FAR 31.205—Selected costs.

Public relations and advertising costs.

FAR 31.205-1 explains how to identify, classify, and cost public relations and advertising expenses under government contracts. It defines what counts as "public relations" and "advertising," describes the types of costs included in those activities (such as media time and space, outside services, and related employee labor, travel, and fringe benefits), and then separates allowable from unallowable costs. The section is especially important because many marketing, image-building, trade show, event, and promotional expenses are unallowable unless they fit a narrow exception tied to contract requirements, disposal of scrap or surplus, export promotion for products normally sold to the U.S. Government, or other specific FAR provisions such as 31.205-34 and 31.205-38(b)(5). It also identifies certain public relations activities that are allowable, including contract-required communications, limited public information efforts, community service participation, plant tours and open houses, and certain ceremonies when specifically provided for by contract. In practice, this section helps contractors avoid charging promotional or image-enhancing costs to the Government when those costs are primarily for sales, branding, or goodwill, while allowing only the limited communications and contract-driven activities the FAR expressly permits.

[Reserved]

Bad debts.

FAR 31.205-3 addresses bad debts and makes clear that losses from amounts a contractor cannot collect are not allowable costs on government contracts. It covers actual losses and estimated losses tied to uncollectible accounts receivable from customers and other claims, as well as directly associated costs such as collection expenses and legal fees. In practice, this means a contractor cannot charge the Government for write-offs, reserves, allowances, or recovery efforts related to unpaid customer debts when those debts are not collectible. The rule is designed to keep the Government from paying for ordinary business credit risk and debt-collection activity that belongs to the contractor’s commercial operations. For contractors, the practical significance is that accounting treatment, billing practices, and indirect cost pools must exclude bad debt amounts and related collection/legal costs. For contracting officers and auditors, the section provides a straightforward allowability rule for reviewing claimed costs and indirect rate proposals.

Bonding costs.

FAR 31.205-4 addresses when bonding costs are allowable as contract costs under the cost principles. It explains what bonding costs are, including bid, performance, payment, advance payment, infringement, and fidelity bonds, and distinguishes between bonds required by the Government under a contract and bonds a contractor obtains as part of its general business operations. The section exists to tell contractors and contracting officers which bonding expenses may be charged to Government contracts and under what conditions, so that only reasonable, properly supported costs are reimbursed. In practice, this means the allowability of a bonding cost depends first on whether the bond is contract-required or business-practice-required, and then on whether the cost is reasonable and consistent with sound business practice. The rule helps prevent improper charging of general business insurance-type expenses while still allowing legitimate protection costs tied to contract performance or normal commercial operations.

[Reserved]

Compensation for personal services.

FAR 31.205-6 addresses the allowability of compensation for personal services charged to Government contracts. It covers the core allowability tests for employee compensation, including current-year work, reasonableness, consistency with the contractor’s established compensation plan or practice, and the need to give the cognizant ACO a chance to review major compensation plan changes. It also explains how compensation interacts with other unallowable cost rules, and it gives special attention to compensation for owners of closely held corporations, LLC members, partners, sole proprietors, immediate family members, and persons contractually committed to acquire a substantial financial interest. The section then breaks out specific compensation topics such as reasonableness standards, labor-management agreement compensation, compensation not covered by such agreements, forms of payment including cash, securities, and other assets, valuation of securities, income tax differential pay for foreign versus domestic assignments, and bonuses and incentive compensation. In practice, this section is central to executive pay, bonus plans, stock-based compensation, relocation-related tax gross-ups, and owner compensation, because these are common audit and cost allowability issues. Contractors need to document their compensation policies, support reasonableness, and avoid treating profit distributions or retroactive salary adjustments as allowable labor costs.

Contingencies.

FAR 31.205-7 explains how contractors and contracting officers should treat contingencies in cost accounting and cost estimating. It defines what a contingency is, states the general rule that contingency costs are unallowable for historical costing purposes, and then distinguishes between two types of contingencies for future cost estimates: those tied to known conditions with reasonably predictable effects, and those tied to known or unknown conditions whose effects cannot be measured precisely. The section also explains when a contingency factor may be recognized in past-period costs, such as in termination settlements, to account for minor unsettled matters and speed resolution. In practice, this rule helps ensure that estimated costs are realistic without allowing speculative or inequitable amounts to be built into individual cost elements. It also requires separate disclosure of certain contingencies, including the basis for the estimate, so the Government can evaluate whether contractual coverage is appropriate. The section is important because it affects proposal pricing, incurred cost submissions, termination claims, and the negotiation of contract terms that may need explicit risk coverage.

Contributions or donations.

FAR 31.205-8 is a very short but important cost principle that makes contributions or donations unallowable as a general rule. It covers donations in the form of cash, property, and services, and it applies regardless of who receives the contribution or donation. In practice, this means a contractor cannot charge the Government for voluntary gifts, charitable donations, sponsorship-style giveaways, donated equipment, or donated labor unless another FAR provision specifically allows the cost. The section exists to keep the Government from paying for expenditures that are not made for the direct performance of the contract and that are essentially voluntary transfers of value. The only express exception in this section is where 31.205-1(e)(3) provides otherwise, so contractors and contracting officers must read this rule together with that cross-reference before deciding whether a particular cost is allowable. For contractors, the practical significance is that the label attached to a payment or transfer does not control; the substance of the transaction does. For contracting officers and auditors, the key task is to identify whether an item is truly a donation or contribution and whether any specific FAR exception applies.

