What Costs Are Reimbursable for Government Contractors?

Government contractors cannot assume that every business expense is reimbursable. Recovery depends on the contract type, the work performed, the contract’s terms, and federal cost principles. For many cost-reimbursement contracts, a cost must be reasonable, allocable to the work, compliant with applicable rules, and adequately documented. Understanding these requirements helps contractors prepare accurate invoices, manage indirect rates, and avoid paying back unsupported charges.

What “Reimbursable” Means in a Federal Contract

In federal contracting, a reimbursable cost is generally an allowable expense that the contractor may charge to the government under the contract. The Federal Acquisition Regulation (FAR) provides the principal cost rules for many contracts, especially in FAR Part 31. A contract’s clauses and agency supplements may add requirements, so the FAR alone does not determine every billing decision.

Reimbursement is most directly associated with cost-reimbursement contracts, such as cost-plus-fixed-fee contracts. Under these arrangements, the government pays allowable incurred costs up to the contract’s estimated cost, subject to the contract terms and funding limits. The fee is handled separately from reimbursed costs. A cost-reimbursement contract does not guarantee payment of every expense or authorize spending beyond the contract’s limits.

Other contract types work differently. A firm-fixed-price contractor generally receives the agreed price for delivering the required work, not reimbursement of each actual expense. The contractor’s costs still matter for pricing, accounting, and compliance, but ordinary cost increases do not automatically increase the government’s payment. Time-and-materials contracts generally pay labor at specified contract rates and materials under the contract’s terms; they are not simply open-ended reimbursement of all business costs.

The Core Tests for Allowable Costs

FAR 31.201-2 identifies basic standards for determining whether a cost is allowable. In general, a cost must meet all applicable conditions below. A contract clause can impose additional limits or procedures.

• Reasonable: The amount and nature of the expense would be considered reasonable under the circumstances. FAR 31.201-3 addresses reasonableness.
• Allocable: The cost is assigned to the contract or another cost objective in accordance with the benefits received or other appropriate allocation rules. FAR 31.201-4 covers allocability.
• Consistent with applicable rules: The cost complies with the contract, FAR cost principles, agency regulations, and, when applicable, Cost Accounting Standards (CAS).
• Consistently treated: The contractor applies its accounting practices consistently, including its distinction between direct and indirect costs.
• Supported by records: The contractor maintains evidence sufficient to establish the nature, amount, and allocation of the expense.

These tests are cumulative. For example, a purchase may be a real business expense but still be unallowable if it is expressly prohibited, not related to the contract, or inadequately documented. FAR 31.201-2 also makes clear that a cost is not allowable merely because it appears in a contractor’s accounting system.

Common Costs That May Be Reimbursable

Whether a cost is recoverable depends on the specific contract and facts. The following categories are commonly considered, but none is automatically allowable in every situation.

Direct labor

Labor charged directly to a contract may be allowable when employees perform contract work and the charges are supported by accurate timekeeping and payroll records. Time records should identify the work performed and be prepared in accordance with the contractor’s established procedures. Supervisors should review corrections and approvals. Charging the same labor to multiple contracts or recording hours that were not worked can create serious compliance problems.

Materials, supplies, and subcontractors

Materials and supplies may be chargeable when they are needed for the contract, properly procured, and assigned to the work they benefit. Contractors should keep purchase orders, invoices, receiving records, inventory records, and evidence of use or disposition. Subcontract costs may be charged when authorized and supported by compliant subcontract documentation, invoices, and evidence that the subcontractor performed the work. Contract clauses may require government consent for certain subcontracts or purchasing actions.

Travel

Travel may be allowable when it is necessary for contract performance and complies with the contract and applicable rules. FAR 31.205-46 addresses travel costs, including limits and documentation requirements. Contractors should retain the business purpose, dates, destinations, receipts where required, approvals, and a record of how expenses were calculated. Federal per diem limits and contract-specific travel provisions can affect the reimbursable amount. Personal expenses and unsupported upgrades should not be billed as contract travel.

Equipment, facilities, and depreciation

Equipment and facility costs may be allocated to contracts when the assets support the work and the accounting treatment is appropriate. Depending on the facts, the charge may be depreciation, a rental expense, or another allowable cost—not necessarily the full purchase price in the period of purchase. FAR 31.205-11 addresses depreciation, while other provisions may apply to rental costs and property. Government-furnished property and contract-specific property clauses require particular care.

Indirect costs

Indirect costs benefit multiple contracts or business activities and cannot be identified exclusively with one contract without disproportionate effort. Examples can include fringe benefits, certain facility expenses, and general and administrative (G&A) expenses. Contractors typically accumulate indirect costs in pools and allocate them using an appropriate base, such as direct labor or another measure of benefit. The allocation method must be reasonable and consistently applied; a contractor should not shift costs between contracts to improve recovery.

Other potentially allowable expenses

Depending on the applicable cost principle and contract, costs for employee compensation, training, insurance, utilities, and certain professional services may be allowable. For example, compensation must satisfy the relevant rules, including reasonableness requirements where applicable. Professional-service charges should be supported by evidence of the services performed, the business purpose, and the amount paid. A general label such as “consulting” is not sufficient documentation by itself.

