Q.  Why are interest costs unallowable?  They are normal business costs, deductible for tax and financial accounting purposes and are not associated with more controversial costs like alcohol, entertainment, excess travel costs.  

A.  As a matter of policy, the government does not want to fund contractor borrowing.  Contractors vary widely in how they finance their operations where some borrow heavily and others use their own capital.  The government feels it would not be fair to pay a contractor more because it incurred borrowing costs which would effectively penalize the contractor who financed their business internally.  To put contractors on more of an equal footing, the government substituted cost of money for actual interest expenses but it applies only to assets not, for example, financing working capital.
 

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