[Reserved]

Cost of money.

FAR 31.205-10 explains the allowability of "cost of money" in federal contracting and distinguishes it from ordinary interest on borrowings. It covers three core subjects: what cost of money is, when it is treated as an incurred cost for cost-reimbursement and progress payment purposes, and the two cost accounting standard concepts it refers to—facilities capital cost of money under 48 CFR 9904.414 and cost of money for capital assets under construction under 48 CFR 9904.417. The section also sets the conditions for allowability, including compliance with the applicable CAS measurement, assignment, and allocation rules, compliance with FAR 31.205-52 limits, and specific identification and proposal of estimated facilities capital cost of money in the relevant cost proposal. It further makes clear that actual interest expense cannot be substituted for the calculated imputed cost of money. In practice, this section matters because it determines whether contractors can recover a notional financing charge on capital tied up in facilities or construction assets, and it requires careful proposal preparation, CAS compliance, and contract-specific identification to avoid disallowance.

Depreciation.

FAR 31.205-11 addresses when depreciation on plant, equipment, and other capital facilities is allowable as a contract cost and when it is not. It explains how residual value affects depreciable cost, how depreciation must be handled when Cost Accounting Standards (CAS) 9904.409 applies, and what happens when CAS does not apply. The section also covers special situations involving property acquired from the Government at no cost, property priced under 31.205-26(e), fully depreciated property, impairment write-downs, sale-and-leaseback reacquisitions, and capital leases under FASB ASC 840. In practice, this cost principle is meant to keep contractors from charging the Government more depreciation than is economically justified, while still allowing recovery of legitimate capital consumption costs. It also ties depreciation treatment to the contractor’s financial accounting methods and to consistent treatment across Government and non-Government business within the same segment or common-control group. For contracting officers and auditors, the section is important because depreciation issues often affect indirect rates, forward pricing, incurred cost audits, and lease or asset restructuring transactions.

Economic planning costs.

FAR 31.205-12 addresses the allowability of economic planning costs under the cost principles for government contracts. It defines these costs as general long-range management planning aimed at the future overall development of the contractor’s business, including planning that considers possible economic dislocations or fundamental changes in the markets where the contractor currently operates. The section’s main purpose is to distinguish allowable strategic, forward-looking business planning from other types of costs that are treated differently under the FAR. It also draws two important boundaries: it excludes organization or reorganization costs, which are covered by FAR 31.205-27, and it points readers to FAR 31.205-38 for market planning costs that are not economic planning costs. In practice, this means contractors may charge certain strategic planning expenses to government contracts if they fit the definition and are otherwise reasonable, allocable, and compliant with the cost principles, while contracting officers and auditors must ensure the costs are not really startup, restructuring, or marketing-related expenses in disguise.

Employee morale, health, welfare, food service, and dormitory costs and credits.

FAR 31.205-13 addresses the allowability of employee morale, health, welfare, food service, and dormitory costs, along with related credits and limits on gifts, recreation, employee organizations, and losses from operating food and lodging services. It explains which employee-support activities are generally allowable, such as house publications, health clinics, wellness and fitness centers, counseling services, cafeterias, canteens, lunch wagons, vending machines, and living accommodations, and it requires that any income generated by these activities be offset against the costs. The section also draws a firm line between allowable morale/welfare support and unallowable gifts and recreation, while carving out narrow exceptions for certain awards and employee participation in company-sponsored teams or organizations. A major practical focus is the treatment of food and dormitory losses: these are allowable only when the contractor’s objective is break-even operation, and even then only if losses are justified by unusual circumstances such as remote locations, excessive unproductive labor costs, or situations where stopping the service would not reduce net costs. The rule further requires allocation of indirect expenses to food and dormitory services and addresses arrangements where employee associations operate services and keep the profits, as well as contractor contributions to employee organizations, which are allowable only to the extent the underlying costs would have been allowable if incurred directly by the contractor. In practice, this section is important because it determines whether employee-support programs can be charged to government contracts, how credits must be applied, and when contractor-provided amenities become unallowable overhead or expressly disallowed costs.

Entertainment costs.

FAR 31.205-14 addresses the allowability of entertainment costs under government contracts. It covers amusement, diversions, social activities, and all directly associated costs, including tickets to shows or sporting events, meals, lodging, rentals, transportation, and gratuities tied to those activities. It also covers membership costs for social, dining, country clubs, and similar organizations with the same purposes. The section exists to prevent contractors from charging the Government for expenses that are primarily personal, social, or recreational rather than necessary for contract performance. In practice, it means contractors must identify and exclude entertainment-related costs from indirect pools, direct charges, and any other cost category, even if the expense is treated as taxable compensation to employees. The rule is broad and strict, so contractors and contracting officers should treat these costs as unallowable regardless of how they are labeled or where they are recorded.

