Entertainment vs. Employee Morale

Yesterday we discussed a recent ASBCA (Armed Services Board of Contract Appeals) decision where the judge sided with the Government on the question of whether certain costs included in an annual incurred cost submission, were specifically unallowable under FAR cost principles. Claiming those costs resulted in the imposition of penalties and interest. There are other aspects of the decision that are instructive for contractors in identifying unallowable costs.

There were five items of cost involved in this case. Four of those were questioned by the auditors as unallowable entertainment (FAR 31.205-14). The contractor claimed that these costs were incurred to improve employee morale, fitness and teamwork and therefore unallowable under FAR 31.205-13 (Employee Morale). These expenses included executive membership to a private club, concert tickets, flowers, and a Christmas party (that included alcohol). The ASBCA did not buy these "employee morale" arguments.

These two cost principals, employee morale (FAR 31.205-13) and entertainment (FAR 31.205-14) need to be considered in concert when deciding whether costs are allowable or not. From the Government's perspective, if the cost do not meet the narrowly defined activities included in employee morale cost principle, they will be inclined to categorized the costs as unallowable entertainment.

The DCAA Contract Audit Manual (DCAM) is quite emphatic, stating it this way:

By statute, entertainment costs are expressly unallowable, without exception. Consequently, the entertainment cost principle at FAR 31.205-14 takes precedence over any other cost principle.

DCAM further states:

Entertainment costs are expressly unallowable, without exception. Therefore, even if the principal purpose for incurring an entertainment cost 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.

If the Government can find a way to classify a cost as entertainment, it will do so. Sometimes, however, they are not correct in their assessment. The arguments proffered by the contractor in this case, seem sophomoric and doomed from the start. However, contractors should not be dissuaded by this case from claiming costs that are truly expenses related to employee morale.

You can read the full ASBCA decision here.