FAR 31.603—Requirements.
Plain-English Summary
FAR 31.603 explains how to determine allowable costs for contracts with State, local, and Indian tribal governments when the contract points to FAR Subpart 31.6, and it tells contracting officers to use the OMB Uniform Guidance at 2 CFR part 200, subpart E, plus appendices V and VII, as they exist on the contract date. It also makes clear that agencies generally should not add extra item-by-item cost restrictions beyond those already required, but it identifies specific categories of costs that are unallowable by statute or regulation. Those unallowable categories include entertainment, lobbying and legislative influence, certain fraud-defense costs, fines and penalties, social club memberships, alcoholic beverages, contributions and donations, promotional advertising, promotional items and memorabilia, airfare above standard commercial fare, certain golden parachute payments, certain commercial insurance for correcting the contractor’s own defects, specified severance pay for foreign nationals on overseas service contracts, and certain proceeding-related costs tied to government actions, whistleblower complaints, False Claims Act matters, and related Congressional investigations. In practice, this section is important because it tells contractors and contracting officers which cost principles control, prevents agencies from imposing unauthorized extra restrictions, and identifies cost items that must be excluded even when the broader allowability framework comes from the Uniform Guidance. It also links cost allowability to the outcome and nature of legal and investigative proceedings, which makes documentation and legal review especially important when such costs arise.
Key Rules
Uniform Guidance Controls
For contracts with State, local, and Indian tribal governments that refer to FAR Subpart 31.6, allowability is determined under 2 CFR part 200, subpart E, and appendices V and VII, as in effect on the contract date. The contracting officer applies those rules rather than a separate FAR cost allowability framework.
No Extra Agency Restrictions
Agencies are generally not expected to impose additional restrictions on individual cost items. This means agencies should rely on the governing cost principles and avoid creating unique disallowance rules unless authorized by law or regulation.
Entertainment and Lobbying Costs Unallowable
Costs for entertainment and directly related expenses, as well as costs incurred to influence legislative action, are unallowable. This covers amusement, social activities, tickets, meals, lodging, transportation, gratuities, and lobbying of Congress or state and local legislatures.
Fraud, Fines, and Penalties
Costs incurred in defending certain fraud proceedings brought by the United States are unallowable when the contractor is found liable or pleads nolo contendere, and payments of fines and penalties for legal or regulatory violations are generally unallowable. An exception exists when the payment is required by the contract or specifically authorized in advance by the contracting officer under applicable rules.
Club, Alcohol, and Donation Costs
Memberships in social, dining, or country clubs, alcoholic beverages, and contributions or donations are unallowable regardless of recipient. These are treated as nonrecoverable even if they may have some business-related purpose.
Promotional and Excess Travel Costs
Advertising intended to promote the contractor or its products, promotional items and memorabilia, and commercial airfare above standard commercial fare are unallowable. Contractors must distinguish ordinary business advertising and travel from promotional or premium-cost spending.
Golden Parachutes and Insurance Limits
Certain severance payments tied to a change in control or ownership are unallowable if they exceed normal severance pay, and commercial insurance that covers the contractor’s own defects in materials or workmanship is unallowable. These rules prevent shifting extraordinary executive compensation or self-insurance for defective work to the government.
Foreign Severance Restrictions
The section disallows severance pay above customary or prevailing industry practice for foreign nationals on overseas service contracts, and it also disallows severance pay when a foreign government requires closure or curtailment of a U.S. facility in that country. These rules limit recovery of severance costs in overseas operations.
Proceeding and Investigation Costs
Costs connected to criminal, civil, or administrative proceedings are subject to special limits when the proceeding results in specified adverse dispositions, including government enforcement actions, whistleblower reprisal complaints, and False Claims Act actions. Related Congressional investigation or inquiry costs are also covered when tied to such proceedings, and the applicable limitations depend on the outcome and any exceptions in 31.205-47(c) or (d).
Responsibilities
Contracting Officer
Apply 2 CFR part 200, subpart E, and appendices V and VII for covered State, local, and Indian tribal government contracts; avoid adding unauthorized extra cost restrictions; determine whether claimed costs fall into the expressly unallowable categories; and authorize any otherwise disallowed fines or penalties only when the contract terms or advance written authorization and applicable regulations permit it.
Contractor
Identify and exclude unallowable costs from proposals, billings, and indirect cost pools; maintain documentation supporting allowability under the applicable Uniform Guidance rules; segregate entertainment, lobbying, club dues, alcohol, donations, promotional items, excess airfare, golden parachutes, and other expressly unallowable costs; and carefully track legal and proceeding-related costs to determine whether they are recoverable.
Subcontractor
Follow the same allowability limits for costs that flow down through the prime contract or are otherwise charged to the government; properly classify proceeding-related, severance, and other sensitive costs; and provide accurate cost data and support to the prime contractor.
Agency
Use the governing Uniform Guidance framework for applicable contracts, refrain from imposing extra item-by-item restrictions without authority, and ensure internal supplements or instructions do not conflict with the FAR, statute, or the contract terms.
