FAR Cost Principles Series (Part 1, Total Cost)

As a former DCAA auditor, it was a primary goal for my position to find and report unallowable costs.  Recently, I have been hearing a lot more from the community in terms of making FAR 31.2 easier to understand.  So, a series is born…

Part 1 – FAR 31.201-1

Within the first part of Part 31 are the guiding principles and applicability.  Once you get into FAR 31.201, the regulation starts to get into the meat of the discussion.  Things like “composition of total cost”, “allowability”, “reasonableness”, and “allocability” show their ugly faces.  They make their way into your psyche and start to haunt you at night as you consider your incurred cost submission or your next proposal.

Composition of total cost (FAR 31.201-1) is one of those concepts that once you know how it works – comes like simple arithmetic.  1 + 1 = 2.  It couldn’t be simpler, except that in order to get to a full “2” there are many decimals and rates in between 1 and 1.  Total costs are all “direct and indirect costs allocable to a contract.”  Yes, the FAR actually references a concept that it has yet to fully describe (see also FAR 21.201-4).  Having seen many contract proposals, incurred cost submissions, and other cost accounting information from government contractors in the DC metro area, it is easy to consider what total cost means.

HammerTotal CostHow do I describe total cost to “everyone” though?  I think I come back to the $100 toilet seat and the $75 dollar hammer that remain trapped in the lore of Gov Con.  How much does a hammer cost?  First, there is the price (let’s go with the upgraded fiberglass one instead of the wooden handle) of $15.00.  Done, right?  Not when you have to consider the total cost of the item.  Direct and indirect, incurred or to be incurred, allocable cost of money, etc.  The list of “additions” to the price are numerous.  If we imagine that we send a guy to Home Depot for the hammer it costs him time (at his salary divided by 2080) and mileage (at the current reimbursement rate).  Then, consider that there are forms that had to be filled out (overhead or G&A) and a process that has to be followed (more G&A).  That hammer just skyrocketed in its “total cost.”

I bet you will never look at a trip to your local hardware store the same again.  Let alone just running out to get a loaf of bread from the grocery store.

At some level, it is nice to consider that the regulation breaks things down into nice neat sections.  The next in the series is Allowability, Reasonableness, and Allocability.

About Marty Herbert

With 13 years of government contract administration, analysis, finance, and audit experience, I have established a firm baseline in ethics and a specialization in government contracts that has prepared me to become a subject matter expert in my field. I am currently working on enhancing government contracts management and compliance through workflow tools and product offerings - attempting to make the process proactive as opposed to reactive.
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