The FAR cost principle (FAR 31.205-51) on alcoholic beverages is only one sentence long: Cost of alcoholic beverages are unallowable. It was added to FAR in 1986 and until then, the cost of alcoholic beverages was often, if not generally, considered allowable, as long as the costs were also "reasonable". In fact, there was a Board of Contracts Appeals case that specifically ruled the cost of alcohol served at a company picnic was allowable.
Despite the brevity and straightforwardness of this cost principle, Government contractors continue to run afoul of the regulation. Usually this happens because contractors do not have adequate policies and procedures in place to identify, screen, and exclude such costs from proposals and billings. One area that auditors like to scrutinize is travel costs because historically they have found that many contractors do not have adequate or effective controls to exclude the cost of alcoholic beverages from travel costs paid directly or reimbursed to employees. It is not uncommon for employees traveling on company business to enjoy an adult beverage with their dinner. Some companies reimburse such costs and then exclude them from billings to the Government. Other contractors specifically prohibit the reimbursement of such costs. Either way, contractors must have adequate internal controls to ensure that such costs are not passed along to the Government.
If the costs of alcoholic beverages are found in the history used to forecast indirect rates or in direct or indirect costs billed to the Government, things often get messy. In fact, the time and resources (and penalties) contractors expend to resolve such occurrences are way in excess of any potential damages to the Government. We know of a case where the auditor found a small amount of alcohol costs in an indirect expense pool. The inclusion of the costs did not affect the claimed G&A rate. Yet the auditor questioned the costs, threatened to write the contractor up for internal control deficiencies, recommended the contracting officer assess penalties, and decided the contractor was also in noncompliance with CAS (Cost Accounting Standard) 405 for failing to exclude such costs. In this case, calmer heads (i.e. the contracting officer) stepped in but not before the Government and the contractor expended inordinate time and resources. This could have been avoided altogether if the contractor had had good internal controls in place.