What counts as a recoverable cost under a defence contract?

This depends entirely on the specific contract terms, but typically includes labour, materials and an allocated proportion of overhead directly attributable to the contracted work — costs need to be clearly linked to the specific deliverable to be recoverable.

How does overhead allocation work for cost recovery purposes?

Overhead needs to be allocated to a contract using a consistent, defensible method — such as a proportion of total labour hours or total revenue — rather than an arbitrary figure, since this allocation can be reviewed under audit.

What documentation supports a cost recovery claim?

Time records linked to specific contract codes, supplier invoices coded to the relevant contract line item, and a consistent overhead allocation methodology applied across the life of the contract.

What happens if a cost recovery claim can't be substantiated?

Unsubstantiated claims can be disputed or rejected by the prime contractor or Defence, delaying payment, and repeated issues can affect the subcontractor's standing for future contract opportunities.

Cost Recovery and Reporting Under Defence Contracts

Published June 2026By True Tally Bookkeeping6 min read

Recoverable Doesn't Mean Automatic

A defence contract typically allows a subcontractor to recover specific categories of cost — but "recoverable" doesn't mean the prime contractor or Defence simply accepts whatever figure is submitted. Recovery depends on the cost being clearly, consistently linked to the specific contracted work, with documentation that supports the claim on review.

What Typically Counts as a Recoverable Cost

This varies by contract, but commonly includes direct labour time spent on the contracted work, materials specifically used for it, and an allocated proportion of overhead reasonably attributable to delivering it. The common thread across all of these is a clear, demonstrable link to the specific deliverable — a cost that's only loosely connected to the contract is far harder to defend as recoverable.

        The overhead allocation trap: overhead needs to be allocated using a consistent, defensible method — a proportion of total labour hours or total revenue, for example — applied the same way across the life of the contract. An allocation that changes method between claims invites questions.
      

What Documentation Actually Supports a Claim

Time records linked to contract codes — not general timesheets, but records tied specifically to the contract being claimed against
Supplier invoices coded to the relevant contract line item — at the point of entry, not reconstructed afterward
A consistent overhead allocation methodology — documented and applied the same way throughout

What Happens When a Claim Can't Be Substantiated

An unsubstantiated cost recovery claim can be disputed or rejected outright, delaying payment while the issue is resolved. Beyond the immediate financial impact, a pattern of weak substantiation can affect a subcontractor's standing for future contract opportunities — prime contractors and Defence both have long memories for suppliers whose claims don't hold up.

True Tally — substantiated cost recovery for Melbourne defence subcontractors

We set up consistent, defensible cost coding and overhead allocation from the start of a contract, so recovery claims hold up to scrutiny. Book a free call to review your current setup.

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Getting This Right Protects Future Work, Not Just Current Payment

Clean, well-substantiated cost recovery isn't just about getting paid correctly on the current contract — it's part of building the kind of track record that makes a subcontractor a lower-risk, more attractive partner for future defence work. Bookkeeping discipline here has commercial value well beyond the immediate claim.

True Tally Bookkeeping — Melbourne

Substantiated, audit-ready cost recovery protects both current payment and future tender eligibility. Let's review your current setup.

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