First, all the comments we have read unanimously say that FAR 31.201-4, "Determining allocability" contains no requirement to "benefit" the government when it comes to allocating costs that are necessary to the overall operation of the company. The entire FAR entire is short and to the point:

A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. Subject to the forgoing, a cost is allocable to a government contract if it

(a) Is incurred specifically for the contract

(b) Benefits both the contract and other work and can be distributed to them in reasonable proportion to the benefits received; or

(c) Is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown.

 Is “Benefit” to a Contract a Criteria For Disallowing a Contract Cost?

Though the second category, which is commonly represented as overhead, mentions "benefits", proof of "benefit" (that is, value) to the contract is not required in the case of a cost incurred specifically for a contract (that is, direct cost) or one that is necessary for the overall operation of the business (an indirect cost usually G&A). The government’s case that a cost for the overall operation of a business is allocable to a contract only if it can show a benefit is a major misunderstanding of allocability.

Though all commentators dismiss the criteria of "benefit" for allocating a cost, one made the point that proof of "some benefit" is appropriate when a cost is not absolutely necessary. Bid and proposal costs, under General Dynamics Corp., though not absolutely necessary were held to be allocable costs because they contribute to new business without which a contractor could not survive. Similarly, Northrup could have either charged the legal costs directly to the cost type contract or to G&A. If charged as G&A, then the "benefit" to the government in defending against wrongful termination cases are that such defenses are required for the contractor's continuing survival.

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