We review bid and proposal cost structures across dozens of small contractor books every year. In roughly 80% of first-time compliance reviews, the same three problems appear: proposal labor is either missing from the books entirely, lumped into a single G&A line with no project codes, or miscoded as marketing. Every one of those patterns is a DCAA audit finding waiting to happen.
Bid and proposal costs under FAR 31.205-18 are fully allowable as indirect costs. The regulation requires no government approval, no caps, and no win/loss distinction. Every reasonable dollar spent preparing, submitting, or supporting a specific bid or proposal is recoverable through your indirect rates. The catch is tracking and classification, not allowability.
The misclassification rate is high because B&P sits at the intersection of three cost principles that look similar: FAR 31.205-18 (B&P), FAR 31.205-1 (advertising and public relations), and FAR 31.205-38 (selling costs). Getting the boundary wrong costs money in two directions. Misclassified B&P gets questioned out of your rate. Unallowable selling or marketing costs hiding inside a B&P pool trigger penalties under FAR 42.709-2.
B&P Cost Allowability Under FAR 31.205-18
Bid and proposal costs are allowable as indirect expenses when they are allocable and reasonable [FAR 31.205-18]. The cost principle covers all costs incurred in preparing, submitting, and supporting bids and proposals, whether or not solicited and whether or not a contract results. The prior dollar cap was eliminated by regulation. No cap applies today. Costs must be accumulated at the project level under CAS 9904.420-40(b) and allocated on the same base as G&A, unless a separately approved allocation base applies.
What FAR 31.205-18 Covers (and What It Does Not)
FAR 31.205-18 covers the costs of preparing, submitting, and supporting bids and proposals on potential government or non-government contracts. The scope is broader than most contractors assume. Solicited and unsolicited bids both qualify. Proposals for new work and proposals for follow-on work both qualify. Winning and losing proposals both qualify.
The allowability test is the standard three-part test [FAR 31.201-2, FAR 31.201-3, FAR 31.201-4]: allocable, reasonable, and not specifically disallowed by regulation or contract terms.
| Cost Type | Allowable Under FAR 31.205-18? | Governing Rule |
|---|---|---|
| Labor writing the proposal (all staff) | Yes | FAR 31.205-18 |
| Executive time on proposal strategy | Yes (must be captured) | FAR 31.205-18 |
| Subcontractor teaming costs | Yes, if tied to specific proposal | FAR 31.205-18 |
| Proposal graphics and printing | Yes | FAR 31.205-18 |
| Time deciding whether to bid | No (marketing cost) | FAR 31.205-1 (unallowable) |
| Trade show attendance | No | FAR 31.205-1 (unallowable) |
| Capabilities brochures | No | FAR 31.205-1 (unallowable) |
| Sales calls not tied to a specific bid | No (selling cost) | FAR 31.205-38 (generally unallowable) |
FAR 31.205-18 also covers independent research and development under the same provision (the clause is titled IR&D and B&P). Both share allowability rules, CAS 420 requirements, and the DFARS major-contractor threshold, but live in separate project accounts. The prior dollar cap has been eliminated by regulation; every allocable, reasonable B&P dollar is recoverable.
The Classification Boundary: B&P vs. Marketing vs. Selling
The B&P/marketing/selling distinction is the single most common source of audit findings on this cost element. Three cost principles govern costs in this area, and the boundaries are specific, not intuitive. Every hour coded to a B&P project must be defensible against this test.
FAR 31.205-18 (B&P): Costs tied to a specific bid or proposal document. The government or a potential teaming partner asked for a submission, or you decided to submit. Time spent writing, pricing, reviewing, and supporting that specific document is B&P.
FAR 31.205-38 (Selling): Direct selling costs (person-to-person contact to induce a particular purchase) are generally allowable. Broader selling activities (market research, customer event sponsorships) are generally unallowable. FAR 31.205-38 cross-references FAR 31.205-18 for proposal-specific costs.
FAR 31.205-1 (Advertising and public relations): Image-building, brand promotion, and trade show attendance are unallowable. General promotional activities fall here, not under B&P.
The practical decision tree works through three questions in sequence:
| Question | Yes Answer | No Answer |
|---|---|---|
| Is the work tied to a specific, identified bid or proposal document? | Proceed to next question | Not B&P. Evaluate under FAR 31.205-38 or FAR 31.205-1 |
| Has the contractor made the decision to bid (go/no-go complete)? | B&P cost under FAR 31.205-18 | Marketing cost. Unallowable under FAR 31.205-1 |
| Is the cost reasonable and allocable to the business unit? | Allowable B&P | Disallowed. Fails FAR 31.201-3 or FAR 31.201-4 |
The go/no-go decision point is where most misclassifications happen. A business development manager spends three days reviewing a solicitation, evaluating the competition, and assessing the firm’s win probability before the partners decide whether to pursue. Those three days are marketing costs. The work product is an internal decision, not a proposal.
Costs incurred after the go decision are B&P. The timestamp on the go decision is the line. Auditors ask for it during floor checks, and contractors who cannot produce it face reclassification of pre-go costs to marketing.
