Costs of recreation are unallowable, except for the costs of employees' participation in company sponsored sports teams or employee organizations designed to improve company loyalty, team work, or physical fitness. The three questions that contractors must ask themselves in order to determine cost allowability are:
- Is the cost for employee participation in a sports team or employee organization?
- Is the team or organization sponsored by the company?
- Is the team or organization's activity designed to improve
- company loyalty,
- team work, or
- physical fitness?
The expenditure must satisfy all three conditions - two out of three won't do it. Therefore, for example, it would be difficult under these standards to justify expenditures of recreational trips or even company picnics.
Sometimes, contractors will have an arrangement with employee associations whereby the associations can provide or operate certain services in the contractor's plant and retain the profits. Vending machines would be a good example of such a service. These profits must be treated in the same manner as if the contractor were providing the service. In other words, the profits cannot be used for employee morale costs that would be unallowable under this cost principle.
Contributions by the contractor to an employee organization, including funds from vending machine receipts or similar sources, are allowable only to the extent that the contractor demonstrates that an equivalent amount of the costs incurred by the employee organization would be allowable if directly incurred by the contractor.
Next: DCAA Guidance for Auditors Reviewing Employee Morale Costs.