Future treatment of unallowable costs: Overview, definition, and example
What is the future treatment of unallowable costs?
The future treatment of unallowable costs refers to how an organization plans to manage and handle expenses that are not permitted or reimbursed under a specific agreement, contract, or regulatory framework. These costs may include expenses that, according to government regulations, contract terms, or accounting standards, are considered unallowable, such as certain types of overhead, entertainment expenses, or fines.
The future treatment of unallowable costs typically involves identifying these costs, ensuring they are not included in future financial reports or claims for reimbursement, and taking steps to address any previously incurred unallowable costs. This process may involve removing the unallowable costs from future billing, adjusting budgets, or ensuring that internal policies are in place to prevent such costs from being incurred again.
Why is the future treatment of unallowable costs important?
Managing the future treatment of unallowable costs is important for compliance with contractual terms, regulatory requirements, and accounting standards. For businesses that work with government contracts or other regulated industries, improperly handling unallowable costs can lead to financial penalties, loss of business opportunities, and damage to the company’s reputation.
Properly addressing unallowable costs ensures that organizations are transparent, adhere to legal and contractual obligations, and maintain good standing with stakeholders. Additionally, preventing unallowable costs from being incurred in the future is key to effective cost management and ensuring that budgets are properly allocated.
Understanding future treatment of unallowable costs through an example
Consider a government contractor that is working on a project where specific costs are unallowable under the terms of the contract. For instance, entertainment expenses, such as client dinners or events, are not reimbursable by the government agency funding the project.
In the past, the contractor mistakenly submitted a claim for reimbursement that included unallowable entertainment expenses. The contractor must now adjust the future treatment of unallowable costs by:
- Reviewing past claims: Identifying and removing any previously submitted unallowable costs from future billing.
- Implementing controls: Introducing new internal controls, such as training staff and implementing approval processes, to ensure unallowable costs are not submitted in the future.
- Adjusting budgets: Ensuring that future budgets exclude unallowable expenses and are in compliance with the contract’s terms.
By properly managing the future treatment of unallowable costs, the contractor can avoid penalties and continue to comply with the contractual and regulatory framework governing their work.
Example of a future treatment of unallowable costs clause
Here’s how a future treatment of unallowable costs clause might appear in a contract or agreement:
“The Contractor agrees to immediately notify the Government of any unallowable costs identified during the performance of this Agreement. The Contractor shall ensure that any future claims for reimbursement exclude any unallowable costs, as defined by applicable regulations, contract terms, and accounting standards. The Contractor shall implement measures to prevent the incurrence of unallowable costs in future billing periods and will cooperate with audits or reviews conducted to ensure compliance with the terms of this Agreement.”
Conclusion
The future treatment of unallowable costs is a critical aspect of compliance, especially for businesses involved in government contracts or highly regulated industries. By identifying, addressing, and preventing unallowable costs, organizations ensure they remain in good standing with clients, regulatory bodies, and financial stakeholders. Effective management of these costs helps organizations maintain transparency, avoid penalties, and foster trust, all while ensuring that financial claims and budgets are accurate and compliant with relevant rules and standards.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.