CLC 056 ANALYZING CONTRACT COSTS EXAM 2026/2027
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Section 1: Cost Principles & Allowability (Q1-15)
Q1. Under FAR 31.201-2, which three criteria must a cost meet to be considered
allowable?
A. Reasonable, allocable, and documented
B. Reasonable, allocable, and not specifically unallowable per FAR 31.205
C. Direct, indirect, and material
D. Fixed, variable, and semi-variable
Correct Answer: B
Rationale: FAR 31.201-2 establishes that costs must be reasonable (31.201-3),
allocable (31.201-4), and not specifically unallowable under FAR 31.205 or other
applicable regulations. While documentation is important for support, it is not one of
the three statutory allowability criteria. Distractor A substitutes documentation for
the unallowability requirement. Distractors C and D confuse cost classification with
allowability criteria. CLC 056 Principle: Memorize the three-pronged allowability
test; documentation supports but does not replace statutory criteria. Common Error:
Confusing documentation requirements with the fundamental allowability tests.
Q2. Which standard requires that a cost not exceed that which would be incurred by
a prudent person in the conduct of competitive business?
A. Allocability
B. Reasonableness
C. Consistency
D. Compliance
,Correct Answer: B
Rationale: FAR 31.201-3 defines reasonableness using the "prudent person"
standard — costs must not exceed what a reasonable businessperson would incur
under similar circumstances. Allocability (A) requires causal-beneficial relationship to
the contract. Consistency (C) is a CAS requirement. Compliance (D) is general
regulatory adherence. CLC 056 Principle: Reasonableness = prudent person test; ask
"Would a reasonable businessperson incur this cost?" Common Error: Confusing
reasonableness with allocability or assuming all incurred costs are reasonable.
Q3. Under FAR 31.201-4, a cost is allocable to a government contract if it:
A. Is specifically identified in the contract line items
B. Is incurred specifically for the contract, benefits both the contract and other work
in proportion to benefits received, or is necessary to the overall operation of the
business
C. Is approved by the Contracting Officer in advance
D. Exceeds $100,000 in value
Correct Answer: B
Rationale: FAR 31.201-4 establishes three allocability tests: (1) incurred specifically
for the contract, (2) benefits both the contract and other work with allocation based
on relative benefits, or (3) necessary to the overall operation of the business.
Distractor A describes direct cost identification, not allocability. Distractor C confuses
advance approval with statutory criteria. Distractor D introduces an arbitrary dollar
threshold. CLC 056 Principle: The three allocability tests are foundational; most
indirect costs fall under test (2) or (3). Common Error: Believing allocability requires
specific contract mention or CO approval.
Q4. Which of the following costs is specifically unallowable under FAR 31.205-1?
A. Direct labor overtime premium
B. Advertising and public relations costs
,C. Direct material freight charges
D. Employee training expenses
Correct Answer: B
Rationale: FAR 31.205-1 specifically identifies advertising and public relations costs
as unallowable, with limited exceptions for recruitment advertising and trade show
participation directly benefiting specific contracts. Direct labor overtime (A) is
allowable under 31.205-6 if consistent with established policy. Direct material freight
(C) is allowable. Employee training (D) is generally allowable under 31.205-44. CLC
056 Principle: Memorize the FAR 31.205 unallowable cost list; advertising is among
the most commonly tested unallowables. Common Error: Assuming all business-
related costs are allowable or confusing allowable training with unallowable public
relations.
Q5. Which FAR 31.205 subsection specifically addresses the unallowability of
alcoholic beverages?
A. 31.205-1
B. 31.205-2
C. 31.205-14
D. 31.205-20
Correct Answer: B
Rationale: FAR 31.205-2 explicitly states that costs of alcoholic beverages are
unallowable. Section 31.205-1 covers advertising. Section 31.205-14 covers
entertainment. Section 31.205-20 covers interest and other financial costs. CLC 056
Principle: FAR 31.205-2 is straightforward — no alcoholic beverage costs are
allowable under any circumstances. Common Error: Confusing the specific
subsection numbers within FAR 31.205.
Q6. Under FAR 31.205-6(p), what is the 2026 adjusted executive compensation cap
for allowability purposes?
, A. $1,000,000
B. $1,045,000
C. $1,078,497
D. $1,250,000
Correct Answer: C
Rationale: The Bipartisan Budget Act of 2025 established a base cap of $1,045,000,
indexed for inflation. The 2026 adjusted cap is $1,078,497. Distractor A reflects pre-
2012 caps. Distractor B is the unindexed base amount. Distractor D is fabricated. CLC
056 Principle: The executive compensation cap is annually adjusted; verify the
current year amount in examinations and negotiations. Common Error: Using
outdated cap amounts or confusing base with indexed figures.
Q7. Which of the following costs is unallowable under FAR 31.205-15?
A. Interest on borrowed capital
B. Fines and penalties
C. Independent research and development
D. Subcontract administration
Correct Answer: B
Rationale: FAR 31.205-15 makes fines and penalties resulting from violations of laws
and regulations unallowable. Interest is addressed in 31.205-20. IR&D is addressed in
31.205-18 (allowable with limitations). Subcontract administration is generally
allowable. CLC 056 Principle: Fines and penalties are unallowable regardless of
whether the contractor contests them; this is a bright-line rule. Common Error:
Believing contested fines might be allowable or confusing interest with fines.