Fines, penalties, and mischarging costs.

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.

Gains and losses on disposition or impairment of depreciable property or other capital assets.

FAR 31.205-16 explains how contractors must treat gains and losses when depreciable property or other capital assets are sold, retired, exchanged, impaired, involuntarily converted, or otherwise disposed of for cost-reimbursement and other cost-based contracting purposes. It covers the basic rule for recognizing gains and losses in the year they occur, how those amounts are charged or credited to the cost groupings that absorbed the original depreciation or amortization, and the special treatment for business combinations, sale-leaseback situations, capital leases, involuntary conversions, exchanges for similar property, mass or extraordinary dispositions, and impairments of long-lived tangible and identifiable intangible assets. It also distinguishes between depreciable property and nondepreciable capital assets, making clear that gains and losses on the latter are generally excluded from contract cost. In practice, this section prevents contractors from double counting depreciation-related costs, ensures the Government shares appropriately in certain realized gains, and limits recovery of losses to amounts that are economically and contractually allowable. It is especially important for property accounting, indirect rate development, asset retirement decisions, insurance recoveries, and any transaction that changes the carrying value or ownership of capital assets used in contract performance.

Idle facilities and idle capacity costs.

FAR 31.205-17 addresses when a contractor may charge the Government for costs associated with unused plant, equipment, or other tangible capital assets. It defines the key terms "idle facilities," "idle capacity," and "facilities," and explains how to distinguish completely unused assets from partially used assets with excess capacity. The section then sets the allowability rules for idle facilities, including the limited circumstances in which those costs are allowable, the general rule that idle capacity costs are allowable as ordinary business costs, and the requirement that capacity not be reducible through subletting, renting, sale, or other reasonable business action. It also recognizes that widespread unused capacity may actually be treated as idle facilities rather than idle capacity, which can change allowability. Finally, it requires a separate agreement when the Government will directly pay for idle facilities or idle capacity reserved for defense mobilization production. In practice, this section matters because it determines whether overhead-like costs tied to underused assets can be billed to the Government, and it pushes contractors to document business necessity, mitigation efforts, and the reasons assets remain unused.

Independent research and development and bid and proposal costs.

FAR 31.205-18 addresses the allowability, allocation, and treatment of independent research and development (IR&D) and bid and proposal (B&P) costs. It defines the key terms used in the rule, including applied research, basic research, development, systems and other concept formulation studies, company, and B&P costs, and it explains what counts as IR&D versus effort that is really contract performance or proposal support. The section then ties cost accounting for these costs to CAS 9904.420, with different treatment depending on whether a contract is fully CAS-covered, modified CAS-covered, or non-CAS-covered. It also explains when IR&D and B&P are allowable as indirect expenses, when deferred IR&D from prior periods may be recognized, and how cooperative arrangements can affect IR&D treatment. In practice, this section matters because IR&D and B&P are often significant overhead-type costs, and improper classification or allocation can lead to unallowable costs, pricing disputes, or defective cost submissions. Contractors need to distinguish internal research from product development and proposal support, while contracting officers need to verify that the contractor’s accounting treatment and contract clauses match the applicable CAS and FAR requirements.

Insurance and indemnification.

FAR 31.205-19 explains when insurance and indemnification costs are allowable as contract costs and when they are not. It covers both purchased insurance and self-insurance, including insurance maintained for the general conduct of the contractor’s business, insurance required or approved by the contract, captive insurer arrangements, fronting company premiums, and the treatment of actual losses, nominal deductibles, and minor uninsured losses. It also sets special limits for catastrophic-loss self-insurance, business interruption coverage, property insurance above acquisition cost, insurance for Government property risk, life insurance on key personnel, defect-correction coverage, retroactive or backdated insurance, and late premium charges tied to certain ERISA-related employee deferred compensation insurance. The section also addresses indemnification, making clear that the Government’s obligation to indemnify exists only when authorized by law or expressly stated in the contract. In practice, this rule is important because contractors often carry broad insurance programs that mix allowable and unallowable elements, and contracting officers and auditors must separate ordinary business insurance from costs that exceed FAR limits or are not properly supported.

Interest and other financial costs.

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.

Labor relations costs.

FAR 31.205-21 addresses which labor relations costs are allowable and which are unallowable in contractor cost accounting. It covers ordinary employee-relations activities that help maintain satisfactory relations between the contractor and its workforce, such as shop stewards, labor-management committees, employee publications, and similar related activities. It also imposes a specific prohibition, required by Executive Order 13494, on costs tied to efforts to persuade employees about whether to organize or bargain collectively, or how to exercise those rights. In practice, this section draws a line between routine, permissible labor-management administration and lobbying-style or campaign-style activity aimed at influencing employees’ collective-bargaining choices. For contractors, the rule affects how they charge labor-relations expenses to contracts and indirect pools; for contracting officers and auditors, it provides a basis for questioning costs that look like union-organizing or anti-organizing activity. The section is important because misclassification can lead to unallowable cost determinations, billing adjustments, and potential False Claims Act or defective pricing-type exposure if unallowable costs are included in proposals, invoices, or indirect rate submissions.

Lobbying and political activity costs.

