Whenever discussing government contracting accounting with our clients, there are typically the same common questions brought to our attention. We’re hoping to be able to help you by answering them before they need to be brought up (but please, feel free to ask our team)!
FAQs
What’s an Allowable/Unallowable Cost
If a government contractor wins a contract, not only can the contractor bill or “recover” the direct cost portion that was incurred but also may be able to bill the associated indirect costs. The indirect costs which are typically made up of fringe costs, G&A, and overhead expenses can be invoiced to the government. This is only the case if the costs are ”allowable” as per the Federal Acquisition Regulations (FAR), as they must be allocable and reasonable.
What is the Difference Between “Unallowable” and “Deductible”?
To the news of some, “allowability” and “deductibility” are two separate concepts. Allowability is a FAR concept, which determines if a cost can be “recovered” (in other words, reimbursed) by the federal government. Deductibility is an Internal Revenue Code (IRC) concept in which whether an expense can be used to reduce taxable income is determined. Generally speaking, expenses may fall into one of these categories, or none at all, all dependent upon the nature of the transaction and the guidelines set forth by the IRC and FAR.
Where are Nonbillable Direct Costs Recorded?
Many contractors incur direct costs that they deem nonbillable. These contractors may then decide to record these costs as overhead costs or unallowable indirect costs. This is not the correct way to account for this! Instead, this expense should be recorded as a direct cost (but not billed) so the true cost and profitability of the task can be reflected.
Some non-billable direct costs may include specific or unique training, amounts in excess of travel regulations, materials, etc… It is extremely pertinent to determine if there is a unique beneficiary of these costs, such as if a cost is unique to a particular task order to contract. Additionally, the assignment of the cost is consistent with the treatment of similar expenses with similar purposes. Various contractors handle the treatment of “direct” unallowable costs differently as per FAR guidance, however, consistency is the key!
When Do I Charge Bid & Proposal?
The appropriate way to charge Bid and Proposal when you begin incurring costs to respond is to a Request for Proposal (RFP) or Request for Quote (RFQ), as in accordance with FAR 31.205-18. Potential costs incurred could be labor of your staff, consultants providing assistance, and supplies such as printing, meals for late-night proposal discussions, etc… Indirect cost rate allocations treat B&P like a job for allocations of fringe and overhead, however, it winds up in the G&A pool.
In terms of labor, you should consider the point of charging B&P rather than G&A, solely for your technical staff. Your technical staff’s overhead should follow them wherever they go, no matter what they are working on. Contrary to this, you should not have your G&A or overhead staff charge to labor as you will be changing the portion of overhead costs that they do not normally have apportioned on their labor. Additionally, no matter win or lose on your bid, you should begin charging B&P once you decide to submit a proposal or quote, the costs will remain in B&P.