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    Are bank service charges allowable?


    Answer

    Bank service charges are not mentioned explicitly in the specific limitations set forth in Federal Acquisition Regulation (FAR) Subpart 31.2.  An analysis to determine allowability of bank service charges, like the analysis of any other incurred cost, must include an evaluation of the five requirements of allowability identified in Federal Acquisition Regulation (FAR) § 31.201-2(a).   
     
    It is understood that the question is specifically whether or not “bank service charges” (e.g., late fee charges, overdraft fees, and charges associated with the admin. of the company’s line of credit) are made unallowable by the specific limitations in FAR § 31.205-20.

    As mentioned, the text of the cost principle at§
    31.205-20 , does not include “bank service charges”, instead there are five types of costs that are made specifically unallowable.  Of the five unallowable costs listed in § 31.205-20, two appear relevant to this question: (1) “interest on borrowings (however presented)” and (3) “costs of financing and refinancing capital (net worth plus long-term liabilities).”   Also, one should be mindful that a cost can be made unallowable due to it being “directly associated” with an unallowable cost.  FAR § 31.201-6 (a) defines a “directly associated cost” as a cost that “is generated solely as a result of incurring another cost, and that would not have been incurred had the other cost not been incurred.”  When a particular cost is determined unallowable, any directly associated costs are unallowable as well.

    To start with, with respect to the unallowable costs identified as “interest on borrowings (however presented),”  not all “interest” is made unallowable, but rather only interest on borrowings.  The analysis would go like this --  Are the “late fee charges”, “overdraft fees” or “charges associated with the administration of the company’s line of credit” interest on  borrowings or alternatively are they directly associated costs of interest on borrowings?   If they are either, they are unallowable under the specific limitations provided in §
    31.205-20.

    For the bank service charges to be unallowable as “costs of financing and refinancing capital (net worth plus long-term liabilities),” the bank service charges would have to be determined to be financing or refinancing capital or directly associated with those costs.   Not all financing costs are unallowable, but rather only those involving capital.  So, the analysis requires a definition of “capital” as well.   In this context, capital has been defined by the Armed Services Board of Contract Appeals  (APPEAL OF -- SRI INTERNATIONAL, A.S.B.C.A.  No. 56353) to mean “net worth plus long-term liabilities.”  The analysis would then go like this -- Are the “late fee charges”, “overdraft fees” or “charges associated with the administration of the company’s line of credit” a form of financing capital or alternatively are they directly associated costs of financing capital?  If they are either, they are unallowable costs under the specific limitations provided in §
    31.205-20.

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