FAR 31.205-20—Interest and other financial costs.
Plain-English Summary
FAR 31.205-20 addresses the allowability of interest and certain other financial costs under government contracts. It specifically covers interest on borrowings in any form, bond discounts, costs of financing and refinancing capital (meaning net worth plus long-term liabilities), legal and professional fees associated with preparing prospectuses, and costs of preparing and issuing stock rights. The rule establishes that these costs are unallowable because they are generally tied to raising capital, restructuring debt, or otherwise financing the contractor’s business rather than performing contract work. The section also points readers to an important exception in FAR 31.205-28 and makes clear that interest assessed by State or local taxing authorities may be allowable if it meets the conditions in FAR 31.205-41(a)(3). In practice, this section is a cost-accounting control point: contractors must segregate financing-related costs from allowable operating costs, and contracting officers must ensure such costs are not billed to the Government unless a specific exception applies.
Key Rules
Interest on borrowings is unallowable
Interest on loans or other borrowings, regardless of how the debt is structured or labeled, may not be charged to Government contracts. This includes conventional debt interest and similar financing charges tied to borrowed funds.
Bond discounts are unallowable
Discounts associated with issuing bonds are treated as financing costs and are not allowable. Contractors cannot recover these costs through contract pricing or reimbursement.
Financing and refinancing capital costs are unallowable
Costs incurred to finance or refinance capital, including net worth plus long-term liabilities, are unallowable. The rule applies to efforts to obtain, restructure, or replace capital used to support the business.
Prospectus preparation fees are unallowable
Legal and professional fees paid to prepare prospectuses are unallowable because they are part of capital-raising activities rather than contract performance. This includes related advisory or drafting services tied to securities offerings.
Stock rights issuance costs are unallowable
Costs of preparing and issuing stock rights are unallowable. These are equity-financing expenses and cannot be allocated to Government contracts.
Exception may apply under 31.205-28
The section expressly notes an exception reference to FAR 31.205-28. Contractors should review that provision before concluding a cost is unallowable if the expense falls within the scope of the referenced rule.
Certain tax-assessed interest may be allowable
Interest assessed by State or local taxing authorities can be allowable only when it meets the conditions in FAR 31.205-41(a)(3). This is a narrow exception and does not change the general unallowability of financing interest.
Responsibilities
Contractor
Identify and segregate interest and financing-related costs from allowable indirect and direct costs. Ensure unallowable items such as borrowing interest, bond discounts, capital financing costs, prospectus fees, and stock-rights issuance costs are excluded from proposals, billings, and final indirect cost rates unless a specific FAR exception applies.
Contracting Officer
Review proposed costs and incurred cost submissions for compliance with FAR 31.205-20. Disallow costs that fall within the unallowable categories unless the contractor demonstrates a valid exception under FAR 31.205-28 or FAR 31.205-41(a)(3).
Agency/Defense Contract Audit Entity
Audit contractor accounting records and cost submissions to verify that financing-related costs are properly identified, excluded, and not allocated to Government contracts. Flag misclassification of debt, equity, or refinancing costs as allowable overhead or G&A.
Legal and Financial Advisors
Advise the contractor on whether a transaction or fee is a financing cost, a capital-raising expense, or a potentially allowable tax-assessed interest item. Support proper documentation and classification so unallowable costs are not inadvertently billed.
Practical Implications
Contractors should set up accounting codes to capture financing costs separately; otherwise, these costs can contaminate indirect pools and create billing or rate proposal issues.
A common pitfall is treating debt-related fees, bond issuance costs, or refinancing expenses as general corporate overhead. Under this rule, those costs are unallowable and must be removed before submission to the Government.
Do not assume all interest is unallowable in every circumstance: interest assessed by State or local taxing authorities may be allowable if the specific conditions in FAR 31.205-41(a)(3) are met.
When a contractor raises capital or restructures debt, the associated legal, accounting, and issuance costs should be reviewed early so they are not mistakenly included in provisional billing rates or final indirect cost proposals.
If a cost might fall under the referenced exception in FAR 31.205-28, the contractor should document the basis carefully before charging it to a contract; otherwise, the safer default is to treat it as unallowable.
Official Regulatory Text
Interest on borrowings (however represented), bond discounts, costs of financing and refinancing capital (net worth plus long-term liabilities), legal and professional fees paid in connection with preparing prospectuses, and costs of preparing and issuing stock rights are unallowable (but see 31.205-28 ). However, interest assessed by State or local taxing authorities under the conditions specified in 31.205-41 (a)(3) is allowable.