Definition: Allowable costs are expenses that are included in a contracted service or product. Usually allowable costs are present in contracts between two companies. Think about allowable costs begs the question, are there unallowable costs? The answer is yes. Usually unallowable costs are referred to as non-covered or non-contracted costs. These are the costs that are over and above what the contract specifies.
What Does Allowable Costs Mean?
It might be easier to look at an example. Let’s assume that your company is hired by the government to clean up an oil spill. The government can state in the contract that it will reimburse the company for travel and flight expenses as long as the flights are coach tickets. A coach ticket would be considered an allowable cost because it is specified in this contract. If all the company managers flew first class to the job site, the government would not be obligated to pay for the tickets. These first class tickets would be considered unallowable costs because the contract only allows travel reimbursement for coach tickets.
Now let’s change the example slightly. Assume the contract states that the price of a coach ticket will be reimbursed. The coach tickets are still considered allowable costs because they will be reimbursed in full. The first class tickets, on the other hand, will only be partially considered allowable expenses since the government will only reimburse the cost of the coach tickets. The difference in between the two tickets is considered an unallowable cost.