Employee Morale - Food and Dormitory Costs

Contractors who operate cafeterias for their employees need to be aware of the "food and dormitory  provisions of the Employee Morale cost principle (FAR 31.205-13) because often times, these cafeterias operate at a loss and charging off those losses to Government contracts is not always possible.

The allowability of food and dormitory losses are determined by the following three factors.

1. Losses from operating food and dormitory services are allowable only if the contractor's objective is to operate such services on a break-even basis.
2. Losses sustained because food services or lodging accommodations are furnished without charge or at prices or rates which obviously would not be conducive to the accomplishment of breaking even, are not allowable.
3. A loss may be allowed to the extent that the contractor can demonstrate that unusual circumstances exist such that even with efficient management, operating the services on a break-even basis would require charging inordinately high prices, or prices or rates higher than those charged by commercial establishments offering the same services in the same geographical areas. The following are examples of unusual circumstances.

• A contractor must provide food or dormitory services at remote locations where adequate commercial facilities are not reasonably available.
• The contractor's charged (but unproductive) labor costs would be excessive if the services were not available.
• If cessation or reduction of food or dormitory operations will not otherwise yield net cost savings.

When calculating the cost of food and dormitory services, contractors must include an allocable share of indirect expenses pertaining to these activities. If contractors fail to do it, the auditors certainly will. That policy was settled back in 1969 under a General Dynamics Board Case (ASBCA No. 12761).

Also, under that same Board case, the ASBCA ruled that offsets were allowable because of the word "aggregate". GD was losing money on its cafeteria but income from vending machines more than offset the losses. The Government challenged the cafeteria losses but the Board ruled that all forms of income and expenses must be considered in the aggregate.

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