The document describes a complimentary webinar series on the 2021 Defense Federal Acquisition Regulation Supplement (DFARS). It will be held every Wednesday at 12pm EST and feature speakers who are attorneys, consultants, and subject matter experts in defense contracting. Recordings will be posted online. The webinars are intended to provide training and assistance to federal contractors on DFARS compliance and government contracting issues.

1. DFARS - 2021
Defense
Federal Acquisition Regulation
Supplement
Complimentary Webinar Series
JSchaus & Associates – Washington, DC – hello@JenniferSchaus.com

2. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
JSchaus & Associates – Washington, DC – hello@JenniferSchaus.com
About The Series
- Complimentary Webinar Series
- Every Wednesday at 12pm EST
- Recorded and posted on our website and YouTube
Channel
- Speakers are attorneys, consultants, subject matter
experts in defense contracting

3. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
JSchaus & Associates – Washington, DC – hello@JenniferSchaus.com
 Full training calendar: virginiaptac.org & useful links
 Register for free counseling: https://virginiaptac.org/services/counseling/
 Your “one stop” shop for Government Contracting assistance
 Reach us at ptac@gmu.edu or 703-277-7750
This procurement technical assistance center is funded in part through a cooperative agreement with the Defense Logistics Agency.

4. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
JSchaus & Associates – Washington, DC – hello@JenniferSchaus.com

5. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
JSchaus & Associates – Washington, DC – hello@JenniferSchaus.com

6. Judy
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• JSchaus & Associates – Washington, DC – hello@JenniferSchaus.com

7. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
JSchaus & Associates – Washington, DC – hello@JenniferSchaus.com
About Us
- Professional services for federal contractors
- Market Analysis
- Proposal Writing / Pricing
- Contract Compliance & Administration

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* Use Code “DFARS”
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10. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
JSchaus & Associates – Washington DC – hello@JenniferSchaus.com
About Our Speaker
Nick SanFilippo
Partner
McGuireWoods LLP
nsanfilippo@mcguirewoods.com
703-712-5378

11. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
JSchaus & Associates – Washington DC – hello@JenniferSchaus.com
DFARS Part #231
Contract Cost Principles and Procedures
Wednesday, 21 July 2021

12. DFARS – 2021 - Defense Federal Acquisition Regulations
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Introduction
DFARS 252.231-7000:
“When the allowability of costs under this contract is determined in accordance with Part
31 of the Federal Acquisition Regulation (FAR), allowability shall also be determined in
accordance with Part 231 of the Defense FAR Supplement, in effect on the date of this
contract.”
Costs under a Government contract are reimbursable only if they are
allowable. The allowability of Government contract costs is governed by the
contract cost principles and procedures contained in FAR Part 31.

13. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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What is the importance of FAR Part 31?
• The primary means of defining the costs that will be considered “allowable” by the government in the
negotiation and administration of its contracts
• Government uses these principles to measure what it will pay a particular contractor under cost-
reimbursement or incentive-fee-type contracts and also to determine the extent of pricing adjustments under
fixed-price contracts
• Cost principles establish basic guidelines for the allowability of costs, and they also delineate specific
categories of allowable or unallowable costs.
Note: The FAR is the primary, but not the only, source for cost principles. Individual agencies may supplement
the FAR cost principles with their own regulations. In addition, individual and class deviations from FAR Part 31
are possible under certain circumstances. Such deviations, however, are rare given the requirement for advance
approval by designated agency officials.

14. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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Why does FAR Part 31 matter?
• The FAR Part 31 cost principles are most important with regard to the allowability of costs
expended under cost-reimbursement or incentive-fee contracts. Thus, the cost principles
are the most relevant for contract administration, although they occasionally pertain to
contract formation issues
• In fixed-price contracts, the parties agree to a firm price, or in appropriate cases, an
adjustable price. Here, the cost principles come into play under such contracts when
changes are negotiated or when the contract is terminated

15. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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When are the rules in FAR Part 31 applicable?
Although the extent to which the cost principles come into play
depends, in large part, on the type of contract awarded—fixed-price
or cost-reimbursement—FAR Part 31 requires the incorporation of the
cost principles into all contracts where (A) “cost analysis is
performed” as well as (B) where a contract clause requires the
“determination, negotiation or allowance of costs.”

16. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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What is “cost analysis”?
• Defined by FAR 15.404-1(c)
• “Cost analysis” involves the evaluation of the judgmental factors used by the contractor in
estimating costs.
• Cost analysis is what distinguishes cost-based acquisition, in which contracts are based on costs
incurred or projected to be incurred by the contractor, from price-based acquisition, in which
contractual relationships are established using price instead of cost
• Cost analysis is required to be used for evaluating the reasonableness of individual elements of cost
whenever cost or pricing data are required under the Truth in Negotiations Act, and may be used to
evaluate information other than cost or pricing data to determine cost reasonableness or cost
realism
• Cost analysis is frequently used—and the cost principles therefore apply—in the pricing of both
cost-reimbursement and fixed-price contracts, subcontracts, and modifications.

17. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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What is involved in the “determination negotiation, and allowance of costs”?
• This means that the contracting officer is required to incorporate the cost principles and
Subpart 31.2 procedures by reference in contracts with commercial organizations as the
basis for
(1) determining reimbursable costs under cost-reimbursement contracts and
subcontracts and the cost-reimbursement (i.e., materials) portion of time-and-
materials contracts,
(2) negotiating indirect cost rates,
(3) proposing, negotiating, or determining costs under terminated contracts,
(4) price revision of fixed-price incentive contracts,
(5) price redetermination of price redetermination contracts, and
(6) pricing changes and other contract modifications.

18. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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Structure of FAR Part 31
FAR Part 31 contains four sets of cost principles, each applicable to contracts
with different types of organizations:
(1) Contracts with commercial organizations (FAR Subpart 31.2).
(2) Contracts with educational institutions (FAR Subpart 31.3).
(3) Contracts with state, local, and federally recognized Indian tribal
governments (FAR Subpart 31.6).
(4) Contracts, grants and agreements with nonprofit organizations (FAR
Subpart 31.7).

19. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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Why is FAR Part 31 structured this way?
• The cost principles and procedures in the succeeding subparts are grouped basically by
organizational type in recognition of differing organizational
characteristics; e.g., commercial concerns and educational institutions.
• The overall objective is to provide that, to the extent practicable, all organizations of similar
types doing similar work will follow the same cost principles and procedures.
• The most frequently used of the four sets of cost principles—and on which this
presentation will focus—is the one in FAR Subpart 31.2 governing contracts with
commercial organizations.
• Not only is Subpart 31.2 the most extensive of the four, but it is also the one to which most
contracts will be subject, since it covers supply, service, and construction contracts.

20. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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Introduction to Subpart 31.2 – Contracts with Commercial Organizations
• Contracts with commercial organizations, including contracts and
modifications for supplies, services, or experimental, developmental, or
research work negotiated with organizations other than educational
institutions, State, local and federally recognized Indian tribal governments,
and nonprofit organizations on the basis of cost.
• Note: the cost principles for contracts with educational institutions, State,
local, and federally recognized Indian tribal governments, and nonprofit
organizations are contained in various OMB Circulars incorporated by
reference in FAR Subparts 31.3 through 31.7.

21. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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Five Factors to Determine Cost Allowability
FAR Subpart 31.2 lists five general factors for determining cost allowability:
(1) Reasonableness.*
(2) Allocability.*
(3) Standards promulgated by the CAS [Cost Accounting Standards] Board, if applicable; otherwise, generally
accepted accounting principles and practices appropriate to the particular circumstances.
(4) Terms of the contract.
(5) Any limitations set forth in this subpart.
“[G]enerally accepted accounting principles and practices” (also mentioned in factor “(3)”) and the “[t]erms of
the contract” (factor “(4)”) depend on individual facts and circumstances and, thus, do not lend themselves to
discussion here.
The Government bears the burden of proving that the costs are of the type made specifically unallowable by
regulation or a contract term.

22. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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Reasonableness
• The criteria for determining whether a cost is “reasonable” are necessarily
open-ended and subjective.
• The FAR provides that a “cost is reasonable if, in its nature and amount, it does
not exceed that which would be incurred by a prudent person in the conduct
of competitive business.”
• In determining whether a cost is reasonable, a number of considerations will
be reviewed, including the contractor's “responsibilities to the government,
other customers, the owners of the business, employees, and the public at
large.”

23. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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Challenging Reasonableness
• A contractor’s incurred costs for FAR Part 31 covered contracts are not
presumed to be reasonable; rather, “the burden of proof shall be upon the
contractor to establish that such cost is reasonable.” However, a contractor's
decisions regarding its business affairs will be accorded some deference
• Where it has been successful in challenging a cost's reasonableness, the
government has usually been able to establish that a contractor abused its
discretion, such as where a contractor retained a large, unproductive work
force for longer than was prudent under the circumstances or where the
contractor incurred excessive promotional costs in connection with preparing
an unsolicited proposal

24. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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Allocability
Allocation of costs is the process of assigning costs to cost objectives. The FAR cost principles
contain the following definition of allocability:
A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis
of relative benefits received or other equitable relationship. Subject to the foregoing, a cost is
allocable to a government contract if it:
(a) Is incurred specifically for the contract;
(b) Benefits both the contract and other work, and can be distributed to them in
reasonable proportion to the benefits received; or
(c) Is necessary to the overall operation of the business, although a direct relationship to
any particular cost objective cannot be shown.

25. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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Direct vs. Indirect Costs
• For contracts with commercial organizations, the total cost of the contract is the sum of the
direct and indirect costs, incurred or to be incurred, that are allocable to the contract, less any
allocable credits, plus any allocable cost of money determined in accordance with FAR 31.205-
10.
• Thus, in determining questions of allocability, it is necessary to assess whether a cost should be
charged directly or indirectly.
• The FAR defines a direct cost as “any cost that can be identified specifically with a particular
final cost objective.” The provision goes on to say that costs “identified specifically with the
contract are direct costs of the contract and are to be charged directly to the contract,” and
“[a]ll costs specifically identified with other final cost objectives of the contractor are direct
costs of those cost objectives and are not to be charged to the contract directly or indirectly.”

26. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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Direct Costs
• The FAR defines a direct cost as any cost that is identified specifically with a
particular final cost objective
• Costs incurred for materials, labor, or other purposes that are clearly
necessary for performing a particular contract are direct costs of the contract.
Even if an expenditure is eventually determined to have been unnecessary for
contract performance, the cost will nonetheless be allocable as a direct charge
if the contractor reasonably believed it was necessary when it decided to incur
the cost.
• The legal test is sometimes referred to as the “but for” test (i.e., whether the
cost would have been incurred but for the existence of the contract).

27. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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Indirect Costs
• The FAR defines an indirect cost as one “not directly identified with a single,
final cost objective, but identified with two or more final cost objectives or an
intermediate cost objective.”
• The provision requires that “[i]ndirect costs shall be accumulated by logical
cost groupings with due consideration of the reasons for incurring such costs”
• Based on this definition, “[c]ommonly, manufacturing overhead, selling
expenses, and general and administrative (G&A) expenses are separately
grouped.”

28. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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“Selected Costs”
• In addition to describing the general rules on cost allowability, the FAR cost principles
also select particular costs for special treatment
• These “selected costs” must not only meet the general requirements for allowability,
they must also meet other, special criteria. Thus, even if a particular expenditure is
eminently reasonable and allocable, it will be deemed unallowable if the selected costs
provisions label it as such.
• Even if a cost is not specifically treated as a selected cost, the FAR Subpart 31.2 cost
principles make clear that the omission does not imply that the cost is either allowable
or unallowable; the selected costs portion of Subpart 31.2 is not intended to “cover
every element of cost.”
• In the following slides are some examples.

29. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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Public Relations and Advertising Costs
The only advertising costs that are allowable are those solely for
(a) the procurement of scarce items needed for performance of
the contract, or
(b) the disposal of scrap or surplus materials required during
performance

30. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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Compensation for Personal Services
• Special forms of compensation for personal services are singled out in the selected cost
provision for individual treatment
• “Compensation for personal services”—broadly defined as “all remuneration paid currently
or accrued, in whatever form and whether paid immediately or deferred, for services
rendered by employees to the contractor during the period of contract performance”—is
generally allowable if reasonable in amount for the work performed.
• Examples:
o Compensation resulting from “arm's length” negotiated labor-management
agreements;
o Severance pay, or dismissal wages;
o Backpay resulting from underpaid work is compensation for the work performed

31. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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Independent Research and Development and Bid and Proposal Costs
• These costs are allowable as indirect expenses to the extent that they are reasonable and allocable
• The DFARS cost principles, in an effort to encourage industry-initiated IR&D efforts, provide that
these costs are allowable only when expended for projects “that are of potential interest to DoD,”
including activities that
(a) strengthen the nation’s defense, industrial, and technology base and enhance its industrial
competitiveness,
(b) promote the development of technologies identified by DOD as critical,
(c) increase the development of technologies useful for both the private commercial and
public sectors (dual-use technologies), and
(d) develop efficient and effective technologies for achieving such environmental benefits as
improved data gathering, cleanup and restoration, pollution-reduction in manufacturing,
environmental conservation, and environmentally safe management of facilities.

32. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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Insurance and Indemnification
• The cost principle should be read in conjunction with FAR Subpart 28.3 and
CAS 416, Accounting for Insurance Costs
• Reasonable insurance costs generally are allowable, subject to certain
restrictions.
• Indemnification costs are allowable only if the contract so provides
• The costs of insuring Government property is allowable only to the extent
that the contractor is liable for its loss or damage, and if the insurance does
not cover loss or damage resulting from the willful misconduct or lack of
good faith of the contractor's directors, officers, or equivalent representatives

33. DFARS – 2021 - Defense Federal Acquisition Regulation Supplement
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Legislative Lobbying Costs
• Generally, the costs of attempting directly to influence—or encouraging others
to influence—legislative officials to favor or oppose legislation or other official
actions are unallowable.

34. DFARS – 2021 - Defense Federal Acquisition Regulations
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THANK YOU To Our Speaker
Nick SanFilippo
McGuireWoods LLP
nsanfilippo@mcguirewoods.com
703-712-5378

35. Thank You For Attending!
DFARS - 2021
Defense Federal Acquisition Regulation Supplement
Complimentary Webinar Series
JSchaus & Associates – Washington, DC – hello@JenniferSchaus.com