FAR 31.205-22 makes lobbying and political activity costs unallowable, and it does so broadly. It covers attempts to influence elections, referenda, initiatives, political parties, campaigns, PACs, and other election-focused organizations; efforts to influence legislation through direct communications with legislators or executive officials; publicity, propaganda, mass demonstrations, rallies, fundraisers, letter-writing and telephone campaigns aimed at legislation; legislative liaison activities when they support or prepare for unallowable lobbying; and attempts to improperly influence executive branch employees on regulatory or contract matters. The section also identifies narrow exceptions, including certain technical and factual presentations to Congress or a state legislature made in response to a documented request, limited lobbying to reduce contract cost or avoid material impairment of performance, and activities specifically authorized by statute to be funded by the contract. In practice, this rule is meant to keep federal contract funds from subsidizing political advocacy or lobbying, while still allowing legitimate, documented communications that are directly tied to contract performance or expressly authorized by law. Contractors must segregate these costs, support their treatment with records, and be prepared to justify allowability in indirect cost proposals and audits.

Losses on other contracts.

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.

[Reserved]

Manufacturing and production engineering costs.

FAR 31.205-25 explains when manufacturing and production engineering costs are allowable in government contract pricing and when they are not. It covers four allowable categories: developing and deploying new or improved materials, systems, processes, methods, equipment, tools, and techniques used in production; developing and deploying pilot production lines; improving current production functions such as plant layout, scheduling and control, methods and job analysis, equipment capability and capacity, inspection techniques, and tooling analysis/design improvements; and material and manufacturing producibility analysis to determine production suitability and optimize manufacturing processes. It also draws important boundaries by excluding basic and applied research under FAR 31.205-18 and excluding development effort for items intended for sale, which is also governed by FAR 31.205-18. Finally, it addresses capitalization: if these development costs are capitalized, or must be capitalized under the contractor’s policies, their allowability is determined under FAR 31.205-11, Depreciation. In practice, this section matters because contractors must correctly classify engineering effort, separate allowable production-improvement work from research or commercial development, and apply the right accounting treatment when costs are capitalized.

Material costs.

FAR 31.205-26 explains how contractors must identify, measure, and allocate material costs when those costs are claimed as allowable contract costs. It covers what counts as material costs, including raw materials, parts, subassemblies, components, manufacturing supplies, and related collateral items such as inbound transportation and in-transit insurance. It also addresses how to treat overruns, spoilage, defective work, credits and offsets such as discounts, rebates, scrap, salvage, and returns, as well as inventory adjustments between physical and book counts. The section further explains how to price materials issued from stores, how to handle interorganizational transfers between commonly controlled entities, and when transferred items may be priced at something other than cost. For commercial products and services transferred at catalog or market price, it adds rules for quantity-based adjustments and possible modification-cost adjustments. In practice, this section is important because it determines whether material charges are properly supported, consistently priced, and free of double counting or inflated costs, which directly affects cost allowability, billing, and audit risk.

Organization costs.

FAR 31.205-27 addresses the allowability of organization costs, reorganization costs, and capital-raising costs under government contracts. It makes clear that expenses tied to forming, restructuring, or defending the corporate structure of a business are generally unallowable, including mergers and acquisitions, changes in controlling interest, and efforts to resist those changes. The section also covers costs of raising capital, such as increasing net worth or long-term liabilities, and specifically identifies common examples like incorporation fees and professional fees for attorneys, accountants, brokers, promoters, organizers, management consultants, and investment counselors. It further defines unallowable reorganization costs to include changes in financial structure that alter the rights and interests of security holders, even if no new capital is raised, while excluding administrative costs of short-term borrowings for working capital. Finally, it carves out an important exception for activities primarily intended to provide compensation, such as stock acquired for executive bonuses, employee savings plans, and employee stock ownership plans, which are governed instead by FAR 31.205-6. In practice, this section matters because contractors must separate ordinary compensation-related equity activities from corporate finance and restructuring costs, and must ensure unallowable organization costs are excluded from proposals, billings, and indirect cost pools.

Other business expenses.

FAR 31.205-28 addresses a narrow set of recurring corporate administrative expenses that may be allowable when they are ordinary, necessary, and properly allocable to the contract. It specifically covers registry and transfer charges tied to changes in ownership of the contractor’s securities, costs of shareholders’ meetings, normal proxy solicitations, preparing and publishing reports to shareholders, preparing and submitting required reports and forms to taxing and other regulatory bodies, incidental costs of directors’ and committee meetings, and other similar costs. In practice, this section matters because it distinguishes routine corporate governance and compliance expenses from unallowable financing, capital-raising, or general corporate overhead items that may not be charged to the Government. Contractors must be able to show that the costs are recurring, similar in nature to the listed items, and not inflated by activities that primarily benefit owners or investors rather than contract performance. Contracting officers and auditors use this rule to test whether corporate-level expenses are properly treated as allowable indirect costs or whether they should be excluded as unallowable business expenses.

Plant protection costs.

