Overview
This section establishes the foundational framework for determining the allowability of costs, specifying that all costs must meet general criteria (reasonableness and allocability) regardless of whether specific guidance exists for a particular item. It also defines how these cost principles flow down through various subcontract types and tiers within the supply chain.
Key Rules
- General Allowability Criteria: Costs are allowable only if they are reasonable, allocable, and compliant with FAR 31.201, 31.202, 31.203, and 31.205.
- Subcontractor Cost Consistency: For cost-reimbursement, fixed-price incentive, and price redeterminable subcontracts, payments to subcontractors are only allowable if the subcontractor’s underlying costs comply with FAR Part 31.
- Applicability to Tiers: These cost principles apply to every subcontract tier above the first firm-fixed-price (FFP) or fixed-price with economic price adjustment (FP-EPA) subcontract.
- Treatment of Unlisted Costs: The absence of a specific cost item in FAR 31.205 does not automatically make it allowable or unallowable; allowability is determined based on general principles and the treatment of similar items.
- Conflict Resolution: If a cost falls under multiple subsections of 31.205, it must be apportioned between them; if it cannot be apportioned, the subsection that most specifically describes the cost's "essential nature" takes precedence.
Practical Implications
- Prime contractors must exercise oversight and perform due diligence on the accounting practices of their cost-type subcontractors to ensure all pass-through costs remain allowable under FAR standards.
- Contracting officers and auditors use the "essential nature" and "similarity" principles to adjudicate new or unique business expenses that are not explicitly defined in the FAR’s list of selected cost items.