The addition of cobalt was experimentally observed to increase the strength and impact toughness of Cu precipitation hardened steel. In order to understand the mechanism of this strengthening, we studied the effect of cobalt in the bulks and surfaces of bcc Fe and bcc Cu, as well as at the Fe/Cu interface by ab initio density-functional approach. We investigated the cobalt distribution between the Fe matrix and Cu precipitate, and found that cobalt is rejected from the core of the Cu particle. The calculated elastic constants and stacking fault energies show that cobalt does not produce any solid solution softening or hardening in bcc Fe. However, cobalt segregated in the interfacial region increases the cleavage fracture energies and cleavage stress of the Fe/Co/Cu interface. The compressive stress, which arises near the interface due to strong Fe-Co bonds, may serve as a barrier for dislocation motion through the interface resulting in additional hardening.