Q8. A contractor incurs costs lobbying Congress for favorable legislation affecting its
industry. Under FAR 31.205-22, these costs are:
| Questions & Answers Updated | DAU Contract Pricing |
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Section 1: Cost Principles & Allowability (Q1-15)
Q1. Under FAR 31.201-2, which three criteria must a cost meet to be considered
allowable?
A. Reasonable, allocable, and documented
B. Reasonable, allocable, and not specifically unallowable per FAR 31.205
C. Direct, indirect, and material
D. Fixed, variable, and semi-variable
Correct Answer: B
Rationale: FAR 31.201-2 establishes that costs must be reasonable (31.201-3),
allocable (31.201-4), and not specifically unallowable under FAR 31.205 or other
applicable regulations. While documentation is important for support, it is not one of
the three statutory allowability criteria. Distractor A substitutes documentation for
the unallowability requirement. Distractors C and D confuse cost classification with
allowability criteria. CLC 056 Principle: Memorize the three-pronged allowability
test; documentation supports but does not replace statutory criteria. Common Error:
Confusing documentation requirements with the fundamental allowability tests.
Q2. Which standard requires that a cost not exceed that which would be incurred by
a prudent person in the conduct of competitive business?
A. Allocability
B. Reasonableness
C. Consistency
D. Compliance
,Correct Answer: B
Rationale: FAR 31.201-3 defines reasonableness using the "prudent person"
standard — costs must not exceed what a reasonable businessperson would incur
under similar circumstances. Allocability (A) requires causal-beneficial relationship to
the contract. Consistency (C) is a CAS requirement. Compliance (D) is general
regulatory adherence. CLC 056 Principle: Reasonableness = prudent person test; ask
"Would a reasonable businessperson incur this cost?" Common Error: Confusing
reasonableness with allocability or assuming all incurred costs are reasonable.
Q3. Under FAR 31.201-4, a cost is allocable to a government contract if it:
A. Is specifically identified in the contract line items
B. Is incurred specifically for the contract, benefits both the contract and other work
in proportion to benefits received, or is necessary to the overall operation of the
business
C. Is approved by the Contracting Officer in advance
D. Exceeds $100,000 in value
Correct Answer: B
Rationale: FAR 31.201-4 establishes three allocability tests: (1) incurred specifically
for the contract, (2) benefits both the contract and other work with allocation based
on relative benefits, or (3) necessary to the overall operation of the business.
Distractor A describes direct cost identification, not allocability. Distractor C confuses
advance approval with statutory criteria. Distractor D introduces an arbitrary dollar
threshold. CLC 056 Principle: The three allocability tests are foundational; most
indirect costs fall under test (2) or (3). Common Error: Believing allocability requires
specific contract mention or CO approval.
Q4. Which of the following costs is specifically unallowable under FAR 31.205-1?
A. Direct labor overtime premium
B. Advertising and public relations costs
,C. Direct material freight charges
D. Employee training expenses
Correct Answer: B
Rationale: FAR 31.205-1 specifically identifies advertising and public relations costs
as unallowable, with limited exceptions for recruitment advertising and trade show
participation directly benefiting specific contracts. Direct labor overtime (A) is
allowable under 31.205-6 if consistent with established policy. Direct material freight
(C) is allowable. Employee training (D) is generally allowable under 31.205-44. CLC
056 Principle: Memorize the FAR 31.205 unallowable cost list; advertising is among
the most commonly tested unallowables. Common Error: Assuming all business-
related costs are allowable or confusing allowable training with unallowable public
relations.
Q5. Which FAR 31.205 subsection specifically addresses the unallowability of
alcoholic beverages?
A. 31.205-1
B. 31.205-2
C. 31.205-14
D. 31.205-20
Correct Answer: B
Rationale: FAR 31.205-2 explicitly states that costs of alcoholic beverages are
unallowable. Section 31.205-1 covers advertising. Section 31.205-14 covers
entertainment. Section 31.205-20 covers interest and other financial costs. CLC 056
Principle: FAR 31.205-2 is straightforward — no alcoholic beverage costs are
allowable under any circumstances. Common Error: Confusing the specific
subsection numbers within FAR 31.205.
Q6. Under FAR 31.205-6(p), what is the 2026 adjusted executive compensation cap
for allowability purposes?
, A. $1,000,000
B. $1,045,000
C. $1,078,497
D. $1,250,000
Correct Answer: C
Rationale: The Bipartisan Budget Act of 2025 established a base cap of $1,045,000,
indexed for inflation. The 2026 adjusted cap is $1,078,497. Distractor A reflects pre-
2012 caps. Distractor B is the unindexed base amount. Distractor D is fabricated. CLC
056 Principle: The executive compensation cap is annually adjusted; verify the
current year amount in examinations and negotiations. Common Error: Using
outdated cap amounts or confusing base with indexed figures.
Q7. Which of the following costs is unallowable under FAR 31.205-15?
A. Interest on borrowed capital
B. Fines and penalties
C. Independent research and development
D. Subcontract administration
Correct Answer: B
Rationale: FAR 31.205-15 makes fines and penalties resulting from violations of laws
and regulations unallowable. Interest is addressed in 31.205-20. IR&D is addressed in
31.205-18 (allowable with limitations). Subcontract administration is generally
allowable. CLC 056 Principle: Fines and penalties are unallowable regardless of
whether the contractor contests them; this is a bright-line rule. Common Error:
Believing contested fines might be allowable or confusing interest with fines.
Q8. A contractor incurs costs lobbying Congress for favorable legislation affecting its
industry. Under FAR 31.205-22, these costs are:
