Overview
This section of the FAR defines the cost principles for specific categories of expenses, determining whether they are "allowable" (reimbursable by the government) or "unallowable." It focuses heavily on the criteria for public relations, advertising, bad debts, bonding, and the complex requirements for employee compensation and benefits.
Key Rules
- Public Relations and Advertising (31.205-1): Costs are generally unallowable if their primary purpose is to enhance a company's image or promote sales. Exceptions include costs specifically required by contract (e.g., recruiting scarce labor, disposing of scrap) and "general liaison" activities like responding to public inquiries or communicating with stockholders.
- Bad Debts (31.205-3): Losses arising from uncollectible accounts, including associated legal and collection costs, are strictly unallowable.
- Bonding Costs (31.205-4): Costs for bid, performance, payment, and fidelity bonds are allowable if required by the government or if they align with sound business practices and reasonable rates.
- Compensation for Personal Services (31.205-6):
- Reasonableness: Total compensation must be reasonable for the work performed and consistent with established, written company policies.
- Stock-Based Compensation: Any compensation calculated or valued based on changes in the price of corporate securities (e.g., stock options, SARs) is unallowable.
- Pensions: Costs must be measured and allocated according to Cost Accounting Standards (CAS) 412 and 413 and must generally be funded by the tax return deadline to be allowable.
- Bonuses: Allowable only if paid under an agreement entered into before services were rendered or pursuant to a consistently followed established plan.
- Personal Use: The portion of company-furnished automobile costs related to personal use is unallowable.
Practical Implications
- Audit Risk in Marketing: Contractors must carefully segregate technical documentation and export-promotion trade show costs from general brand-building and "memento" costs (like souvenirs or gifts), as the latter will be disallowed during a DCAA audit.
- Compensation Planning: Because the government does not recognize compensation based on stock price volatility, contractors must structure executive pay with a focus on allowable cash-based elements or specific performance metrics not tied to the stock market to ensure cost recovery.
- Documentation Necessity: The lack of a formal, consistently applied compensation plan can lead to a "presumption of unallowability" for pay raises or bonuses, making written internal policies critical for defense during cost negotiations.