Government cost scrutiny rarely begins with an audit report. It usually starts with how accounting policies translate into everyday decisions about cost classification, documentation, and consistency.
FAR Part 31 sets the framework the government relies on to evaluate those decisions, and policy gaps often surface only after costs have already been incurred and reported. Alignment with FAR Part 31 is therefore less about policy language and more about whether accounting practices can withstand review across pricing, billing, and indirect rate activities.
| In This Article: A practical view of what FAR Part 31 alignment actually means, why accounting policies sit at the center of government cost scrutiny, and where outsourced accounting models most often succeed or fail in supporting compliant cost treatment. |
What Alignment With FAR Part 31 Really Looks Like In Practice
Alignment with FAR Part 31 rarely hinges on rewriting an accounting manual for stylistic compliance. Practical alignment is evident in the way policies maintain uniform cost management across systems, approvals, and reporting cycles.
FAR Part 31 operates as a framework for evaluating allowability, allocability, and consistency, meaning policies must produce cost data that can withstand scrutiny long after transactions occur.
Accounting practices that rely on informal judgment or after-the-fact corrections tend to break down under audit review, particularly when government access rights permit broad examination of supporting records.
Cost principles under FAR Part 31 function as cumulative tests rather than isolated rules. Allowability requires satisfaction of the requirements of reasonableness, allocability, applicable accounting standards, contract terms, and any stated limitations.
Policies, therefore, need to define how each of these conditions is addressed operationally, translating abstract standards into repeatable actions within daily accounting activity.
Why Allowability Depends on Systems and Documentation Discipline
Allowability determinations often fail due to missing or inconsistent supporting documentation rather than to obvious misclassification.
FAR places the burden of proof on the contractor when costs are questioned, as incurrence alone doesn’t establish the reasonableness of accounting policies. Accounting policies that rely on discretionary explanations prepared after the fact expose organizations to heightened risk during audits conducted months or years later.
Effective policies embed documentation expectations into routine workflows. Approval thresholds, required market comparisons, compensation benchmarks, and justification memoranda establish a record that supports reasonableness at the time of incurrence.
System-level controls reinforce these expectations by guiding how transactions are coded and reviewed before they enter job-cost or indirect-pool reporting. Outsourced accounting services play a meaningful role when standardized processes replace ad hoc documentation practices.
Allocability and the Accounting Architecture Behind It
Allocability transforms accounting structure into a compliance issue rather than a purely financial one.
FAR guidance frames allocability around the connection between a cost and the objectives it supports, weighing relative benefit and relevance, which includes cases where costs support more than one effort or the whole operation.
Policies need to be clear about the final cost goals, whether costs are direct or indirect, and how allocation bases show the benefits received. Accounting systems should make these definitions mandatory by requiring cost objective fields, controlled cost type lists, and pool-based logic that follows publicly announced rules.
Weak alignment between written policy and system configuration often leads to coding drift, where similar costs migrate between direct and indirect treatment without a defensible rationale.
Consistency Rules and the Hidden Risk in Direct and Indirect Treatment
FAR’s consistency principle represents one of the most common failure points in accounting policy design. When costs arise for the same purpose in comparable situations, they must be handled uniformly across all cost objectives.
Policies that lack a clear definition of what constitutes like circumstances leave room for inconsistent application, particularly in areas such as program management, proposal activity, shared technical resources, or internal research efforts.
Written cost accounting practices should articulate treatment decisions for major cost categories, including labor, subcontract management, information technology resources, recruiting, training, and bid and proposal activity.
System controls reduce subjective interpretation by limiting reclassification options and requiring documented approvals for exceptions. Mapping policy intent to the chart of accounts, indirect pools, and billing structure remains a central focus for accounting teams supporting government cost scrutiny.
Making Unallowable Costs Difficult to Mischarge
Unallowable costs under FAR pose challenges throughout the entire cost lifecycle. Policies must address identification, segregation, allocation exclusion, and reporting with enough clarity that unallowables don’t inadvertently enter indirect pools or certified submissions.
FAR references CAS requirements for accounting for unallowable costs, reinforcing that treatment expectations extend beyond simple expense categorization.
Controls operate at multiple stages. Purchase request policies establish upfront screening, system coding structures isolate unallowables at entry, allocation logic prevents pool contamination, and review procedures catch issues before billing or proposal submission.
Outsourced accounting arrangements often add value through strict monthly reviews that reduce the need for year-end corrections. These corrections tend to draw auditors’ attention and increase risk exposure.
How Policy Alignment Intersects With Certifications and System Adequacy
Accounting policies aligned with FAR Part 31 directly influence certification risk and system adequacy determinations.
Cost-type contracts commonly require submission and certification of final indirect cost rate proposals, and FAR ties acceptance of those submissions to allowability standards. Inclusion of unallowable costs in certified proposals can trigger penalties under statutory and regulatory frameworks.
For organizations operating under DFARS accounting system requirements, alignment extends further into business system expectations. DFARS defines acceptable accounting systems based on the ability to produce reliable cost data, support proper allocations, and comply with laws and regulations.
System disapprovals introduce formal remediation timelines and potential payment withholds, making policy-driven consistency and documentation a practical necessity rather than a theoretical goal.
Outsourced accounting services supporting these environments are evaluated on their capacity to produce audit-ready records, manage corrective actions, and sustain consistent practices across contract portfolios.
FAR Part 31 alignment serves as the foundation that allows those services to function effectively under ongoing government oversight.
Where Sound Policy Design Supports Defensible Government Cost Outcomes
Accounting policies that follow FAR Part 31 affect how costs are evaluated, approved, and audited, not just when transactions are recorded.
Using the same approach, clear documentation rules, and a well-organized system reduces risk and helps maintain solid results on government contracts. Diener and Associates has worked alongside government contractors and growing businesses since 1989, delivering practical guidance with the responsiveness of a closely held firm.
To discuss FAR Part 31 alignment, outsourced accounting support, or consulting services, book an online consultation or contact our experienced CPAs at (703) 386-7864.