Entertainment Costs - Part 3

Today we finish off our short series on entertainment costs. In Part 1, we discussed the essence of the cost principle. In Part 2, we discussed some of the Board decisions (Boards of Contract Appeals) concerning entertainment costs. In this final part, we will take a look at some of the things that DCAA tells its auditors to be alert for when reviewing entertainment costs. Most of the following is found in DCAA Contract Audit Manual Section 7-1100.

In its guidance, the Agency repeatedly states that entertainment costs are expressly unallowable and auditors should never be dissuaded into believing that such costs might be allowable under competing cost principles. Contractors always have the obligation to adequately support all costs but in this case, DCAA emphasizes the requirement. If the Government challenges the allowability of claimed costs, it is the contractor's responsibility to establish that the cost is for an allowable activity.

Entertainment costs are expressly unallowable, without exception. Therefore, even if the principal purpose for incurring an entertainment is other than for entertainment, the entertainment cost is unallowable. For example, while the cost of a contractor open house for employee families is generally allowable, the cost of entertainment provided as part of the open house is unallowable. In this example, contractors would be expected to analyze cost and exclude unallowable costs from any proposal or claim to the Government.

The statutes and cost principles at 31.205-13 (Employee Morale) and 31.205-14 (Entertainment) are closely related. Taken together, the cost principles expressly disallow costs which some conntractors may have considered reasonable and allowable prior to the 1995 effective date of the current rule. Examples of such costs include, but are not limited to:

• Entertainment provided as part of public relations, employee relations, or corporate celebrations;
• Gifts to anyone who is not an employee;
• Gifts to employees which are not for performance or achievement or are not made according to an established plan or policy;
• Compensation awards of entertainment, including tickets to shows or sports events, or travel; and
• Recreational trips, shows, picnics, or parties.

Finally, auditors are specifically guided to look for entertainment costs that might be buried in other accounts. Accounts that are considered high risk for inclusion of potentially unallowable entertainment costs include:

• Public relations costs
• Business meetings