FAR 31.205-23—Losses on other contracts.
Plain-English Summary
FAR 31.205-23 addresses one narrow but important cost principle: losses on other contracts are not allowable costs on the contract being priced or reimbursed. In plain terms, if a contractor loses money on one contract, it generally cannot shift that loss to the Government through another contract’s indirect rates, direct charges, or other cost buildup. The rule expressly covers any excess of costs over income under any other contract, and it specifically includes the contractor’s contributed portion under cost-sharing contracts. This section exists to keep each contract’s economics separate, prevent cross-subsidization of losses, and protect the Government from paying for business decisions, underpricing, performance problems, or unfavorable outcomes on unrelated work. In practice, contractors must identify and segregate losses at the contract level, while contracting officers and auditors must ensure those losses are excluded from allowable cost claims and rate proposals.
Key Rules
Losses Are Unallowable
Any excess of costs over income under another contract is unallowable. The rule applies regardless of why the loss occurred, so the contractor cannot recover that shortfall from the Government through other contracts.
Applies to Any Other Contract
The prohibition is not limited to a particular contract type. It reaches losses on other contracts generally, meaning a loss on one job cannot be charged to a different job or spread through indirect cost pools.
Includes Cost-Sharing Contributions
For cost-sharing contracts, the contractor’s contributed portion is also covered. If the contractor absorbs part of the cost as its share, that contributed amount cannot be treated as an allowable loss on another contract.
No Shifting Through Indirect Rates
A contractor may not recover a contract loss by loading it into overhead, G&A, or other indirect cost allocations. The loss must remain with the losing contract and cannot be redistributed to the Government through rate calculations.
Separate Contract Accounting Matters
The rule depends on identifying the excess of costs over income at the contract level. Contractors need accounting systems and records that can show which contract incurred the loss and prevent improper cross-charging.
Responsibilities
Contractor
Must absorb losses on other contracts and ensure they are not billed, allocated, or otherwise recovered from the Government under different contracts. The contractor must maintain records that clearly identify contract-level losses, including its contributed share under cost-sharing arrangements.
Contracting Officer
Must evaluate proposed and claimed costs to ensure losses on other contracts are excluded from allowable costs. The contracting officer should question rate proposals, cost submissions, or pricing structures that appear to spread unrelated contract losses.
Auditor / DCAA or Other Reviewing Official
Must test cost records, indirect rate pools, and contract accounting to verify that losses on other contracts are not included in claimed costs. The reviewer should identify improper cross-subsidization and recommend disallowance where necessary.
Agency
Must apply the cost principle consistently in pricing, administration, and payment decisions so the Government does not bear losses from unrelated contractor work. The agency should support controls that keep contract costs segregated and properly allocated.
Practical Implications
Contractors cannot use one profitable contract to cover the loss from another contract when charging the Government; the loss stays with the losing contract.
The biggest compliance risk is indirect cost pooling: a loss that is not isolated can accidentally inflate overhead or G&A rates and become an unallowable charge.
Cost-sharing arrangements need special attention because the contractor’s own contributed share is also protected by this rule and cannot be recovered elsewhere.
Contracting officers and auditors should look for unusual rate spikes, unexplained negative margins, or accounting entries that suggest a prior contract loss is being redistributed.
Good contract-level accounting and clear documentation are essential; without them, contractors may face disallowances, questioned costs, and rate adjustments.
Official Regulatory Text
An excess of costs over income under any other contract (including the contractor’s contributed portion under cost-sharing contracts) is unallowable.