FAR 31.205-15—Fines, penalties, and mischarging costs.
Plain-English Summary
FAR 31.205-15 addresses two related categories of unallowable costs: fines and penalties, and costs connected with mischarging on Government contracts. It explains when a contractor may not charge the Government for amounts paid because of violations of Federal, State, local, or foreign laws and regulations, and it identifies a narrow exception when the fine or penalty was incurred because the contractor was following specific contract terms or written instructions from the contracting officer. The section also covers costs arising from false, improper, or altered cost charging or recording, including the costs of investigating the extent of the mischarge and the costs of correcting it, such as rescreening or reconstructing records. In practice, this rule protects the Government from paying for legal violations and from bearing the cost of contractor misconduct or record tampering. It is important for contractors because these costs are not merely disfavored; they are expressly unallowable when they fall within the rule. It is important for contracting officers and auditors because it helps distinguish ordinary contract administration costs from costs that must be excluded from reimbursement, indirect cost pools, or final pricing.
Key Rules
Fines and penalties are unallowable
Costs of fines and penalties resulting from violations of, or failure to comply with, Federal, State, local, or foreign laws and regulations are unallowable. This applies regardless of whether the violation occurs in the course of performing a Government contract, unless a specific exception applies.
Exception for contract-required compliance
A fine or penalty may be allowable only when it was incurred because the contractor complied with specific terms and conditions of the contract or with written instructions from the contracting officer. The exception is narrow and requires a direct link between the Government’s direction and the cost incurred.
Mischarging-related costs are unallowable
Costs connected with or related to mischarging on Government contracts are unallowable when the mischarging is caused by, or results from, alteration or destruction of records, or other false or improper charging or recording of costs. The rule focuses on misconduct or improper recordkeeping, not simple accounting mistakes.
Investigation and quantification costs are included
Unallowable mischarging-related costs include amounts spent to measure, determine, or otherwise identify the magnitude of the improper charging. If the contractor must investigate how much was mischarged, those investigative costs are also unallowable when tied to the prohibited conduct.
Correction and remediation costs are included
Costs to remedy or correct the mischarging are also unallowable, including costs to rescreen records, reconstruct records, or otherwise repair the accounting trail. The Government will not pay for the contractor’s cleanup of its own false or improper charging.
Responsibilities
Contractor
Must ensure fines and penalties are not claimed as allowable contract costs unless the narrow contract-direction exception applies. Must prevent, detect, and correct mischarging, maintain accurate records, and exclude from claims any costs associated with altered, destroyed, false, or improper cost charging or recording.
Contracting Officer
Must avoid authorizing reimbursement of fines, penalties, or mischarging-related costs unless the contract specifically requires the conduct or the officer has issued written instructions that bring the cost within the exception. Should document any direction carefully and ensure cost allowability determinations reflect this rule.
Government auditors and reviewers
Must identify and disallow fines, penalties, and mischarging-related costs when reviewing incurred cost submissions, proposals, or vouchers. Should trace whether claimed investigation or correction costs stem from improper charging, record alteration, or destruction.
Agency/Program officials
Must not direct contractor conduct in a way that creates avoidable fines or penalties without understanding the cost consequences. When compliance actions are necessary, they should coordinate with the contracting officer so any written direction is clear and supportable.
Practical Implications
Contractors cannot shift the cost of legal violations to the Government; fines and penalties generally stay with the contractor.
If a contractor is investigating or cleaning up a mischarge, those cleanup costs may also be unallowable, so the accounting impact can extend well beyond the original error.
The exception for contract terms or written instructions is narrow, so contractors should keep clear documentation before treating any fine or penalty as allowable.
Record integrity matters: alteration or destruction of records can turn a billing problem into an unallowable-cost issue with broader audit and compliance consequences.
Contracting officers should be careful when giving written instructions, because direction that leads to a fine or penalty may affect allowability if it falls within the exception.
Official Regulatory Text
(a) Costs of fines and penalties resulting from violations of, or failure of the contractor to comply with, Federal, State, local, or foreign laws and regulations, are unallowable except when incurred as a result of compliance with specific terms and conditions of the contract or written instructions from the contracting officer. (b) Costs incurred in connection with, or related to, the mischarging of costs on Government contracts are unallowable when the costs are caused by, or result from, alteration or destruction of records, or other false or improper charging or recording of costs. Such costs include those incurred to measure or otherwise determine the magnitude of the improper charging, and costs incurred to remedy or correct the mischarging, such as costs to rescreen and reconstruct records.