Entertainment Costs - Part 2

Yesterday, we introduced the FAR (Federal Acquisition Regulations) cost principle governing the allowability of entertainment costs. Entertainment is not allowable under Government contracts and entertainment by any other name is still unallowable. Thus, you cannot argue that some example of entertainment is good for employee morale and therefore is allowable under the employee morale cost principle (FAR 31.205-13).

Most forms of entertainment are obvious and Government contractors by and large do a pretty good job of identifying and excluding such costs from proposals and billings. However, there have been a number of board cases (Boards of Contract Appeals) that have had to decide whether a certain cost is a form of amusement, diversion, or social activity.

In one case, the city of Seattle wanted to honor Boeing's 50th anniversary with a banquet. Boeing paid for printing and mailing invitations. When the event was to take place, there was an airline strike so Boeing chartered an aircraft to bring important guests to the banquet. The Government took the position that the banquet was entertainment and therefore the cost of the invitations and mailings and the charter aircraft were directly associated to entertainment activities and therefore unallowable. The Board did not agree. The Board stated that Boeing did not plan the banquet but stepped in and did what a prudent businessman would do in the circumstances, considering the responsibilities to the owners of the business, his employees, his customers, the Government and public at large.

In another case, the Board sustained the Government's position that a luncheon for visiting businessmen and Government employees were unallowable entertainment expenses because the luncheons were not for dissemination of technical information or stimulating production.

In contrast to the previous ruling, the Board ruled in 1990 that the cost of luncheons and dinner meetings were allowable. The contractor had demonstrated that they had discussed business matters. Moreover, the amounts involved were modest, the meetings were not excessive in number and were reasonable in nature and amount.

Finally, in a case from 1991, the Board ruled that a company holiday party was unallowable entertainment because clients were invited and the primary purpose of the event was entertainment. The Board stated that "To be an allowable cost, it must be clearly documented that an event's purpose was to improve employee morale, that the event benefited employees and not outside participants (such as spouses or other non-government clients), and that the costs were reasonable".

The key point from these cases is that documentation is absolutely critical to fending off challenges to allowability. Secondarily, be careful who you invite to your business luncheons and dinners.  Contemporaneous records are the best evidence but, as illustrated in one of the cases described above, affidavits were used to prove that the luncheon served a business purpose.

Click here to go to Part 3