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Revisiting Unallowable Costs versus Employee Discontent

By Jacqueline M. Weir

Some say it’s the little things that go a long way.  For years, companies provided tickets to local sporting events, held holiday parties and sponsored awarded ceremonies to say “thank you” to their employees.  Until 1995, the cost of such events were generally allowable and recoverable as “indirect costs” under the Federal Acquisition Register (FAR) cost principles, provided they met the test of reasonableness.  Costs incurred to promote employee morale, health and welfare were “allowable” in calculating a company’s government overhead rate under FAR 31.205-13.

Since 1995, the government amended the cost principles to specifically disallow company holiday parties and picnics,  The new regulations reclassified these costs as “entertainment costs” under FAR 31.205-14 and disallowed them as they do any other cost of amusement or social activity.  Because of today’s competitive environment, it’s important to control your unallowable costs; many companies have considered eliminating events. 

What should a company do?  Give up these old traditions and eliminate past events that are positive to morale?  I hope not.  Here is my list of the top events that are both fun for employees and allowable under the FARs. 

• Team building and leadership events can replace traditional company outings.  The company can sponsor scavenger hunts or sporting teams, which relieve stress, motivate employees, and are allowable under the FARs.
• Retreats can be held away from the office.  Business meetings are allowable costs when reasonable and can be fun and productive.  Meeting places now have exercise facilities, spas, and other distractions employees can enjoy after hours.
• Individual improvement programs can be a tool that demonstrates the company’s appreciation.  A training program or tuition reimbursement plan to further an employee’s career benefits both the employer and employee.

Whatever you decide, keep your employees involved.  An Employee Moral Committee representing a cross-section of the company’s employees will allow all to have a say in replacing old events with new, allowable events.  The cost of enhancing employee morale, health and welfare is still allowable under the FARs if it’s reasonable.  The goal is to keep employee morale high and unallowable costs low. 

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