The most popular business question going around is “What is Allowable vs. Unallowable under FAR?” Revolutionary Solutions is here to help. First, you must know that The Department of Defense (DoD), GSA, and the National Aeronautics and Space Administration (NASA) jointly issue the Federal Acquisition Regulation (FAR) for use by executive agencies in acquiring goods and services. This article will discuss a few sections of the Federal Acquisition Regulations, better known as FAR; specifically, FAR Part 31.205-10 through FAR 31.205-47. The following paragraphs are broken up by various FAR provisions to ensure that readers are not confused with the different clauses.
A common question that Revolutionary Solutions sees is whether contributions or donations are allowable under FAR allowable cost. The answer to this question is no. public relations and advertising costs, the only allowable public relations and advertising costs are ones that are “specifically required by the contract or that arise from requirements of Government Contracts.” However, you must also keep in mind that contingencies are possible. Future events or conditions that result in increased costs are unallowable.
Another popular question from accounting departments is regarding pricing. Accounting departments beg to know if actual interest cost in lieu of the calculated imputed cost of money is an allowable expense. The answer is no; this example would be an unallowable expense as you cannot tax interest to the government. More information can be found under FAR Part 31.205-10 under the Cost of Money.
FAR has a section called “Employee Morale, Health, Welfare, Dormitory and Foodservice” (31.205-13). This section discusses how gifts and recreation costs are unallowable. However, this does not include costs of employees partaking in company-sponsored sports teams or employee events; these events are designed to improve loyalty, teamwork, and fitness, helping your company and government employees grow positively.
Regarding Costs of Fines and Penalties found under FAR 31.205-15. It is important to remember that Costs of Fines and Penalties from failure to comply with federal, state, or local laws and regulations is unallowable, except when incurred as a result of compliance with terms and conditions of the contract. The critical part to remember is if it is not in the contract, it is unallowable.
Let us not forget to discuss Lobbying and Political Activity. Costs associated with lobbying, influencing, or supporting any political party or activity are unallowable. An example of this would be a company that tries to influence an agency or federal/state legislative law to write up documentation to change their outcome; they cannot charge for their time and effort. Those hours for your time cannot be billed to a contract. Therefore, under FAR 31.205-22, those costs would be unallowable. Additionally, in FAR 31.205-22 Section 6, Executive Lobbying Costs are also unallowable. “Costs incurred in attempting to improperly influence (see FAR 3.401), either directly or indirectly, an employee or officer of the executive branch of the Federal Government to give consideration or to act regarding a regulatory or contract matter are unallowable.” Therefore, if you are working to change laws, \these costs are unallowable. An example of this is a person writing to a member of Congress, urging them to vote against an amendment; it is a personal decision to urge them forward and is unallowable.
Another popular question regarding allowable and unallowable expenses includes Organization Costs. FAR 31.205-27 states “with the exception of activities intended to provided compensation for employees, all organizational expenditures in connection with (1) planning or executing the organization or reorganization of the corporate structure of a business, including mergers and acquisitions, (2) resisting or planning to resist the reorganization of the corporate structure of a business or a change in the controlling interest in the ownership of a business, and (3) raising capital (net worth plus long-term liabilities), are unallowable.” This means that anything to help the organization grow is unallowable, and you cannot bill the government for your time. For example, if a company decides to purchase a secondary company, all associated costs are unbillable. Accountants, lawyers, brokers, third-party vendors are your personal cost, and you cannot bill the government for their services.
Do not confuse this with Pre-Contract Costs. As stated in FAR, “Costs incurred before the effective date of the contract directly pursuant to the negotiation and in anticipation of the contract award when such incurrence is necessary to comply with the proposed contract delivery schedule. These costs are allowable to the extent that they would have been allowable if incurred after the date of the contract” (FAR 31.205-32). A translation of this would indicate that if a company needs to order materials before the contract’s effective date, this cost is allowable because you are ordering these specific materials for this contract. If your company decides to relocate, those costs are unallowable.
Did you know that costs such as loss on the sale of one’s home or things like realtor’s fees and commissions, insurance costs, etc. are unallowable? For a more specific list, see FAR 31.205-35 Section c. This is unallowable because this was your personal decision unless the contract specifies differently due to place of performance relocation.
Lastly, Revolutionary Solutions would like to inform you that Costs related to Legal and Other Proceedings are also unallowable. Costs incurred in connection with any proceeding brought by a Federal, State, local, or a foreign government for violation of, or a failure to comply with, law or regulation by the contractor (including its agents or employees), or costs incurred in connection with any proceeding brought by a third party in the name of the United States under the False Claims Act, which results in a criminal or civil proceeding, or a conviction, are unallowable, as specified in FAR 31.205-47. However, these costs can be allowable to the extent it relates to the written contract.
Please note this information is provided for reference only. Please contact your tax accountant for further guidance. If you have additional questions regarding allowable and unallowable FAR costs, please contact us.