FAR 31.205-29 addresses the allowability of plant protection costs, meaning the costs a contractor incurs to safeguard its facilities, property, and operations. This section specifically covers wages, uniforms, and equipment for personnel engaged in plant protection; depreciation on plant protection capital assets; and necessary expenses incurred to comply with military requirements. In practice, it tells contractors and contracting officers which security-related facility costs may be charged to government contracts when they are ordinary, necessary, and properly supported. The rule matters because plant protection can include both routine industrial security and special measures required by military customers, and the allowability of those costs affects indirect rates, pricing, and incurred cost audits. It also helps distinguish allowable protection costs from unallowable or excessive security-related spending that is not tied to contract performance or required compliance. Contractors must therefore document the business purpose, allocation basis, and relationship to plant protection or military requirements to support reimbursement.

Patent costs.

FAR 31.205-30 addresses which patent-related costs a contractor may charge to the Government as allowable indirect or direct costs. It covers three main subject areas: costs of preparing invention disclosures, reports, and related documents; costs of searching prior art to support those disclosures; and costs of filing and prosecuting a U.S. patent application when title or a royalty-free license will be conveyed to the Government. It also allows general patent counseling services, such as advice on patent laws, regulations, contract clauses, and employee agreements. The section’s purpose is to distinguish patent costs that are required by a Government contract from patent costs that are primarily for the contractor’s own business interests, which are unallowable unless they fall within the narrow counseling exception. In practice, this rule matters because patent expenses can be significant, and allowability depends on the contract’s patent requirements and the specific purpose of the work. Contractors must be able to tie the cost to a Government contract requirement and keep adequate support, while contracting officers and auditors must verify that the claimed patent costs are not broader than the regulation permits.

Plant reconversion costs.

FAR 31.205-31 addresses plant reconversion costs, meaning the costs a contractor incurs to restore or rehabilitate its facilities to approximately the condition they were in before the Government contract began, except for normal wear and tear. The section establishes the basic allowability rule: reconversion costs are generally unallowable. It then identifies a narrow exception for the cost of removing Government property and the restoration or rehabilitation costs directly caused by that removal. The rule also allows, in special circumstances where equity requires it, additional reconversion costs if the parties agree to them before the costs are incurred. Finally, it warns against double recovery, including charging the same costs through contingencies, additional profit or fee, or other contracts. In practice, this section matters when a contract ends or Government property must be removed, because it determines whether cleanup, repair, and restoration costs can be billed to the Government and how those costs must be documented and approved.

Precontract costs.

FAR 31.205-32 addresses when a contractor may charge precontract costs to a federal contract. It defines precontract costs as costs incurred before the contract’s effective date that are directly tied to the negotiation and anticipated award of the contract, and only when incurring those costs is necessary to meet the proposed delivery schedule. The section also sets the key allowability test: the costs are allowable only to the extent they would have been allowable if incurred after contract award, which ties this rule back to the general cost principles in FAR Part 31. It is a narrow exception to the normal rule that costs incurred before award are not automatically chargeable to the government. In practice, this section matters when contractors begin work early to avoid schedule slippage, but it also creates risk if the contractor starts spending before award without a clear contractual basis or without ensuring the costs are otherwise allowable. The reference to FAR 31.109 signals that precontract costs may also be addressed through advance agreements or other cost allowability arrangements.

Professional and consultant service costs.

FAR 31.205-33 addresses when professional and consultant service costs are allowable as contractor incurred costs and when they are unallowable. It defines what counts as professional and consultant services, explains the basic allowability standard, and then identifies specific prohibited uses such as improperly obtaining or using protected information, improperly influencing solicitations or source selections, violating statutes or regulations on improper business practices or conflicts of interest, or performing work outside the agreed purpose and scope. The section also tells contracting officers what factors to consider in judging reasonableness, including the nature and necessity of the service, the contractor’s capability, past use of such services, the relationship to Government business, whether hiring would be cheaper than contracting, the provider’s qualifications and customary fee, and the adequacy of the agreement. It separately sets out special rules for retainer fees, requiring proof that the services are necessary and customary, that the retainer is supported by past usage, that the fee is reasonable compared with maintaining in-house capability, and that actual services are documented. Finally, it specifies the documentation needed to support fees for services rendered, including agreements, invoices, and work products. In practice, this section is important because consultant costs are often scrutinized for reasonableness, scope, and compliance risk, and contractors must be able to prove both that the services were legitimate and that the amounts charged were properly supported.

Recruitment costs.

FAR 31.205-34 addresses which recruitment costs are allowable as contractor costs under cost-reimbursement and other flexibly priced contracts, and which advertising-related costs must be excluded. It covers six allowable cost categories: help-wanted advertising, operating an employment office, aptitude and educational testing, recruiting travel for employees, applicant interview travel, and employment agency fees limited to standard commercial rates. It also imposes a specific limitation on help-wanted advertising: the ad must describe specific positions or classes of positions and must not include unrelated promotional material such as extensive product illustrations or company capability descriptions. In practice, this section helps contractors distinguish ordinary hiring expenses from unallowable promotional advertising, and it gives contracting officers a clear basis for reviewing labor-related indirect costs for reasonableness and allocability. The rule matters because recruitment is a normal business need, but federal reimbursement is limited to costs that are genuinely tied to filling positions rather than marketing the contractor’s brand or products.

