What are Allowable Costs?

Allowable costs are those expenses specified in a contract that can be billed to the customer. These costs are usually capped at what is considered a reasonable amount; to verify that this is the case, allowable costs are frequently audited by the purchasing entity to ensure that they are reasonable. The concept is frequently applied to contracts in which the buyer is a government entity.

Example of Allowable Costs

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.