Recruitment Costs

The subject of recruiting costs is getting increased attention by Government auditors, especially as it pertains to the use of employment agencies and "head hunters". In past blog posts, we've danced around the allowability of certain types of recruiting costs. For example, see this one from March 2010 and this one from September 2010. However, neither of these posts dealt comprehensively with the cost principle.

The cost principle itself is fairly brief and straight-forward. Under FAR 31.205-34, the following types of recruiting costs are allowable:

1. Cost of help-wanted advertising as long as it describes specific positions or classes of positions and does not include extensive illustrations or descriptions of the company's products or capabilities.
2. Costs of operating an employment office needed to secure and maintain an adequate labor force.
3. Costs of operating an aptitude and educational testing program.
4. Travel costs of employees engaged in recruiting personnel.
5. Travel costs of applicants for interviews.
6. Costs for employment agencies, not in excess of standard commercial rates.

In reviewing costs for item 1, help-wanted advertising, auditors must often exercise judgment as to whether the cost is for advertising specifically to fill vacant positions or is more for advertising the company's products. Companies can be very clever and creative in dressing up general advertising to look like help-wanted. Auditors are pretty good at differentiating the two.

Item 6, employment agencies (and "head-hunters") is another area that auditors like to spend time. Auditors know from experience that contractors often fail to document that claimed costs do not exceed standard commercial rates. This failure could lead to questioned costs and possibly the application of penalties. Part of the problem is that there doesn't seem to be standard commercial rates in the employment agency industry and therefore it is difficult to fix a baseline for comparison purposes. Contractors then need to subject employment agency contracts to the same rigorous purchasing system practices that it would for purchased parts, subcontracted items, and other support services. There should be a complete audit trail showing how cost reasonableness was assured.