—Application of principles and procedures.
Plain-English Summary
FAR 31.204 explains how to apply the cost principles in Subpart 31.2 when deciding whether a cost is allowable. It ties allowability back to the core tests in FAR 31.201 through 31.205—reasonableness, allocability, and specific allowability rules—and makes clear that those tests apply to all selected cost items, even when a particular item is discussed elsewhere for emphasis or clarity. The section also addresses how subcontract costs are treated in different subcontract structures, including cost-reimbursement, fixed-price incentive, price redeterminable, firm-fixed-price, and fixed-price with economic price adjustment provisions, and it extends certain rules to higher tiers above the first firm-fixed-price or FPEA subcontract. In addition, it states when payments under firm-fixed-price or FPEA subcontracts are allowable if subcontract cost analysis was performed and the price was negotiated under FAR 31.102. Finally, it clarifies that FAR 31.205 is not an exhaustive list of every possible cost element, and it provides a method for handling costs that fit more than one selected cost item by requiring apportionment when possible or use of the most specific or best-fitting subsection when apportionment is not possible. In practice, this section is the roadmap for analyzing allowability questions, especially for subcontract-related costs and mixed or ambiguous cost items.
Key Rules
Core allowability tests apply
A cost is allowable only to the extent it is reasonable, allocable, and allowable under FAR 31.201, 31.202, 31.203, and 31.205. These standards govern all selected cost items, even when a later subsection gives special guidance for a particular cost.
Certain subcontract reimbursements are allowable
For cost-reimbursement, fixed-price incentive, and price redeterminable subcontracts, reimbursements or payments to subcontractors are allowable only to the extent they reflect subcontractor costs that are consistent with Part 31. The rule focuses on the underlying subcontractor-incurred costs, not just the payment label.
Rule extends to higher tiers
The subcontract reimbursement rule applies to any tier above the first firm-fixed-price subcontract or first fixed-price subcontract with economic price adjustment provisions. This means the allowability analysis can reach beyond the immediate subcontract relationship in the supply chain.
Firm-fixed-price payments can be allowable
Payments under firm-fixed-price subcontracts, or fixed-price subcontracts with economic price adjustment provisions and related modifications, are allowable if subcontract cost analysis was performed and the price was negotiated in accordance with FAR 31.102. The focus is on the negotiated price process rather than reimbursement of actual subcontractor costs.
Part 31.205 is not exhaustive
If a cost item is not specifically listed in FAR 31.205, that does not make it automatically allowable or unallowable. Allowability must still be determined using the general principles in Subpart 31.2 and by comparing the item to similar or related selected cost items.
Apportion costs when multiple subsections apply
When more than one subsection of FAR 31.205 applies to a cost, the contractor must allocate the cost among the relevant subsections and evaluate each portion under the applicable rule. This prevents a single mixed cost from being treated as wholly allowable or wholly unallowable when it contains different elements.
Use the most specific subsection if needed
If a cost cannot be apportioned among multiple applicable subsections, allowability is determined under the subsection that most specifically addresses the cost or best captures its essential nature. This is the fallback rule for mixed or hard-to-separate costs.
Responsibilities
Contracting Officer
Apply the Subpart 31.2 allowability framework consistently, including reasonableness, allocability, and the selected cost-item rules. Review subcontract-related costs using the correct subcontract type and ensure mixed costs are apportioned or matched to the most specific applicable subsection.
Contractor
Support claimed costs with documentation showing they are reasonable, allocable, and consistent with Part 31. For subcontract costs, ensure the subcontract type, pricing method, and cost analysis support allowability, and properly separate or classify mixed costs under the relevant cost principles.
Subcontractor
Incurs and bills costs in a manner consistent with Part 31 when the prime’s allowability analysis depends on subcontractor-incurred costs. Provide cost information needed for reimbursement or price analysis where the subcontract structure makes underlying cost consistency relevant.
Agency
Establish and enforce policies and oversight practices that apply the cost principles uniformly across contracts and subcontract tiers. Ensure acquisition personnel understand that Part 31.205 is not exhaustive and that mixed costs require careful classification.
Practical Implications
This section is a reminder that allowability is never determined by one rule alone; you must always start with reasonableness and allocability, then check the specific cost item rules. Skipping that sequence is a common audit and negotiation mistake.
Subcontract structure matters a lot. A cost-reimbursement or fixed-price incentive subcontract is analyzed differently from a firm-fixed-price subcontract, so contractors need to know which pricing arrangement controls the allowability question.
Mixed costs are a frequent trap. If a single invoice or expense contains multiple cost elements, the contractor should split them out when possible; otherwise, the most specific applicable cost principle controls.
The fact that a cost is not named in FAR 31.205 does not mean it is automatically allowable. Contractors and contracting officers still need to compare it to similar costs and apply the underlying principles.
Documentation is critical. For subcontract payments, especially under firm-fixed-price arrangements, the existence of subcontract cost analysis and proper negotiation under FAR 31.102 can be decisive in supporting allowability.
Official Regulatory Text
(a) Costs are allowable to the extent they are reasonable, allocable, and determined to be allowable under 31.201 , 31.202 , 31.203 , and 31.205 . These criteria apply to all of the selected items that follow, even if particular guidance is provided for certain items for emphasis or clarity. (b) (1) For the following subcontract types, costs incurred as reimbursements or payments to a subcontractor are allowable to the extent the reimbursements or payments are for costs incurred by the subcontractor that are consistent with this part: (i) Cost-reimbursement. (ii) Fixed-price incentive. (iii) Price redeterminable ( i.e., fixed-price contracts with prospective price redetermination and fixed-ceiling-price contracts with retroactive price redetermination). (2) The requirements of paragraph (b)(1) of this section apply to any tier above the first firm-fixed-price subcontract or fixed-price subcontract with economic price adjustment provisions. (c) Costs incurred as payments under firm-fixed-price subcontracts or fixed-price subcontracts with economic price adjustment provisions or modifications thereto, for which subcontract cost analysis was performed are allowable if the price was negotiated in accordance with 31.102 . (d) Section 31.205 does not cover every element of cost. Failure to include any item of cost does not imply that it is either allowable or unallowable. The determination of allowability shall be based on the principles and standards in this subpart and the treatment of similar or related selected items. When more than one subsection in 31.205 is relevant to a contractor cost, the cost shall be apportioned among the applicable subsections, and the determination of allowability of each portion shall be based on the guidance contained in the applicable subsection. When a cost, to which more than one subsection in 31.205 is relevant, cannot be apportioned, the determination of allowability shall be based on the guidance contained in the subsection that most specifically deals with, or best captures the essential nature of, the cost at issue.