What are Allowable Costs?

Allowable costs are those expenses specified in a contract that can be billed to the customer. For example, a contract to develop a customized lathe allows for the reimbursement of direct materials, direct labor, and a specific overhead charge as allowable costs. The seller cannot bill any other costs through to the customer. Thus, the nature of an allowable cost depends on the terms of the underlying contract. Billed costs may be audited to verify that they are allowable under the terms of the associated contract.

The concept is frequently applied to contracts in which the buyer is a government entity.