Chapter 6: Contract Structure, Page 44 and FAR 16

When the Government cannot provide sufficient, detailed information about a requirement, it must assume some of the cost risk and use a cost-reimbursement contract. Instead of paying a predefined price, the Government reimburses the contractor for all allowable, allocable, and reasonable costs, defined as follows:

• 
  Allowable costs — costs that are not prohibited by statute or regulation.
  
• 
  Allocable costs — costs that add value and are directly related to a particular contract.
  
• 
  Reasonable costs — costs that a prudent business person would pay.