Relocation costs.

FAR 31.205-35 addresses when employee relocation costs are allowable as contract costs and when they are not. It covers permanent change-of-duty relocations for existing employees and recruitment relocations for new employees, including travel for the employee and immediate family, transportation of household goods, home-finding trips, temporary lodging, real estate closing costs, continuing ownership costs on a vacated home, other ordinary relocation expenses, home purchase costs at the new location, mortgage interest differential payments, rental differential payments, lease cancellation costs, tax gross-ups, and spouse employment assistance. It also sets important limits, such as the 14 percent cap on certain home-sale-related costs, the 5 percent cap on home-acquisition costs, the 3-year limit for mortgage and rental differential calculations, and the $5,000 cap for miscellaneous lump-sum relocation costs. The section also identifies costs that are unallowable, including home-sale losses, many home-purchase costs, continuing mortgage principal, and lender-arrangement costs. In practice, this rule is meant to let contractors reimburse reasonable, employer-benefiting relocation expenses while preventing the Government from paying for personal investment losses, excessive housing costs, or inconsistent relocation practices.

Rental costs.

FAR 31.205-36 addresses when rental and lease costs are allowable as contract costs under the cost principles. It covers three main topics: operating leases for real or personal property, sale-and-leaseback arrangements, and interorganizational rentals between divisions, subsidiaries, affiliates, or other commonly controlled organizations. It also points readers to the separate rule for capital leases at FAR 31.205-11 and to the termination-cost rule at FAR 31.205-42(e) for unexpired leases tied to contract terminations. In practice, this section matters because rental costs are often significant overhead or direct costs, and allowability depends not just on whether the contractor actually paid rent, but on whether the lease decision was reasonable, whether the arrangement is at arm’s length or between related entities, and whether the amount exceeds what would be allowable under ownership. The rule is designed to prevent contractors from shifting excessive occupancy or equipment costs to the Government while still allowing legitimate market-based leasing costs.

Royalties and other costs for use of patents.

FAR 31.205-37 addresses when royalties and patent-related costs are allowable as contract costs, and when they are not. It covers royalties on patents, amortization of the cost of purchasing a patent or patent rights, the requirement that the patent be necessary for proper contract performance and applicable to contract products or processes, and the specific disallowance triggers: Government license or free-use rights, invalidity, unenforceability, and expiration of the patent. It also addresses reasonableness concerns when royalty arrangements are not the result of arm’s-length bargaining, including royalties paid to affiliates, royalties paid under agreements made in anticipation of a Government award, and royalties agreed to after award. Finally, it limits recovery when the patent was formerly owned by the contractor and points readers to advance agreements under FAR 31.109. In practice, this section is about preventing the Government from paying patent charges that are unnecessary, inflated, or already covered by Government rights, while still allowing legitimate intellectual property costs that are truly needed to perform the contract.

Selling costs.

FAR 31.205-38 explains which selling costs are allowable and which are unallowable under the cost principles for government contracts. It defines “selling” broadly and then sorts selling-related activities into specific buckets: advertising, corporate image enhancement/public relations, bid and proposal costs, market planning, and direct selling. The section also cross-references other FAR cost principles that control allowability for advertising, public relations, bid and proposal, and long-range market planning, so contractors must read this rule together with 31.205-1, 31.205-12, and 31.205-18. In practice, the rule is meant to prevent contractors from charging general marketing, image-building, and proposal-development efforts to the Government unless a specific cost principle allows them. At the same time, it recognizes that some selling activity is legitimate and allowable, especially direct selling and certain market planning costs. The final clause imposes a special restriction on commissions and similar compensation, allowing them only when paid to bona fide employees or established commercial or selling agencies maintained to secure business. For contractors, this section is a cost-accounting and compliance checkpoint; for contracting officers and auditors, it is a basis for testing whether claimed selling costs are properly classified and supported.

Service and warranty costs.

FAR 31.205-39 addresses the allowability of service and warranty costs under government contracts. It covers costs arising from a contractor’s contractual obligation to provide post-delivery or post-performance support, including installation, training, correcting defects in products, replacing defective parts, and making refunds when performance is inadequate. The section’s purpose is to tell contractors and contracting officers when these costs may be charged to the Government and to prevent double counting of the same risk or cost in pricing and cost buildup. In practice, this means a contractor may recover legitimate warranty or service obligations if the contract terms permit it, but must not build the same expected cost into both the estimated product cost and a separate risk or contingency element. The rule is important because warranty and service obligations can be significant, especially in supply and production contracts, and improper treatment can affect proposal pricing, incurred cost allowability, and audit findings.

Special tooling and special test equipment costs.

FAR 31.205-40 addresses the allowability and allocation of costs for special tooling and special test equipment used to perform Government contracts. It explains what happens when these items are acquired for contract performance, when their costs must be charged directly to the specific Government contract or contracts for which they were obtained, and when the costs are limited to depreciation or amortization instead. The section also covers two important exceptions: items acquired before the contract’s effective date (or replacements for those items), and items the contract schedule specifically excludes. Finally, it addresses situations where items are not treated as special tooling or special test equipment because they can be converted to general-purpose use with relatively minor expense, and it allows the costs of adapting them for the contract and restoring them afterward. In practice, this rule helps contractors and contracting officers determine whether tooling and test equipment costs are directly allocable, recoverable over time, or subject to special treatment based on contract terms and the item’s practical use.

