Why segregation is the whole game
For a contractor with cost-reimbursable or time-and-materials work, an expense report is not just a reimbursement. It is a source document for indirect rates and direct billings that DCAA may audit years later. The question is not only whether the company pays the employee, but whether the cost can be charged to the government.
Unallowable does not mean unreimbursable. A company can choose to reimburse an employee for a beer with dinner and still owe the government a clean exclusion of that cost. What DCAA looks for is that expressly unallowable costs, and costs directly associated with them, are identified and kept out of anything billed or proposed.
Travel costs under FAR 31.205-46
FAR 31.205-46 limits lodging, meals and incidental expenses to the per diem rates in the Federal Travel Regulation, the Joint Travel Regulations or the State Department standardized regulations, depending on location. Amounts above those rates are unallowable except in the circumstances the regulation provides for.
Airfare is limited to the lowest customary standard, coach or equivalent fare offered during normal business hours. Business or first class costs above that fare are unallowable unless one of the documented exceptions applies, such as a medical need. The documentation must exist at the time of travel, not be reconstructed during an audit.
- Compare each night's lodging to the locality maximum for that city and date
- Compare M&IE to the per diem rate, including reduced first and last day amounts
- Keep the coach fare quote alongside any premium ticket
- Store the exception justification with the report, signed before travel
Alcohol under FAR 31.205-51
FAR 31.205-51 makes costs of alcoholic beverages unallowable, full stop. There is no business purpose exception. This is where line-item review matters, because alcohol almost never arrives as its own transaction.
It hides inside restaurant receipts, hotel folios as a bar or minibar charge, and conference banquet invoices. A $92.18 dinner with two glasses of wine is a mix of potentially allowable food and unallowable alcohol, and the receipt total alone cannot tell you which is which.
Entertainment under FAR 31.205-14
FAR 31.205-14 makes costs of amusement, diversion, social activities and directly associated costs unallowable. That covers tickets to shows or sporting events, meals and lodging tied to the outing, rentals, transportation to the venue and gratuities.
The directly associated part is what catches teams. If the cost would not have existed but for the entertainment, it belongs in the unallowable bucket too. The rideshare to the ballpark is entertainment, even though rideshare is normally travel.
Worked example: one trip, three cost buckets
Dmitri Vasquez, a test engineer at Brightwater Defense Analytics, flew to Huntsville for four nights to support a field test on a cost-plus contract. His report totals $3,412.87. Here is how it splits once each line is reviewed.
His hotel ran $41.37 a night above the locality lodging maximum, so $165.48 across four nights is unallowable travel excess. He was rebooked into business class at $1,846.20 when the lowest customary coach fare on file was $612.40, and no exception was documented, so $1,233.80 is unallowable. One dinner receipt of $58.47 included two beers at $14.00, which goes to the alcohol account.
On the last night the test team went to a minor league game. Dmitri's ticket was $23.50 and the rideshare there was $18.62, both unallowable entertainment, the ride as a directly associated cost. In total $1,455.40 of the $3,412.87 is segregated, and the remaining $1,957.47 can flow to the contract.
- Lodging excess over locality maximum: $165.48 (FAR 31.205-46)
- Airfare above lowest customary coach fare: $1,233.80 (FAR 31.205-46)
- Beer on dinner receipt: $14.00 (FAR 31.205-51)
- Game ticket and rideshare to venue: $42.12 (FAR 31.205-14)
- Allowable remainder: $1,957.47
Building segregation into the expense workflow
The cleanest approach is a dedicated set of unallowable GL accounts mirroring your allowable ones, for example travel excess, alcohol and entertainment, with the split made at the time the report is approved. Waiting until year end to scrub the ledger means reconstructing receipts that are two to three years old by the time DCAA asks.
Phyto Nex AI reads folio and restaurant line items, flags alcohol, entertainment and per diem excess against the rates you load, and proposes the split. Your accounting team reviews and approves each split before anything posts, so the audit trail shows a human decision on every unallowable line.
Arjun Nair, Government Contracts Specialist
Arjun worked in cost accounting for two defense services contractors and has supported several DCAA incurred cost audits. He advises Phyto Nex AI customers on FAR cost principles and unallowable cost segregation.