Typically, those beginning their Government contracts journey find out (sometimes too late!) they are including unallowable costs in their accounting of costs.  They are not separating them as they need to do. It is critical that all Government contractors split out their unallowable costs into distinctly identifiable accounts.  How do you treat unallowable costs in your Government contracts books of record?

Treating Unallowable Costs In Your Pools And Bases
Simply stated, your unallowable costs are always eliminated from all indirect pools.   DCAA will also look to include unallowable costs in the base for G&A.  Unallowable costs attract their fair share of G&A like all other costs in your organization.  Be sure to treat them this way.  There are many things to be concerned about when separating your indirect costs into pools.  What is important is to recognize that including unallowable costs in your indirect pools and claiming them as valid allowable costs, is costly.

What Auditors Look For
Auditors look for reasons to delve into questioning whether your allowable costs are unallowable.  When you include unallowable costs in allowable, you are making a false claim against the Government.  That comes with costly penalties.  Do not fear unallowable costs but rather take the actions we have discussed here to keep your books clean and properly segregate them for an auditor to find them in the right place.

Many costs of doing business are valid in the commercial environment but are unallowable when you ask the Federal Government to reimburse you for them.  If you advertise for your business, spend money on alcohol during your marketing efforts, or pay interest on debts, you will not be able to ask the Federal Government to pay for those costs when you do business with them. An unallowable cost is defined as any cost which, under the provisions of any pertinent law, regulation, or sponsored project cannot be included in prices, cost reimbursements, or settlements under the Government contract to which it is allocable.

Unallowable Policies and Procedures
Keeping your books clean of unallowable costs, in practice, takes following the steps we outline in this article.  An important step is establishing policies (and practices) surrounding unallowable costs. Your policies should explain the basis for guiding your decisions and achieving your desired outcomes.  A policy is a statement of intent and is implemented as a procedure or protocol.  Policies are not procedures and vice versa. The types of policies you need to establish are unallowable costs, detailed records of unallowable costs, direct and indirect costs definitions, unbillable costs, and consistency in costs accounting for unallowable costs.

Your treatment of unallowable costs must be consistently applied each year. Including those costs in your base for G&A will ensure that those costs are getting their fair share of G&A application. Making your accounting policies and procedures clear about how you treat unallowable costs gives further credibility to your commitment to separating them from allowable costs.  Be sure you do the simple tasks of writing down what you do in dealing with unallowable costs and follow through with those policies and procedures in practice.  You will thank yourself for these important steps.

Marsha Lindquist
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