Editor’s Note. The concept of an "unallowable" cost is foreign to most firms. Despite its strangeness, it is a concept that pervades the federal acquisitions arena. Congress imposes the rules, government auditors and contracting officials consider it one of their primary duties to police them and through imposition of penalties, the government makes it expensive to disregard the rules. Despite its pervasiveness, it has surprisingly received little attention. The following is based on an article by published in the June 1997 issue of Government Contract Costing Pricing and Accounting Report.)

Cost Accounting Standard 405, Accounting for Unallowable Costs, applies to a broad range of contractors. The standard covers contractors doing business with defense and civilian agencies as well as education institutions governed by OMB Circular A-21. (Editor's Note. The standard explicitly applies to both fully CAS covered contractors and those with modified coverage; since it is the yardstick for proper treatment of unallowable costs, the standard implicitly covers all contractors whose contract costs are subject to government audit.) We will address the basic requirements of CAS 405, identify the categories of "unallowable costs", discuss the different requirements to identify and exclude unallowable costs, address practical problems encountered by contractors, clarify when penalties are applicable and recommend prudent actions.

Basic Requirement

The standard does not identify what costs are unallowable--that is left to individual procurement regulations (e.g. FAR) and individual contract provisions. Rather it requires identification of specific costs at the time they are defined as unallowable and establishes guidelines for the cost accounting treatment of them.

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