CAS 420: Project-Level Accumulation
CAS 9904.420-40(b) requires that each B&P effort be tracked as a separate project. Project costs include all costs allocable to the B&P effort except business-unit G&A. Direct labor, fringe, and overhead all flow into each B&P project. G&A is allocated after the fact, at the pool level, not at the project level.
DCAA auditors test B&P project codes during floor checks. A contractor with one G&A-level B&P pool and no project-level tracking is noncompliant with CAS 420 regardless of whether the dollar amounts are correct. The structure fails, not the numbers.
CAS 9904.420-50(a) governs measurement: direct-equivalent costs plus overhead and other indirect costs flow into each project. The allocation base for B&P costs must match the G&A allocation base unless a special allocation is approved [CAS 9904.420]. Switching bases between fiscal years without disclosure violates CAS 401 (consistency in estimating, accumulating, and reporting costs).
A documented finding: a contractor tracked initial proposal costs on a total cost input base, then later lumped B&P into the engineering overhead pool allocated over direct engineering labor. The inconsistency drew a CAS 420 and CAS 401 noncompliance finding.
For cost classification purposes, B&P is an indirect cost. It belongs in the G&A pool or a separate B&P pool, never direct-charged to a contract, with one narrow exception covered in the audit findings section below.
DFARS 231.205-18: The Major-Contractor Threshold
DFARS 231.205-18 supplements the base FAR rule with a reporting requirement for large DoD contractors. A major contractor is defined as one whose combined IR&D and B&P costs allocated to covered DoD contracts exceed $11 million in the prior fiscal year [DFARS 231.205-18]. Segments allocating fewer than $1.1 million in combined IR&D and B&P to covered contracts are excluded from the calculation.
This threshold matters because the consequence is not a paperwork requirement. IR&D costs become unallowable if the contractor crosses the major-contractor threshold and fails to report IR&D projects to the Defense Technical Information Center (DTIC) within three months after the contractor’s fiscal year end [DFARS 231.205-18]. When those costs are included in an indirect cost proposal and are expressly unallowable, penalty provisions apply under FAR 42.709-2, including the disallowed amount plus interest, and doubled penalties for costs previously determined unallowable on the same contractor [FAR 42.709-4].
| Factor | Detail |
|---|---|
| Major-contractor threshold | Combined IR&D + B&P allocated to covered DoD contracts exceeds $11M in prior FY [DFARS 231.205-18] |
| Segment exclusion | Segments allocating under $1.1M combined IR&D + B&P to covered contracts are excluded from the calculation |
| What gets reported to DTIC | IR&D projects only (B&P projects are not submitted to DTIC) |
| Reporting deadline | No later than 3 months after end of contractor fiscal year |
| Consequence of non-reporting | IR&D costs become unallowable; expressly unallowable costs trigger penalties under FAR 42.709-2 and FAR 42.709-4 |
| DTIC portal | Defense Innovation Marketplace (defenseinnovationmarketplace.dtic.mil) |
A critical precision point: only IR&D projects are submitted to DTIC, not B&P projects. But the $11M threshold counts both combined. A contractor with $7M in IR&D and $5M in B&P crosses the threshold; that contractor must report its IR&D projects to DTIC within three months of fiscal year end or the $7M in IR&D becomes unallowable. The $5M in B&P triggered the obligation even though B&P itself has no DTIC submission requirement.
Tracking Bid and Proposal Costs in QuickBooks
CAS 420 requires project-level accumulation. In QuickBooks, the structure is a customer:job hierarchy where each proposal pursuit gets its own job. The job code follows a consistent pattern: B&P plus an opportunity descriptor (for example, B&P-Army-Logistics-RFP-FY26).
The setup mirrors the chart of accounts structure used for direct contracts with one critical difference: proposal labor never touches a billable contract. Every hour coded to a B&P job is indirect. The job code is the audit trail; the indirect rate structure handles allocation.
The executive time problem deserves specific attention. When a CEO, CFO, or business development vice president works on a proposal, those hours must hit the B&P project code. Missing executive time depresses B&P costs and inflates G&A in ways auditors test during floor checks by interviewing executives directly. If the CEO spent 20 hours on the executive summary, those 20 hours belong in the B&P project at the CEO’s fully-loaded rate.
See the indirect rate stacking article for a full walkthrough of how B&P costs flow through fringe, overhead, and G&A pools to final cost objectives.