Taxes.

FAR 31.205-41 explains when taxes are allowable as contract costs and when they are not. It covers allowable Federal, State, and local taxes that are paid or accrued under generally accepted accounting principles; taxes that are disputed as illegal or erroneously assessed; the special treatment of the Environmental Tax under Internal Revenue Code section 59A (the “Superfund Tax”); and the allowability of reasonable costs incurred to challenge or recover disputed taxes when the contracting officer directs or concurs. It also identifies several categories of unallowable taxes, including Federal income and excess profits taxes, taxes tied to financing or reorganizations, taxes from which the contractor can obtain an exemption, special assessments for capital improvements, certain property taxes used solely for non-Government work, specified excise taxes under subtitle D chapter 43 of the Internal Revenue Code, income tax accruals used to smooth book-tax differences, and the tax imposed under 26 U.S.C. 5000C. The section further explains how to allocate property taxes between Government and non-Government work, and how to handle refunds, credits, and foreign tax credits when taxes or related interest and penalties were previously reimbursed as contract costs. In practice, this rule matters because it determines whether a tax cost can be billed to the Government, how disputed taxes must be handled before payment, and how later refunds must be returned or credited to the Government.

Termination costs.

FAR 31.205-42 explains which costs may be treated as allowable termination costs when a contract is ended before completion, and how those costs must be evaluated alongside the general cost principles in FAR subpart 31.2. It covers common items, costs that continue after termination, initial costs such as starting load and preparatory costs, loss of useful value of special tooling and special machinery/equipment, rental under unexpired leases, alterations of leased property, settlement expenses, and subcontractor claims. The section exists because termination creates unusual costs that would not normally arise in full-performance contracts, and the Government needs rules to separate legitimate termination-related costs from costs that should be absorbed elsewhere or disallowed. In practice, this section controls what a contractor can recover in a termination settlement proposal and what a contracting officer should scrutinize when evaluating whether claimed costs were necessary, unavoidable, properly allocated, and supported by records. It also requires attention to mitigation, segregation of costs, residual value, title protection, and the relationship between direct charges and overhead. For both parties, the practical significance is that termination settlements are evidence-driven and highly fact-specific, with recovery often turning on whether the contractor could reasonably reuse property, stop costs promptly, and document the connection between the claimed cost and the terminated effort.

Trade, business, technical and professional activity costs.

FAR 31.205-43 addresses a narrow but important set of allowable costs tied to trade, business, technical, and professional activity. It covers three main subject areas: memberships in trade, business, technical, and professional organizations; subscriptions to trade, business, professional, or technical periodicals; and costs associated with meetings, conventions, conferences, symposia, and seminars when the principal purpose is to disseminate trade, business, technical, or professional information or to stimulate production or improved productivity. For qualifying events, the rule also covers the contractor’s costs of organizing, setting up, and sponsoring the event, including facility rental, transportation, subsistence, and incidental costs, as well as attendance costs for contractor employees and, in limited cases, nonemployees. In practice, this section matters because it tells contractors when these professional-development and industry-engagement expenses may be charged to government contracts and when they are not allowable. It also creates specific conditions for nonemployee attendance and requires contractors to apply the travel-cost rules in FAR 31.205-46 when attendance involves travel. The section is designed to support legitimate industry participation and knowledge-sharing while preventing reimbursement of personal, duplicative, or unrelated entertainment-type costs.

Training and education costs.

FAR 31.205-44 addresses when contractor costs for employee training and education are allowable as indirect or direct contract costs, and when they are not. The section generally allows training and education costs if they are related to the employee’s current field of work or a field the employee may reasonably be expected to enter, but it then carves out several important exceptions. Those exceptions cover overtime compensation for training, salaries paid while employees attend certain classes during working hours, the cost of full-time graduate education beyond a limited period, grants and similar contributions to schools or training institutions, education costs for non-bona fide employees, a narrow foreign-posting exception for dependent education, and contractor contributions to college savings plans for dependents. In practice, this rule helps distinguish legitimate workforce development from unallowable personal benefits, charitable contributions, or excessive educational support. Contractors must document the business relationship of the training, apply the specific exclusions carefully, and ensure costs are charged consistently and in accordance with cost principles. Contracting officers and auditors use this section to test whether claimed education costs are reasonable, properly supported, and not shifted into government contracts when the regulation makes them unallowable.

[Reserved]

Travel costs.

FAR 31.205-46 governs the allowability of travel costs charged to government contracts, including transportation, lodging, meals, incidental expenses, airfare, and travel by contractor-owned, -leased, or -chartered aircraft. It explains when contractor personnel’s official business travel is allowable, how transportation may be priced, and how lodging, meals, and incidentals are generally capped by the applicable Federal per diem systems for the continental United States, Alaska/Hawaii/outlying areas, and foreign areas. It also addresses special or unusual situations where actual expenses above standard per diem may be allowable, the need for written justification and higher-level approval, documentation and receipt requirements, and the need for advance agreements in some cases. The section further limits airfare to the lowest priced available fare unless specific exceptions apply and are documented, and it caps contractor aircraft travel costs at the allowable airfare unless the contract requires such aircraft or the contracting officer approves a higher amount. In practice, this section is designed to prevent excessive or poorly documented travel charges while still allowing reasonable, mission-related travel costs when properly supported and approved.

