Reference

Cost Principles, Indirect Rates & Government Accounting for SDVOSBs

Cost accounting is the wall a growing SDVOSB hits when it moves past firm-fixed-price work. A firm can win a cost-reimbursement award on technical merit and be found nonresponsible because its books can’t segregate direct from indirect costs; a firm can bill for three years on a provisional rate and then owe a six-figure give-back when the final rates settle. These plain-English pages take one cost concept at a time — the five allowability tests, reasonableness and allocability, the expressly unallowable costs of FAR 31.205 and the penalty that follows them, the direct-versus-indirect consistency rule, the fringe/overhead/G&A structure behind a wrap rate, provisional billing rates and the annual true-up, the incurred cost submission, the SF 1408 accounting system, timekeeping and labor charging, who at DCAA audits versus who at DCMA decides, certified cost or pricing data and defective pricing, and the Cost Accounting Standards small-business exemption. Each has an at-a-glance card, its controlling FAR or statutory authority, when it applies, how to comply, and the SDVOSB-specific angle.

Last updated Update cadence: Quarterly, plus on FAR amendment or inflation adjustment of the TINA / CAS / penalty thresholds

Compiled from: FAR Part 31 (Contract Cost Principles and Procedures), incl. 31.201-2 through 31.201-6, 31.202, 31.203, and 31.205 · FAR Subpart 42.7 (Indirect Cost Rates), FAR 42.709 penalties, and the clause at FAR 52.216-7 · FAR 9.106 / 16.301-3 and Standard Form 1408 (preaward accounting system survey) · FAR Subpart 15.4 and 41 U.S.C. § 3502 (certified cost or pricing data); FAR Part 30 and 48 CFR Chapter 99 (Cost Accounting Standards)

Change log (1)
  1. LaunchedPublished the federal cost principles, indirect rates & government accounting requirements reference covering how the government decides what an SDVOSB may charge it — the five allowability tests of FAR 31.201-2, reasonableness and allocability (FAR 31.201-3 / 31.201-4), the expressly unallowable costs of FAR 31.205 with directly associated costs (FAR 31.201-6) and the FAR 42.709 / 52.242-3 penalty, the direct-vs-indirect consistency rule (FAR 31.202 / 31.203), the fringe/overhead/G&A pool-and-base structure behind a wrap rate, provisional billing rates (FAR 42.704), the incurred cost submission and final indirect rate settlement (FAR 52.216-7(d) / 42.705 / 42.708 quick closeout), the adequate accounting system tested on the SF 1408 (FAR 16.301-3 / 9.106), timekeeping and labor charging with floor checks and total time accounting, DCAA audits versus DCMA administrative contracting officer determinations, certified cost or pricing data and defective pricing (FAR 15.403-1 / 15.403-4 / 15.406-2 / 52.215-10), and the Cost Accounting Standards with the small-business exemption at 48 CFR 9903.201-1 — each with an at-a-glance quick-facts card, a when-it-applies list, a key-features table, an SDVOSB-specific angle, a how-to-comply checklist, watch-outs, FAQPage, Article, Dataset, and BreadcrumbList structured data, primary-source FAR / U.S.C. / CFR citations, and cross-links into the glossary, contract types, payment methods, thresholds, clauses, forms (SF 1408), regulation explainers, contracting roles, how-to guides, FAQ, and the price-to-win, size-standard, win-probability, and limitations-on-subcontracting calculators.

