Q.  I just joined a company whose philosophy on unallowable costs is explicitly “when in doubt leave it out” which is contrary to my other company where the practice was “when in doubt leave it in.” What do you think?

A. I tend to side with the leave it in school. In my experience as a DCAA auditor, CFO/controller and consultant I have seen too many times contractors unnecessarily reduce and even eliminate profit on government contracts when they excessively bend over backwards to make sure unallowable costs are screened.  Remember a 10 percent profit fee does not translate into 10 percent profit but the profitability of the contract can be significantly lower and even a loss if a lot of costs are excluded from the price. The fact is, except for those instances where a cost is unmistakably unallowable in accordance with the FAR 31 cost principles (e.g. liquor, bad debt, interest) most costs are clearly allowable while others are in the grayish area where varied and valid interpretations of allowability or allocability rules can make the same cost allowable or unallowable. Unless those costs are subject to penalties (e.g. explicitly unallowable cost where a cost principle clearly makes it unallowable) or the cost was deemed unallowable in prior decisions by the ACO I would not be in a hurry to “leave it out” if a plausible case can be made for its allowability.  Reasonable people can differ in their interpretations of the cost principles and cost allocation rules and fear of adverse reactions by auditors for these grayish areas is often unfounded. Feel free to use our “Ask the Experts” service to discuss the allowability of costs you are unsure of – that’s what its there for.

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