Kingsfield · Research · Government Contracts

How is the allowability of a cost determined under a government contract?

Published 2026-06-23 · U.S. federal law

A cost charged to a government contract is allowable only if it meets every factor: reasonableness, allocability, compliance with applicable cost-accounting standards, and the terms of the contract.

The answer

The four factors

48 CFR 31.201-2 provides that a cost is allowable only when it is reasonable, allocable, compliant with applicable Cost Accounting Standards or generally accepted accounting principles, and consistent with the terms of the contract and the limitations of the cost principles, with the burden on the contractor to support its costs.

Selected costs are a separate layer

The general allowability test stands apart from the specific rules for individual cost items. Even a cost that passes the four factors can still be limited or disallowed by a more specific selected-cost rule.

The judged input

What the AI drafted

Submitted to the judge

This is an excerpt from a draft government-contracts compliance memo — the kind of work product a lawyer generates with a legal-AI drafting tool, then has to stand behind. Kingsfield does not write it; it rules on the citations the model put in it. This draft cites two authorities; one of them is wrong.

AI draft excerpt — government-contracts compliance memo

Before the Company bills these expenses to its cost-reimbursement contract, each item must satisfy the general allowability test, and we must be able to support the amounts charged. Under 48 CFR 31.201-2, a cost is allowable only if it is reasonable, allocable, compliant with applicable accounting standards, and consistent with the contract terms, with the burden of proof resting on the contractor. We advise that the governing four-factor allowability standard is found at 48 CFR 31.205.

The judge ruled on every citation as the draft used it — it accepted 48 CFR 31.201-2 and rejected 48 CFR 31.205. Here is why.

The verdict

How Kingsfield ruled

Ruled 2026-06-23

Each citation in the draft above was submitted to the Kingsfield judge and ruled against the primary-law corpus — Accept, Reject, or Inconclusive, per citation. These are live verdicts, not editorial. Each card shows the claim the draft made and the verbatim authority the verdict was rendered against.

Accept48 CFR 31.201-2

The draft claimed: A cost is allowable only when it is reasonable, allocable, compliant with applicable Cost Accounting Standards or generally accepted accounting principles, and consistent with the terms of the contract and the cost principles; the contractor bears the burden of supporting its costs.

“A cost is allowable only when the cost complies with all of the following requirements:”

Cite found; proposition supported by the cited text.

Reject48 CFR 31.205

The draft claimed: Section 31.205 states the general four-factor test (reasonable, allocable, compliant, consistent) that determines whether any cost is allowable on a government contract.

Cite found, but the cited text does not support the claim. 48 CFR 31.205 is the catalog of selected costs addressing the allowability of specific items; the general four-factor allowability test is stated at 48 CFR 31.201-2. Regenerate with the correct authority.

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This page is legal information, not legal advice, and does not create an attorney-client relationship. The draft shown is an illustration of a typical AI answer; verdicts reflect the cited authority in the Kingsfield corpus as of the ruling date shown above.