DCAA Compliance & the Unallowable-Cost Trap
One unallowable cost in the wrong pool can put your whole indirect rate — and your next incurred-cost submission — under the microscope. This guide shows government contractors exactly how FAR Part 31 decides what stays and what gets questioned.
The cost principles, decoded — and how to keep your books audit-ready
Plain-English guidance written for contractors, not auditors — the allowability rules, the two tests every cost has to pass, two worked examples, and the exact documentation that survives a DCAA review.
Allowable vs. unallowable, decoded
The FAR 31.205 line items that quietly go unallowable — entertainment, interest, lobbying, bad debts — in plain terms.
The two questions auditors ask
Allocability and reasonableness — the tests every cost has to pass before it lands in an indirect pool.
Indirect rates, without the mystery
How direct, overhead, and G&A pools fit together, and where contractors most often get it wrong.
Two worked examples
An allowable cost and an unallowable one that look identical on the ledger — and the audit difference between them.
Audit-ready documentation
The build-as-you-go checklist that keeps an incurred-cost submission defensible.
Five costly mistakes
The errors that trigger questioned costs — and how to keep them off your books from day one.
Same ledger line. Two costs. Two answers.
A business travel cost
- Allocable: incurred to perform the contract work.
- Reasonable: within policy and what a prudent business would pay.
- Allocable and reasonable, not on an exclusion list → allowable in the pool.
A client-entertainment dinner
- Category: entertainment — expressly unallowable under FAR 31.205-14.
- It doesn’t matter that it was business-related or reasonable.
- Expressly unallowable → strip it out and segregate it, or risk a questioned cost.
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Important. This page and the guide are general educational information, not audit, tax, legal, or accounting advice, and do not create a client relationship. Cost allowability under FAR Part 31, DFARS, and the Cost Accounting Standards, and the treatment of any given cost, depend on your specific facts, contracts, and documentation. Examples are illustrative and simplified. No outcome is guaranteed. Consult a qualified professional about your own situation before acting.