Josef Kamara, CPA, CISSP, CISA · Updated May 6, 2026 · 1 minute read

Unallowable Cost

A cost that fails one or more of the FAR 31.201-2 allowability tests or appears on the FAR 31.205 list of expressly unallowable items. Examples include alcoholic beverages (31.205-51), bad debts (31.205-3), entertainment (31.205-14), federal income tax (31.205-41), goodwill (31.205-49), and lobbying (31.205-22). FAR 31.201-6 requires contractors to identify and segregate unallowable costs in their accounting records and exclude them from any billing, claim, or proposal to the government. Failure to segregate is a frequent DCAA audit finding and a False Claims Act exposure if the cost is then billed.