Expressly Unallowable Costs: When Billing the Wrong Expense Comes With a Penalty

Published 2026 | TIKC NewsWire

Not every cost you bill the government is allowed, and most contractors know that. What fewer know is that a special group of costs are not only disallowed, they come with a penalty attached the moment you claim them. These are expressly unallowable costs. Claim one on a cost-reimbursement contract and the government can make you pay it back plus a penalty, and in some cases that penalty doubles. The frustrating part is that these are often ordinary expenses that simply do not belong on a government invoice.

What expressly unallowable means

The cost rules in FAR Part 31 list categories of costs the government will not pay for. Some are judgment calls. But others are named and clearly stated as unallowable, things like interest on borrowing, certain entertainment, alcohol, fines and penalties, and some advertising and lobbying. Because the rule names them plainly, you are expected to know not to bill them. When you do anyway, the law treats it as a cost you had no business claiming, and that is what triggers the penalty.

Why the penalty exists

The penalty is there to make contractors screen their own costs instead of billing everything and letting the auditor sort it out. The government does not want to play referee on costs that are obviously off limits. So it shifts the burden to you: build a system that catches these before they ever hit an invoice. If an auditor finds an expressly unallowable cost in your claim, the penalty is meant to be the consequence of a screen you should have had.

The small-business version of the problem

For a small firm, the owner’s expenses and the company’s expenses often run through the same accounts. A business dinner with wine, interest on a line of credit, a parking ticket on a company car, a sponsorship that is really advertising. None of these are fraud. But if they flow into an indirect cost pool that you then bill against a government contract, you have claimed expressly unallowable costs. The right move is to flag these accounts and pull them out before they ever reach your rates. This is exactly the kind of gap that shows up in a DCAA incurred cost audit.

What to do now

• Learn the named categories. Know the costs FAR calls out plainly as unallowable so you recognize them in your own books.
• Tag unallowable accounts. Set up your accounting so interest, entertainment, alcohol, fines, and similar costs are marked and excluded automatically.
• Screen before you bill. Review indirect cost pools so no expressly unallowable cost ends up in your rates.
• Separate owner and company spending. Keep personal and non-billable expenses out of the pools you charge the government.
• Document your screening. Keep proof that you review and remove these costs, so an auditor sees a working system.

Expressly unallowable costs punish sloppiness, not ambition. You are allowed to spend money on entertainment, interest, and the rest. You just cannot pass those costs to the government, and the penalty is the price of forgetting that. Tag the accounts, screen before you bill, and keep the proof, and these costs stay a line in your own ledger instead of a penalty in an audit finding. Brick by brick.

FAQ

What is the difference between unallowable and expressly unallowable?

Unallowable costs simply will not be reimbursed. Expressly unallowable costs are named plainly in the rules as unallowable, and claiming them can trigger a penalty on top of repayment because you were expected to know better.

What kinds of costs are expressly unallowable?

Common examples include interest on borrowing, alcohol, certain entertainment, fines and penalties, and some advertising and lobbying. The exact treatment is set out in FAR Part 31.

Can the penalty really double?

In some situations, yes. If a cost previously determined to be unallowable is claimed again, the penalty can be larger. That is why fixing the root cause after the first finding matters.

Does this apply to fixed-price work?

The penalty structure is tied to cost-type contracts and the cost principles that govern them. If you bill costs or rates to the government, you need to screen for expressly unallowable costs.

Sources

Federal Acquisition Regulation. (2026). Part 31, Contract Cost Principles and Procedures.

Federal Acquisition Regulation. (2026). 42.709, Penalties for unallowable costs.

This article is general information, not legal advice.