Updated November 2026 · VG CPA PC advisors
Common unallowable costs
FAR Part 31.205 lists them. Common examples include entertainment (31.205-14), alcoholic beverages (31.205-51), bad debts (31.205-3), contributions and donations (31.205-8), fines and penalties (31.205-15), interest and other financing costs (31.205-20), lobbying (31.205-22), organization and reorganization costs (31.205-27) and certain legal proceeding costs (31.205-47).
Other costs are allowable only within limits, such as executive compensation above the statutory cap, some advertising and public relations, travel above per diem rates, and certain employee morale costs.
Accounting for them
Set up separate general ledger accounts for unallowable costs, train employees who code expenses, and review credit card and expense reports regularly. Costs that are mixed, such as a meeting that included entertainment, should be split.
Directly associated costs, such as staff time spent planning an unallowable event, are also unallowable and must be excluded.
Penalties
Including expressly unallowable costs in a final indirect cost rate proposal can result in a penalty equal to the disallowed amount plus interest, and twice that amount for costs already found unallowable. Repeated problems can also raise questions about the adequacy of your accounting system.
A certification signed with the incurred cost submission states that the proposal excludes unallowable costs, so careful review before submission matters.