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. The standard explicitly applies to both fully CAS covered contracts and those with modified coverage. FAR 31.201-6 applies to non-CAS-covered contracts. The government did not intend for a different treatment of unallowable costs and to emphasize this point FAR 31.201-6(c) states unallowable costs are to be accounted for and presented in accordance with practices directed by CAS 405. 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 and say a word about when penalties are applicable and recommend prudent actions.

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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