Costs That Are Often Unallowable or Restricted

FAR Subpart 31.2 lists cost principles for commercial organizations, including costs that are expressly unallowable or subject to limitations. Common examples include:

• Entertainment: Entertainment costs are generally unallowable under FAR 31.205-14, subject to the rule’s details and exceptions.
• Alcoholic beverages: Costs of alcoholic beverages are generally unallowable under FAR 31.205-51.
• Lobbying and certain political activity: Many such costs are unallowable under FAR 31.205-22.
• Interest and other financing costs: These are generally restricted under FAR 31.205-20, subject to specified exceptions.
• Fines and penalties: FAR 31.205-15 generally disallows fines and penalties resulting from violations of law or regulation.
• Bad debts: These are generally unallowable under FAR 31.205-3.
• Charitable contributions and donations: These are generally unallowable under FAR 31.205-8.
• Certain advertising, public relations, and selling expenses: Allowability depends on the specific purpose and conditions in FAR 31.205-1, -38, and related provisions.

Some expenses are not categorically barred but are limited or allowable only under specific conditions. Examples include compensation, travel, relocation, legal costs, and independent research and development (IR&D). Contractors should consult the exact cost principle rather than relying on a broad category name.

When a cost is expressly unallowable, FAR 31.201-6 generally requires the contractor to identify and exclude it from billings, claims, and proposals as applicable. If an unallowable cost is included in an indirect-cost pool, it can improperly increase charges to the government. Accounting systems should identify these costs and prevent them from flowing into government billings.

Direct Costs, Indirect Costs, and Allocation

A direct cost can be identified specifically with a particular contract or other cost objective. An indirect cost supports multiple activities and is distributed through an allocation method. The classification depends on the contractor’s accounting practices and the facts—not simply on which treatment produces the largest reimbursement.

For example, an employee’s hours spent exclusively on one contract may be direct labor. A shared accounting department’s salaries may be indirect and allocated through a G&A pool. If the same type of cost is treated as direct for one contract and indirect for another, the contractor may need a valid reason and consistent policy. FAR 31.202 and 31.203 address direct and indirect costs, while CAS may impose additional consistency and allocation requirements on covered contracts.

Many contractors use provisional indirect billing rates during the year and later submit incurred-cost information so final rates can be established. On covered cost-reimbursement contracts, FAR 52.216-7, Allowable Cost and Payment, sets out payment and final indirect-cost procedures. The clause’s requirements, deadlines, and any agency-specific terms should be checked directly; provisional billing rates are not necessarily the final rates.

Documentation That Supports Reimbursement

Good records allow a contractor to show that a charge was incurred, connected to the work, correctly calculated, and treated consistently. The supporting evidence varies by cost, but commonly includes:

• Approved contract documents, task orders, modifications, and funding information
• Employee time records, payroll records, and labor distribution reports
• Invoices, purchase orders, receiving reports, and proof of payment
• Travel authorizations, business purpose, itineraries, and receipts
• Subcontract agreements, invoices, deliverables, and acceptance records
• Accounting policies, indirect-pool schedules, allocation calculations, and rate support
• Approvals and explanations for unusual, high-value, or one-time expenses

Records should be created and retained in line with the contract, applicable clauses, and federal record-retention rules. Contractors should not wait until an audit to reconstruct time or explain a purchase. A charge that is otherwise reasonable can be questioned or disallowed if the contractor cannot substantiate it.

How Contract Type Changes Cost Recovery

The contract’s payment clause is essential. Even a cost that is generally allowable under FAR Part 31 may not be payable in a particular transaction if the contract does not authorize it, a funding ceiling has been reached, or required approval was not obtained.

Practical Steps Before Billing a Cost

1. Check the contract: Review the contract type, statement of work, funding, payment clauses, travel terms, and approval requirements.
2. Identify the cost objective: Determine which contract or indirect pool benefits from the expense and use a defensible allocation method.
3. Apply the relevant cost principle: Check FAR Part 31 and any agency-specific or CAS requirements that apply.
4. Confirm the evidence: Make sure records show what was purchased or performed, why it was needed, and how the amount was calculated.
5. Screen for unallowable costs: Exclude prohibited or restricted amounts from billings and indirect pools as required.
6. Escalate uncertain charges: Seek guidance from contract, finance, or compliance personnel before invoicing an ambiguous expense.

Authoritative Resources

The primary reference for many federal cost questions is FAR Part 31, Contract Cost Principles and Procedures. Useful provisions include FAR 31.201-2 through 31.201-6 for allowability, allocability, reasonableness, and unallowable costs; FAR 31.202 and 31.203 for direct and indirect costs; and FAR 31.205 for specific cost categories. The FAR 52.216-7 clause is relevant to allowable cost and payment when included in a contract.

Applicability depends on the contract and contractor. Cost principles for commercial organizations are in FAR 31.2, while other organizational types may be governed by different subparts. CAS coverage, agency supplements, contract clauses, and current policy can change the analysis. For a disputed or high-value charge, contractors should consult the contracting officer and qualified legal or accounting professionals rather than assume that a general cost example settles the issue.