Accounting for FAR (Federal Acquisition Regulation)

Posted by Jeremiah Mcnicholas on September 19, 2014

Federal Acquisition Regulation (FAR)

The Federal Acquisition Regulation (FAR) had its beginnings in the Armed Services Procurement Regulation established in 1947 governing the federal government’s purchasing process. It is meant to ensure purchasing procedures are standard, consistent, and conducted in an impartial manner. While these regulations are imposed strictly on work done with the federal government, many state organizations such as the department of transportation will have policies in place similar to FAR.

We will focus our attention on the FAR Cost Principle outlined in part 31 which defines when and to what extent costs can be recovered. The FAR Cost principle states that before a contractor may recover a particular cost it must be allowable (per FAR Part 31 and the contract), allocable, and reasonable. This principle is incredibly important because the government can recover any costs found not allowable, reasonable, or allocable to the contract. In short, if you don’t adhere to this principle, the government can ask for their money back.

FAR Part 31.205 contains around 50 selected costs detailing those that are expressly allowable and expressly unallowable. The costs that are specifically classified as unallowable are costs that the government won’t pay for under any condition. It’s important that your accounting system is capable of segregating these costs to prevent complications in billing or a potential government audit. Examples of expressly unallowable cost include alcoholic beverages, entertainment, donations, legislative lobbying, flowers, or fines.

Keep in mind, FAR Part 31.205 does not cover every element of cost. If a cost is not mentioned it does not imply that it is either allowable or unallowable. Determination of allowability is analogously based. So the allowability of a cost similar to the one in question will be applied. Use the cost principle that best captures the essential nature of the cost at issue.

With this segregation of costs in mind, it’s important that your firm use an accounting system that makes this process easy and enforceable. Remember, it’s up to you to determine whether a cost is allowable, allocable, and reasonable. Most AE specific accounting solutions should be able to allocate a cost to a project and categorize the cost as either allowable or unallowable. This task becomes much more difficult if your firm is using a generic accounting solution.

So if your firm is doing government work (or would like to be) and you’re using a generic accounting system, it may be time to take a look at an AE specific solution. For more information about Ajera, an accounting and project management software specific to AE firms that makes FAR compliance easy, take a look here.

Download the whitepaper: Top Considerations for Adopting an A&E Industry Specific Accounting Platform Understand the limitations of generic accounting systems and how an A&E industry specific solution helps A&E firms grow their business and increase profitability.