The Cost Principles (FAR Part 31)

Allowability
Allowability of Costs — The Five Tests of FAR 31.201-2FAR 31.201-2 is the gate every dollar has to pass through before the government will pay it. A cost is allowable only if it is reasonable, allocable, compliant with CAS or GAAP, consistent with the contract terms, and not limited by a FAR Subpart 31.2 cost principle — and the contractor bears the burden of proving it.
Reasonable & Allocable
Reasonableness & Allocability — The Two Tests That Decide Most DisputesTwo of the five allowability conditions do most of the work in a real audit. FAR 31.201-3 asks whether the amount is what a prudent person in competitive business would have paid; FAR 31.201-4 asks whether the contract received a benefit that justifies the charge. Neither is a bright-line rule, which is why they generate most cost disputes.
Unallowable Costs
Unallowable Costs — FAR 31.205 Selected Costs and the Penalties That FollowFAR 31.205 works through dozens of specific cost categories and states whether each is allowable, unallowable, or allowable only within limits. FAR 31.201-6 requires you to identify and exclude them — including directly associated costs — and FAR 42.709 imposes a penalty when unallowable indirect costs show up in a claim.
Direct vs. Indirect
Direct vs. Indirect Costs — Drawing the Line and Holding ItA direct cost is identified specifically with a single final cost objective; an indirect cost benefits more than one and is spread through a pool and a base. FAR 31.202 requires consistency: you may not charge a cost directly if costs incurred for the same purpose in like circumstances are treated as indirect.

Indirect Rates & Rate Structure

Rate Structure
Indirect Cost Rate Structure — Fringe, Overhead, G&A and the Wrap RateAn indirect cost rate is a pool of shared costs divided by an allocation base. Most government contractors run three tiers — fringe, overhead, and general and administrative expense — which compound into the 'wrap rate' that turns a raw hourly salary into the price you bid.
Billing Rates
Provisional Billing Rates — Getting Paid Before the Year ClosesYou can't wait for a closed fiscal year to bill indirect costs, so FAR 42.704 lets the contracting officer or auditor set billing rates to approximate your final rates. They are interim by design — every dollar billed on a provisional rate is subject to a true-up when the final rates settle.
Incurred Cost / Final Rates
The Incurred Cost Submission & Final Indirect Rate SettlementThe clause at FAR 52.216-7(d) requires a final indirect cost rate proposal within six months after the end of each fiscal year. The government reviews it, negotiates final rates under FAR 42.705, and every interim voucher billed on provisional rates is trued up to those final rates.

Accounting System & Audit

Accounting System
An Adequate Accounting System — The SF 1408 Gate on Cost-Type WorkFAR 16.301-3 bars a cost-reimbursement award unless the contractor's accounting system is adequate for determining costs applicable to the contract. Adequacy is tested against the criteria on Standard Form 1408 — segregation of direct and indirect costs, job-cost accumulation, timekeeping, and exclusion of unallowables.
Timekeeping
Timekeeping & Labor Charging — The Most Audited Control You OwnLabor is the largest cost on most services contracts and the easiest to mischarge, so timekeeping is where auditors look first. An acceptable system records all hours worked daily, by cost objective, entered by the employee, approved by a supervisor, with any correction visible and explained.
DCAA / DCMA
DCAA Audits & DCMA Administration — Who Checks Your CostsDCAA audits; it does not decide. The Defense Contract Audit Agency examines costs and issues reports with recommendations, while the contracting officer — often an administrative contracting officer at DCMA — makes the determinations that bind you. Knowing the difference changes how you respond.

Pricing Data & Cost Accounting Standards

Certified Data / TINA
Certified Cost or Pricing Data & Defective PricingAbove the statutory threshold and absent an exception, you must submit certified cost or pricing data and sign a certificate that it was accurate, complete, and current as of the agreement date. If it wasn't, the price is reduced — that is defective pricing, and the government can recover years later.
CAS
Cost Accounting Standards (CAS) — And the Small Business ExemptionThe Cost Accounting Standards impose uniform rules on how covered contractors measure, assign, and allocate costs. Small businesses are exempt from CAS entirely — but the exemption is by size status, so the standards become a real planning question as an SDVOSB approaches its size standard.

Your rates decide your price before your proposal does

The SDVOSBs that grow past fixed-price work build the accounting system a year before they need it, price from a wrap rate they can defend, and treat the annual rate true-up as an accounting event rather than a crisis. Model the rate and the competition before you commit to a bid.

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