Allowable vs. Unallowable Expenses for Government Contractors
When it comes to government contracting, few topics cause more confusion than figuring out which costs are allowable and where those costs belong. Misclassifying even a single expense can lead to audit issues, inaccurate indirect rates, and lost profits.
Understanding the difference between Overhead (OH), General & Administrative (G&A), and allowable vs. unallowable costs isn’t just an accounting task, it’s a cornerstone of compliance, profitability, and credibility.
Why It Matters
Every dollar billed to a government contract must meet the standards of FAR Part 31, which governs the allowability, allocability, and reasonableness of costs. These principles ensure transparency in how contractors use federal funds and they protect you from costly errors.
It is essential for government contractors to ensure compliance with these guidelines when preparing cost proposals, billing, and during audits.
When handled correctly:
- Your pricing remains accurate and defensible.
- You avoid disallowed costs and audit findings.
- You maintain profitability and client trust.
When ignored, even small missteps can compound into compliance issues that affect your bottom line.
💡 Common Compliance Risks
- Charging unallowable costs to government contracts.
- Misclassifying Overhead vs. G&A expenses.
- Applying the wrong cost base for indirect rates.
- Lack of documentation for cost allocation.
Allowable Costs: What You Can Charge
Allowable costs are those that meet three simple FAR requirements: they must be reasonable, allocable, and compliant with FAR, your specific contract terms and follow generally accepted accounting principles (GAAP).
Typical Allowable Costs
Each of these costs contributes directly or indirectly to fulfilling contractual obligations and that’s the key to allowability.
Unallowable Costs: What You Can’t Charge
Some expenses, no matter how reasonable they seem, are simply not chargeable to the government. These fall under FAR Part 31’s unallowable cost rules.
Common Unallowable Examples
Even partially unallowable expenses, like a business dinner that includes alcohol, must be separated and documented carefully. The golden rule: when in doubt, check the FAR and document your rationale.
Overhead (OH) vs. G&A: Knowing the Difference
Beyond allowability, understanding the distinction between Overhead and G&A is crucial. Both are indirect costs, but they serve different purposes and belong in different pools.
Overhead (OH)
Overhead includes indirect costs that support contract execution but aren’t tied to one specific project.
These may include:
- Supervision of technical or project work (non-billable time)
- Indirect labor that supports multiple contracts
- Facility expenses for project operations
- Software and tools used across contracts
- Training related to contract performance
Overhead, simply put, supports the work.
General & Administrative (G&A)
G&A covers business-wide expenses that keep the organization running, regardless of contract activity.
Examples include:
- Executive and corporate office salaries
- Accounting, HR, and legal support
- Business development and proposal preparation
- IT systems such as ERP or email platforms
- Corporate insurance and company-wide subscriptions
G&A supports the business as a whole.
Why Getting It Right Matters
Misclassifying costs between OH and G&A can have real consequences. It can inflate your indirect rates, distort your bids, and draw attention from auditors. Worse, it can create a ripple effect that impacts how competitive and profitable your contracts are.
To stay on track:
- Maintain clear, consistent cost classifications.
- Regularly review your allocation methods and cost pools.
- Keep supporting documentation for every decision.
When your cost structure is accurate, your rates are defensible and your audits are far less stressful.
Staying Compliant and Audit-Ready
FAR compliance isn’t a one-time task; it’s an ongoing discipline. Here are a few best practices that make a difference:
- Segregate unallowable costs from the start, not after the fact.
- Review cost pools regularly as your operations evolve.
- Document everything allocations, rationale, and methodology.
- Train your teams so everyone understands what’s allowable and where costs belong.
Being audit-ready means you can demonstrate transparency, accuracy, and consistency at any time.
Webinar
Join Iuvo Systems for an insightful webinar focused on mastering cost classifications and compliance within the framework of FAR Part 31.
Our experts will break down the distinctions between Overhead (OH) and General & Administrative (G&A) expenses, helping government contractors ensure proper cost allocation, compliance, and audit readiness.
You’ll learn how to:
- Identify allowable vs. unallowable costs under FAR Part 31
- Properly classify and allocate OH vs. G&A expenses
- Avoid common compliance risks that impact rates and profitability
- Strengthen documentation and audit preparedness practices
This session is designed for finance professionals, compliance officers, and executives working in government contracting who want to enhance their understanding of cost principles and ensure compliance excellence.
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This webinar has been rescheduled. A new date and time will be announced soon.
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Final Thoughts
Getting overhead, G&A, and cost allowability right is about more than compliance, it’s about control. When your accounting structure reflects the true nature of your work, your proposals are stronger, your rates are fair, and your business is better positioned for growth.
At Iuvo Systems, we help government contractors align their cost strategies with FAR principles, reduce audit risks, and maximize profitability, all through smarter, compliant cost management.
If you’re ready to gain control over your indirect rates and ensure every dollar stands up to audit scrutiny, Iuvo Systems can help.
Let’s talk about how our team can help you build a FAR-compliant cost structure that supports profitability, transparency, and growth.
Learn more about our Outsourced Accounting and Enterprise System Solutions services.
Iuvo means “to help and to support” in Latin. True to our mission of being a trusted partner in the success of government contractors.
About Iuvo:
Iuvo Systems is a certified 8(a) and Minority Business Enterprise (MBE) small business with over 16 years of experience specializing in outsourced accounting & financial services, data analytics & reporting, enterprise system solutions, and GovCon staffing solutions for government contractors and agencies. Iuvo Systems provides expertise in all aspects of Government Contracting, DCAA, FAR, and CAS. We are headquartered in Washington DC metro area with an office in Atlanta, GA. We proudly serve clients across the nation and extend our expertise to support operations outside the continental United States (OCONUS).