Costs related to legal and other proceedings.

FAR 31.205-47 addresses when costs connected with legal and other proceedings are allowable or unallowable under government contracts. It defines the kinds of costs covered, including legal fees, accounting and consulting support, employee and officer time, clerical and administrative expenses, and similar costs incurred before, during, and after a judicial or administrative proceeding that is directly related to that proceeding. It also defines key terms such as fraud, penalty, and proceeding, and then sets out the major disallowance triggers tied to criminal, civil, and administrative actions brought by governments, whistleblower reprisal claims, and False Claims Act actions. The section explains when costs become unallowable based on the outcome of the proceeding, including convictions, findings of liability involving fraud or similar misconduct, monetary penalties, corrective-action orders, debarment or suspension, rescission or voiding of a contract, and termination for default based on legal or regulatory violations. It also covers consent or compromise outcomes, special treatment for settlements with the United States, and limited circumstances where costs from third-party False Claims Act or whistleblower reprisal matters may still be allowed if the contracting officer determines there was very little likelihood the claimant would have prevailed. In practice, this rule is important because it determines whether a contractor can charge the Government for defense, settlement-related, and related administrative costs arising from investigations and litigation, and it requires careful tracking of the proceeding, its basis, and its final disposition.

Research and development costs.

FAR 31.205-48 addresses how to treat research and development (R&D) costs when they are sponsored by a grant or required under a contract. It ties the meaning of R&D to the technical effort described in FAR 31.205-18, but limits this subsection to work that is either funded by a grant or performed because a contract requires it. The key practical issue is cost recovery: if the contractor spends more on the R&D effort than the price of the contract or the amount of the grant, the excess cannot be charged to any other Government contract. In other words, the Government will not pay twice for the same R&D effort, and a contractor cannot shift overruns from one sponsored R&D effort to another Government contract. This section matters because it protects the Government from bearing costs beyond the agreed sponsorship amount and requires contractors to track R&D funding and overruns carefully. It is especially important for contractors performing sponsored research, development projects, or other technical efforts where funding limits and cost allowability must be monitored closely.

Goodwill.

FAR 31.205-49 addresses goodwill, which is an unidentifiable intangible asset that can arise when a business is acquired for more than the fair value of its identifiable assets minus liabilities assumed. The section explains what goodwill is, how it is created under the purchase method of accounting in a business combination, and that it may result from acquiring an entire company or only a portion of one. Its central purpose is to make clear that the Government will not reimburse contractors for costs associated with goodwill, including amortization, expensing, write-offs, or write-downs, regardless of how those charges are labeled or presented in the contractor’s accounting records. In practice, this means contractors must separate acquisition-related accounting treatment from allowable contract cost treatment and ensure goodwill charges are excluded from indirect rates, proposals, and incurred cost submissions. For contracting officers and auditors, the rule provides a straightforward basis for disallowing goodwill-related charges that may otherwise be embedded in corporate overhead, restructuring, or acquisition accounting entries.

[Reserved]

Costs of alcoholic beverages.

FAR 31.205-51 is a very short but absolute cost principle: it addresses the allowability of alcoholic beverages and states that their costs are unallowable. In practice, this means contractors may not charge the Government for beer, wine, liquor, spirits, mixed drinks, or other alcoholic beverages under any contract cost proposal, billing, indirect pool, or final indirect rate calculation. The section exists to draw a bright line for a category of entertainment or hospitality expense that the Government will not reimburse, regardless of whether the alcohol was purchased for employee events, client entertainment, celebrations, or other business-related gatherings. For contractors, the practical significance is straightforward but important: alcohol costs must be excluded from claimed costs and segregated from otherwise allowable event or meal expenses. For contracting officers and auditors, the rule provides a clear basis to question, disallow, or adjust any claimed alcoholic beverage costs that appear in direct or indirect cost submissions.

Asset valuations resulting from business combinations.

FAR 31.205-52 addresses how contractors must measure allowable depreciation, amortization, and cost of money when a business combination is accounted for under the purchase method. It covers two separate asset categories: tangible capital assets and intangible capital assets. For tangible assets, it ties allowability to the capitalized asset values assigned under CAS 9904.404-50(d), even if the contract or subcontract is not subject to CAS, so long as the costs are allocable, reasonable, and not otherwise unallowable. For intangible assets, it imposes a ceiling: allowable amortization and cost of money cannot exceed the amounts that would have been allowable if the business combination had not occurred. The purpose is to prevent contractors from increasing Government-reimbursable costs simply because an acquisition or merger changed the book basis of assets. In practice, this section requires careful post-acquisition cost accounting, documentation of asset valuations, and a clear distinction between tangible and intangible assets when proposing or billing indirect costs.