Although I initially skipped this section, I believe touching on it can provide some insight to the “logic” of the government allowability criteria.
The government is entitled to its share of everything (see also Income Taxes). The same can be said within government contracts. If an event triggers an allowable cost that also generates some sort of credit (income, rebate, allowance, etc.), FAR 31.201-5 says the government is entitled to their share of the same.
The easiest example of credits (but perhaps often overlooked) is the rebate on office supplies. When a contractor is purchasing office supplies in the quantities they need, there are many rebates and incentives that the government should also benefit. The case of paper with a $5 rebate is a prime example. I have seen these little amounts add up to big savings for the contractor, and the government should also get the proportion of rebate attributable to them. This is as simple as applying the indirect rate associated with the cost. If the cost is direct to the contract, the government is entitled to the full rebate or allowance.
Accounting for Unallowables
As we prepare to enter into the world of “expressly unallowable” and “selected costs” for government contracts, it is important to note that the government has indicated you must separate any unallowable costs from the rest of the costs. Many contractors do this with a simple account number prefix or suffix. Others may segregate the unallowables completely and show them in a separate chart of accounts altogether. Regardless of how this separation is approached, it must be shown and delivered to an auditor to allow for a thorough review.
If you remember, I have mentioned in previous posts that sometimes FAR and CAS interconnect. This is certainly the case with accounting for unallowables. In fact, FAR 31.201-6 holds government contractors to the standards established in 48 CFR 9904.405 – the Cost Accounting Standard related to Accounting for Unallowable Costs.
The stage is now set and the accounting system is established for a nice look into the world of the “Selected Costs” – expressly unallowable, allowable with restrictions, or allowable.