Do you have a federal contract or grant?
If so, chances are you have an indirect rate agreement with your primary granting agency. According to FAR Part 31.201-2, a cost is allowable only when it is reasonable, allocable, follows generally accepted accounting principles, and is compliant with contract terms.
Although what can seem reasonable and allocable from a contractor or grantee’s point of view often falls in a gray area. These costs can be questioned during an audit and result in possible disallowance. It is the contractor’s responsibility to set up an accounting system and related controls to appropriately account for costs, maintain records, and supporting documentation. The supporting documentation must adequately demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles.
As described in FAR Part 31.201-3, a cost is reasonable if, in its nature, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. What is reasonable depends upon a variety of considerations and circumstances. One general rule is to look at every cost and determine if it is necessary for you to conduct business or perform the work at hand.
In FAR Part 31.201-4, allocable costs are described as costs assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. This means that the cost is allocable if incurred specifically for the contract, benefits multiple contracts, and can be distributed reasonably, or is necessary to the operation of the business.
Take a moment to review your costs prior to submitting your next rate proposal and ask yourself are these costs reasonable and allocable. Is my accounting system appropriately segregating unallowable costs?
Need help with your indirect rates and cost allocation? Reach out to our government contracting and consulting team.