In an earlier version of the Armed Services Procurement Regulations (predecessor to FAR), "interest" was unallowable whereas in later versions of the draft the words "on borrowing" was added. This change limited application of the principle to interest on borrowing. The scope was expanded in November 1959 to make cost allowability to not only cost type contractos but to fixed price incentive contracts as well as contracts terminated for the convenience of the government. The regulatory history of ASPR 15-205.17 makes clear the drafter intended to preclude recovery of interest costs incurred in the context of raising capital.

Several board of contract appeals decisions recognized that the cost principle’s disallowance of interest on borrowing is based on governmental policy that contractors who choose to operate with borrowed funds should not have an advantage over those contractors that choose to finance their work through their own capital. Several cases clearly rejected attempts at recovering "interest" costs. Some actually referred to the recovery attempts as "interest" while others used different names (e.g. "assessments of extending lines of credit", "penalty charges", "interest income lost").

Certain other cases have been decided that ruled though cost of borrowing or raising capital is unallowable, other costs not associated with borrowing or raising capital is allowable even though the cost may be an interest payment. In Navgas, Inc. it permitted the contractor recover on interest on judgments and interest on accounts payable since they were not associated with "borrowing" within the meaning of the cost principle.

Two more recent cases have expanded the allowability of interest payments.

1. In Lockheed Corp. v. Widnall, the contractor was assessed additional tax and interest charges by the State of California for inadvertently not paying state taxes several years before. The majority of the board ruled the interest paid by Lockheed was within the cost principle’s allowability prohibition reasoning that borrowing had occurred whether or not the underpayment was inadvertent. The minority members sided with Lockheed stating the cost was not unallowable since borrowing had not occurred. In the light of the dispute, Lockheed appealed to the Federal Circuit court, claiming the cost principle disallowed only interest on borrowing not interest in general. The Court sided with Lockheed, noting that "borrowing" is generally defined as a loan and a loan required intent. It stated the cost principle does not make all interest payments unallowable but only that interest paid to raise capital as unallowable. While a deliberate underpayment of taxes may be a way to raise capital, an inadvertent underpayment serves no such purpose.

2. In Ingalls Shipbuilding Inc. v. Dalton, the contractor had incorrectly not paid certain workers compensation costs and a court later ruled it was required to pay 100% of the compensation costs plus a 10% "penalty". The government indicated the 10% amount was unallowable because (1) they were in the nature of fines or penalties and thus not chargeable to a government contract under FAR31.205-15, "Fines penalties and mischarging costs" or alternatively (2) they were unallowable as interest under FAR 31.205-20. The Court rejected both claims stating (1) they did not constitute fines or penalties under the fines and penalties cost principle but were rather a private remedy to the person injured and (2) following the Lockheed decision, nothing in the payment could be regarded as an effort to raise capital or otherwise borrow money and hence the additional charge was not prohibited interest on borrowing.

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