Direct, Indirect, Allowable And Non-Billable.. Written By: Thomas Martin, MBA, CPA; Klineco Staff.

November 15, 2016

Government Contract Accounting

Direct Versus Indirect Costs

Allowable Versus Unallowable Costs

Billable Versus Non-Billable Costs


Specific Cost Categories:


Direct and Indirect

Direct costs are charges specific to a contract or Work Order.  (The Final Cost Objective) Indirect Costs are all other costs which are allocable to intermediate or other cost objectives.  Common indirect cost pools are Fringe, Overhead and G&A.

Allowable and Unallowable

Allowable costs are limited to allocable costs that are allowable under FAR-Part 31.  Unallowable costs can be legitimate but specifically distinguished per the FAR and must be excluded from any Government billings, claims or contract proposals.  The classification for unallowable costs must be the same as allowable and non-billable costs in order to absorb their appropriate indirect cost burdens.

Allowable costs must be allocable and reasonable which is a FAR concept and determines if these costs can be recovered or reimbursed by the Federal Government.

Accounting systems must be set up properly to identify unallowable direct and indirect costs in order to exclude these costs from Government Reports.  An expense can be both unallowable and non-deductible or deductible but unallowable in accordance with the guidelines set forth in the Internal Revenue Code and FAR.  Common unallowable costs are set forth in the FAR Cost Principles Guide.  Other unallowable costs are identified by law or regulation and some unallowable costs are intended to limit costs such as excess travel, excess executive compensation and business combinations costs. 

Billable and Non-Billable

Billable expenses are costs a customer agrees to pay for and non-billable expenses are costs related to the work product that a customer will not reimburse. These billable expenses must be classified for accounting purposes in the same manner so the true cost of the task can be calculated. Non-billable costs must absorb the appropriate burdens in the same manner as billable costs and retain their identity as direct or indirect costs.

In conclusion, there are many variables related to costs and compliance.  Consistency is vital for all costs.  The cost accounting structure of a business must be organized properly for all costs in order to correctly record costs of a particular task.  All phases of the resulting cost accounting system must be considered adequate and FAR Compliant to successfully pass the required DCAA accounting system audit prior to the award of Cost Type Government contract.