Legal/Compliance Staff
Review fraud, whistleblower, False Claims Act, Congressional inquiry, and other proceeding-related costs to determine whether they are unallowable, partially allowable, or subject to limitation; advise on the effect of case outcomes and exceptions; and support proper cost treatment and disclosure.
Practical Implications
Contractors should screen expense reports, travel, entertainment, marketing, executive compensation, and legal invoices for expressly unallowable items before they hit a billing system or indirect pool.
The outcome of a proceeding matters: some defense and investigation costs become unallowable only when the case ends in specified adverse dispositions, so legal status tracking is essential.
Agencies should not invent new disallowance rules for individual cost items; if a cost is not specifically restricted by the governing guidance or statute, the agency needs a valid basis before rejecting it.
Foreign operations require extra care because severance rules for overseas service contracts can differ from domestic practice and may be capped by industry norms or barred entirely in certain closure scenarios.
Documentation is critical: if a cost is potentially allowable only with advance contracting officer authorization or under a specific exception, the contractor should retain the written approval and the factual basis supporting the charge.
Official Regulatory Text
(a) Contracts that refer to this subpart 31.6 for determining allowable costs under contracts with State, local and Indian tribal governments shall be deemed to refer to, and shall have the allowability of costs determined by the contracting officer in accordance with, the OMB Uniform Guidance at 2 CFR part 200 , subpart E and appendices V and VII, in effect on the date of the contract. (b) Agencies are not expected to place additional restrictions on individual items of cost. However, under 10 U.S.C. 3744 , 41 U.S.C.4304 , 31 U.S.C. 3730 , and 41 U.S.C. 4310 , the following costs are unallowable: (1) Costs of entertainment, including amusement, diversion, and social activities, and any costs directly associated with such costs (such as tickets to shows or sports events, meals, lodging, rentals, transportation, and gratuities). (2) Costs incurred to influence (directly or indirectly) legislative action on any matter pending before Congress, a State legislature, or a legislative body of a political subdivision of a State. (3) Costs incurred in defense of any civil or criminal fraud proceeding or similar proceeding (including filing of any false certification) brought by the United States where the contractor is found liable or has pleaded nolo contendere to a charge of fraud or similar proceeding (including filing of a false certification). (4) Payments of fines and penalties resulting from violations of, or failure to comply with, Federal, state, local, or foreign laws and regulations, except when incurred as a result of compliance with specific terms and conditions of the contract or specific written instructions from the contracting officer authorizing in advance such payments in accordance with applicable regulations in the FAR or an executive agency supplement to the FAR. (5) Costs of any membership in any social, dining, or country club or organization. (6) Costs of alcoholic beverages. (7) Contributions or donations, regardless of the recipient. (8) Costs of advertising designed to promote the contractor or its products. (9) Costs of promotional items and memorabilia, including models, gifts, and souvenirs. (10) Costs for travel by commercial aircraft which exceed the amount of the standard commercial fare. (11) Costs incurred in making any payment (commonly known as a "golden parachute payment") which is- (i) In an amount in excess of the normal severance pay paid by the contractor to an employee upon termination of employment; and (ii) Is paid to the employee contingent upon, and following, a change in management control over, or ownership of, the contractor or a substantial portion of the contractor’s assets. (12) Costs of commercial insurance that protects against the costs of the contractor for correction of the contractor’s own defects in materials or workmanship. (13) Costs of severance pay paid by the contractor to foreign nationals employed by the contractor under a service contract performed outside the United States, to the extent that the amount of the severance pay paid in any case exceeds the amount paid in the industry involved under the customary or prevailing practice for firms in that industry providing similar services in the United States, as determined by regulations in the FAR or in an executive agency supplement to the FAR. (14) Costs of severance pay paid by the contractor to a foreign national employed by the contractor under a service contract performed in a foreign country if the termination of the employment of the foreign national is the result of the closing of, or curtailment of activities at, a United States facility in that country at the request of the government of that country. (15) Unless any of the exceptions at 31.205-47 (c) or (d) apply, costs incurred by a contractor or subcontractor in connection with any criminal, civil, or administrative proceedings that result in dispositions described at 31.205-47 (b)(1) through (5) commenced by: a Federal, State, local, or foreign government, for a violation of, or failure to comply with, law or regulation by the contractor or subcontractor (including its agents or employees); a contractor or subcontractor employee submitting a whistleblower complaint of reprisal in accordance with 41 U.S.C. 4712 or 10 U.S.C. 4701 ; or a third party in the name of the United States under the False Claims Act, 31 U.S.C. 3730 . For any such proceeding that does not result in a disposition described at 31.205-47 (b)(1) through (5), or to which 31.205-47 (c) exceptions apply, the cost of that proceeding shall be subject to the limitations in 31.205-47 (e). (16) Costs incurred in connection with a Congressional investigation or inquiry into an issue that is the subject matter of a proceeding resulting in a disposition as described at 31.205-47 (b)(1) through (5).