We frequently come across what we consider goofy audit positions. Of course, one of the things we do is to help contractors implement internal controls to reduce the occurrence of potentially unallowable costs and when a particular cost is challenged by the Government, provide advice and guidance on how to respond.
Sometimes the allowability of a particular cost is not black and white. There may be no FAR cost principle that discusses the allowability of the item. When there is no specific cost principle to apply and the contract is otherwise silent on the matter, contractors and the Government usually decide on "reasonableness".
Recently, we came across a situation where the Government questioned a contractor's purchase of bottled water. In this case, the cumulative cost turned out to be rather significant - evidently contractor employees were guzzling a lot of water. There being no specific cost principle that addresses the purchase of bottled water, the Government questioned the amount based on reasonableness. The city water supply was perfectly safe for drinking, therefore the cost to purchase bottled water was unreasonable and therefore unallowable under Government contracts.
Sometimes it is interesting, informative, and instructive to know the Government's policy in similar situations. In this case, given the same set of circumstances, would the Government purchase bottled water for its employees? Probably not. Back in 1961, the GAO ruled that a Government agency could not use appropriated funds to purchase bottled water. They ruled that bottled water generally does not materially contribute to an agency's mission accomplishment, and is ordinarily considered a personal expense. The decision did allow for some exceptions however. Where water is unhealthy or unpotable, agencies may buy bottled water.
There is also a DoD Regulation (FMR vol. 10, chapter 12, paragraph 120203) that governs the purchase of bottled water. Essentially, the regulation permits the purchase of water where the public water is unsafe or unavailable.
Note, the GAO decision and the DoD regulation do not apply directly to contracts. However, these can be and have been used by the Government to support a position of "unreasonableness". If the Government does not allow it for their own employees, is it reasonable to expect that contractors should be allowed to purchase it for their employees?