Top Audit Findings on B&P
DCAA’s Selected Areas of Cost Guidebook, Chapter 33 documents the most common B&P findings. These patterns repeat across small contractor reviews, and each one has a clear fix.
| Finding | What Auditors See | Fix |
|---|---|---|
| No project-level B&P accumulation | All proposal labor in a single G&A overhead line [CAS 9904.420] | Create a separate job code for each pursuit in QuickBooks |
| Marketing costs booked as B&P | Pre-go/no-go labor, brochures, trade shows in B&P pool | Document the go/no-go date; recode pre-go costs to marketing (unallowable) |
| Executive time missing | CEO and VP hours absent from proposal project despite confirmed participation | Mandate executive time entry to B&P jobs; test with direct interviews |
| Unallowable costs in B&P pool | Trade show costs, PR expenses, or advertising traced to B&P project codes | Segregate into FAR 31.205-1 unallowable cost center |
| B&P in wrong pool | B&P expenses in engineering overhead, allocated over direct engineering labor | Move B&P to G&A pool; align allocation base [CAS 420] |
| Inconsistent allocation base | B&P allocated on TCI one year, value-added the next, no disclosure | Lock the allocation base; amend CAS Disclosure Statement if CAS-covered [CAS 401] |
| Direct-charged proposal costs without authority | IDIQ task-order proposal labor charged directly to a contract, no written policy | Document authority in written accounting policies; limit to post-go-ahead window |
| DTIC non-reporting (major contractors) | IR&D costs claimed as allowable; no DTIC submission within 3 months of FY end | Assign DTIC reporting ownership; calendar the deadline; verify submission |
The direct-charge exception for IDIQ task orders requires its own compliance structure. Common practice for cost-reimbursement contractors with IDIQ vehicles is to permit direct treatment of proposal costs only when four conditions are met: the costs are classified as B&P, the contractor’s written accounting policies authorize direct treatment, the contract requires the submission, and the costs are limited to the window between the government’s go-ahead and the proposal submission date. Verify the applicable source (DCAA Selected Areas of Cost Guidebook, Chapter 33 or specific FAR/agency guidance) before relying on this framework in a written accounting policy.
Contractors with DCAA-adequate accounting systems build the direct-charge B&P policy into their written accounting procedures and test it annually. For contractors entering the cost proposal phase of a new pursuit, B&P tracking must be in place before the first hour is logged.
Frequently Asked Questions
Are bid and proposal costs allowable on government contracts?
Yes. Under FAR 31.205-18, bid and proposal costs are allowable as indirect costs when they are allocable and reasonable. The prior dollar cap was eliminated by regulation. Every reasonable dollar tied to preparing, submitting, or supporting a specific bid is recoverable through indirect rates. Allowability does not depend on winning the contract.
What is the difference between B&P costs and marketing costs?
B&P costs under FAR 31.205-18 are tied to a specific bid or proposal document prepared after the contractor decides to pursue the opportunity. Marketing costs, governed by FAR 31.205-1, include time spent deciding whether to bid and general promotional activities. Costs incurred before the go/no-go decision are marketing, not B&P, and are generally unallowable.
Do B&P costs need to be reported to DTIC?
No. B&P projects are not submitted to DTIC. Only IR&D projects require DTIC reporting. However, B&P costs count toward the $11M combined IR&D plus B&P threshold under DFARS 231.205-18. If that threshold is crossed, the contractor must report its IR&D projects to DTIC within three months of fiscal year end or risk IR&D costs becoming unallowable.
How do I track bid and proposal costs in QuickBooks?
Set up each pursuit as a Customer:Job coded as B&P plus an opportunity descriptor. Have all staff, including executives, log proposal time to that job daily. Labor flows through fringe and overhead at the project level, and the total B&P pool allocates through G&A to all final cost objectives. Never charge proposal time to a billable contract without written direct-charge authority.
Are unsuccessful proposal costs still recoverable?
Yes. FAR 31.205-18 contains no win/loss distinction. Costs incurred preparing, submitting, and supporting a bid are allowable whether or not a contract results. Unsuccessful proposals are recoverable through indirect rates as long as the underlying costs were reasonable, properly classified, and accumulated at the project level under CAS 9904.420-40(b).
Key Takeaways
- Bid and proposal costs under FAR 31.205-18 are fully allowable as indirect costs when allocable and reasonable. The prior dollar cap was eliminated by regulation. Winning or losing the bid does not affect allowability.
- The go/no-go decision date is the line between B&P and marketing. Costs incurred before that decision are marketing, not B&P [FAR 31.205-1]. Document the go decision in writing before logging the first proposal hour.
- CAS 9904.420-40(b) requires project-level accumulation. Each pursuit needs its own job code. Lumping all proposal labor into a single G&A line is a CAS 420 noncompliance finding even if the dollar amounts are correct.
- Major contractors (combined IR&D plus B&P over $11M on covered DoD contracts) must report IR&D projects to DTIC within three months of fiscal year end [DFARS 231.205-18]. Missing the deadline makes IR&D costs unallowable. If those costs are included in an indirect cost proposal as expressly unallowable, penalty provisions apply under FAR 42.709-2 and FAR 42.709-4.
- Executive time on proposals must be captured. Missing CEO and VP hours depresses B&P costs, inflates G&A, and fails the DCAA floor check when auditors interview executives directly.
Unsure whether your B&P tracking structure holds up under DCAA accounting system standards? Review the accounting system checklist to see what auditors test. For a full review of your indirect rate structure and B&P classification, book a discovery call with our CPA-managed team. We also cover the broader FAR 31.205 unallowable cost framework and how B&P interacts with it.
