Overview
FAR 31.203 establishes the principles for identifying, grouping, and allocating indirect costs—those costs not directly attributable to a single cost objective—to government contracts. It ensures that these costs are distributed equitably based on the relative benefits received by the contract, while strictly prohibiting the double-counting of costs as both direct and indirect.
Key Rules
- Definition and Consistency: Indirect costs are those remaining after direct costs are determined; no cost may be charged as indirect if other costs incurred for the same purpose in like circumstances have been charged as direct.
- Logical Grouping: Costs must be accumulated into logical groupings using an allocation base common to all cost objectives that reflects the benefits accruing to those objectives.
- Base Integrity: Contractors may not fragment an established allocation base; all items properly belonging in the base (including unallowable costs) must bear their pro rata share of indirect expenses.
- Mandatory Revisions: Allocation methods must be updated when significant changes occur in the contractor’s business, such as shifts in the extent of subcontracting, production volume, or manufacturing processes.
- Base Period: The standard period for allocating indirect costs is the contractor’s 12-month fiscal year, though CAS-covered contracts must follow 48 CFR 9904.406.
- Excessive Pass-Through: Any indirect costs meeting the definition of an "excessive pass-through charge" under FAR 52.215-23 are strictly unallowable.
Practical Implications
- Contractors must ensure their accounting systems are disciplined enough to prevent "double-dipping," as charging the same type of expense as both a direct and indirect cost is a primary cause of audit findings.
- When calculating indirect rates (like G&A), contractors must include unallowable costs in the base to ensure the government does not overpay for its share of legitimate overhead.