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Cost Allowability

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In another thread somebody posted

"Unallowable means neither G&A nor Overhead."

Unfortunately that thread is closed so I'm posting a response here, realizing that many people "lurk" without posting.

That quoted statement is wrong.

Unallowable costs are still the same costs they ever were, only unallowable. If the costs were G&A then they are still G&A. If they were overhead they are still overhead. If they were direct costs, then they are still direct costs. Unallowable costs must receive their fair share of indirect costs, so you have to keep them in the same place.

 

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H2H:

Would it be correct to say that unallowable costs must be identified as such and excluded from indirect cost pools, but must remain in indirect cost allocation bases?

Would reading FAR 31.203(d) be helpful to beginners?

Quote

(d) Once an appropriate base for allocating indirect costs has been accepted, the contractor shall not fragment the base by removing individual elements. All items properly includable in an indirect cost base shall bear a pro rata share of indirect costs irrespective of their acceptance as Government contract costs. For example, when a cost input base is used for the allocation of G&A costs, the contractor shall include in the base all items that would properly be part of the cost input base, whether allowable or unallowable, and these items shall bear their pro rata share of G&A costs.

Emphasis added.

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Yes, that is true 99% of the time. The only exception would be if the the cost pool includes a directly associated unallowable cost where the original unallowable cost is in the base. (See 31.201-6(d).)

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FAR 31.201-6(a):

Quote

(a) Costs that are expressly unallowable or mutually agreed to be unallowable, including mutually agreed to be unallowable directly associated costs, shall be identified and excluded from any billing, claim, or proposal applicable to a Government contract. A directly associated cost is any cost that is generated solely as a result of incurring another cost, and that would not have been incurred had the other cost not been incurred. When an unallowable cost is incurred, its directly associated costs are also unallowable.

FAR 31.201-6(d):

Quote

(d) If a directly associated cost is included in a cost pool that is allocated over a base that includes the unallowable cost with which it is associated, the directly associated cost shall remain in the cost pool. Since the unallowable costs will attract their allocable share of costs from the cost pool, no further action is required to assure disallowance of the directly associated costs. In all other cases, the directly associated costs, if material in amount, must be purged from the cost pool as unallowable costs.

FAR 31.203(d):

Quote

(d) Once an appropriate base for allocating indirect costs has been accepted, the contractor shall not fragment the base by removing individual elements. All items properly includable in an indirect cost base shall bear a pro rata share of indirect costs irrespective of their acceptance as Government contract costs. For example, when a cost input base is used for the allocation of G&A costs, the contractor shall include in the base all items that would properly be part of the cost input base, whether allowable or unallowable, and these items shall bear their pro rata share of G&A costs.

Emphasis added.

 

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8 hours ago, here_2_help said:

In another thread somebody posted

"Unallowable means neither G&A nor Overhead."

H2H, I didn’t find that quoted statement in a recently closed thread. 

Are you referring to something that I said ? I didn’t say that. 

I did see in one of my posts in that thread where I incorrectly referred to “G&A base”, which is the denominator. I should have used  “indirect G&A  pool”, which is the  numerator, for calculating G&A to charges to the government.

Quote:

“I would “derive an answer from above” , (thanks H2H) that Business Development costs should be allocated to the benefiting cost objectives. G&A costs are those costs which benefit the business as a whole.

This may apparently be be done by adjusting the G&A base [I should have said: indirect G&A cost pool] for those non-general business costs and  include them in overhead for the benefitting cost objectives rather than in G&A.“

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20 minutes ago, Vern Edwards said:

It's not about you, Joel.

ok, thanks for the clarification.  But if it concerned the recent thread, I admit that I also flubbed, as stated above.

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Joel, the captioned quote was from me.

A more accurate statement might be:  "Unallowable costs are not chargeable to either a G&A pool or an Overhead Pool." 

Regards, Corduroy Frog

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1 minute ago, Corduroy Frog said:

Joel, the captioned quote was from me.

Regards, Corduroy Frog

ok, thanks, Corduroy.

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26 minutes ago, Corduroy Frog said:

A more accurate statement might be:  "Unallowable costs are not chargeable to either a G&A pool or an Overhead Pool." 

That is not a true statement either.  Remember, unallowable base costs are to be included in the base for calculation of indirect cost rates.  Therefore, if overhead is a part of the G&A base, unallowable overhead costs are to be included in the overhead pool for calculation of the G&A rate.  However, unallowable overhead costs are to be excluded from the overhead pool for calculation of the overhead rate. 

On another note, many people I have spoken with mistakenly believe that unallowable G&A costs can be included in the G&A base.  That is incorrect.  As H2H mentioned earlier, G&A costs remain G&A costs whether they are allowable or not.  Unallowable G&A costs are to be accumulated in a separate pool, then allocated to contracts using the G&A base.  See, FAR 31.201-6 and CAS 405.  The fact that a cost is not allowable, does not mean that it is not allocable to contracts.  See, FAR 31.201-1.

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1 hour ago, Retreadfed said:

Unallowable G&A costs are to be accumulated in a separate pool, then allocated to contracts using the G&A base.  See, FAR 31.201-6 and CAS 405

@Retreadfed

Please point me to the specific words in 48 CFR 9904.405 (CAS 405) that will lead me to that conclusion---that unallowable G&A costs are to be included in a cost pool and allocated to contracts.

I'm asking, not challenging.

23 hours ago, here_2_help said:

If the costs were G&A then they are still G&A.

I find that a little confusing. How about this:

One way to categorize costs is on the basis of how they are allocated to contracts. Allocation is a business decision that must be made in accordance with certain regulatory criteria. See FAR 31.201-4, "Determining allocability." See also CAS 402, 403, 410, 413, and 418.

If a cost is allocated directly to a contract, then it's categorized as a direct cost. If it's allocated indirectly, then it's an indirect cost. If a cost is allocated through a G&A pool, then it's a G&A cost. If the costs are then determined to be unallowable, they are unallowable G&A costs. Unallowable costs must be accounted for in accordance with FAR 31.201-6 and CAS 405.

Everyone must keep in mind that we are in the Beginner's Forum. I'm an old salt, and I barely understand this stuff. Communicate in complete statements and as clearly as possible. In other words, don't just say stuff, explain stuff. With specific references, please.

 

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Vern, see CAS 405-20 "The Standard is predicated on the proposition that costs incurred in carrying on the activities of an enterprise—regardless of the allowability of such costs under Government contracts—are allocable to the cost objectives with which they are identified on the basis of their beneficial or causal relationships."

Also, see CAS 405-40(e) "All unallowable costs covered by paragraphs (a) through (d) of this subsection shall be subject to the same cost accounting principles governing cost allocability as allowable costs."

Finally, see CAS 405-50(a) "The detail and depth of records required as backup support for proposals, billings, or claims shall be that which is adequate to establish and maintain visibility of identified unallowable costs (including directly associated costs), their accounting status in terms of their allocability to contract cost objectives, and the cost accounting treatment which has been accorded such costs" and (b)(1) " to provide visibility for incurred costs, acceptable alternative practices would include:

(i) The segregation of unallowable costs in separate accounts maintained for this purpose in the regular books of account,

(ii) The development and maintenance of separate accounting records or workpapers, or

(iii) The use of any less formal cost accounting techniques which establishes and maintains adequate cost identification to permit audit verification of the accounting recognition given unallowable costs."

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