This is the third in our series on public relations and advertising costs. We have been examining how such costs are treated by the FAR (Federal Acquisition Regulations) cost principles, particularly FAR 31.205-1, Public Relations and Advertising Costs. If you've been involved in Government contracting for awhile, you probably think that advertising is unallowable as is the cost of most public relations efforts. That's because, for the most part, such costs are unallowable. However, there are two things to consider. First, the cost must meet the FAR definitions of advertising and public relations (see Part 1) and then, FAR provides some examples of advertising and public relations costs that are specifically allowable (see Part 2). Sometimes, Government auditors see an account entitled "Advertising" and simply question the total account without looking into the detailed transactions that make up the account. Don't let them do their quick and dirty analysis. Make sure the review transactions in the account(s).
After defining public relations and advertising and then listing related activities that are allowable, FAR 31.205-1 lists eight different public relations and/or advertising activities that are specifically unallowable. These activities include:
- All public relations and advertising costs, other than those specified in Part 2 of this series, whose primary purpose is to promote the sale of products or services by stimulating interest in a product or product line, or by disseminating messages calling favorable attention to the contractor for purposes of enhancing the company image to sell the company's products or services.
- All costs of trade shows and other special events which do not contain a significant effort to promote the export sales of products normally sold to the U.S. Government.
- Costs of sponsoring meetings, conventions, symposium, seminars, and other special events when the principal purpose of the event is other than dissemination of technical information or stimulation of production.
- Costs of ceremonies such as corporate celebrations and new product announcements.
- Costs of promotional material, motion pictures, videotapes, brochures, handouts, magazines, and other media that are designed to call favorable attention to the contractor and its activities.
- Costs of souvenirs, models, imprinted clothing, buttons, and other mementos provided to customers or the public (note, it does not say "employees")
- Costs of memberships in civic and community organizations.
- Costs associated with the donation of excess food to nonprofit organizations in accordance with the Federal Food Donation Act of 2008 (this applies only to contracts for the provision, service, or sale of food in the United States).
We underscored the terms "primary purpose" and "principle purpose" in the foregoing listing for a purpose. Some activities are dual purposed. Web sites come to mind. Certainly there is an element of public relations and advertising inherent in most websites. However, websites are also used to disseminate technical information, for customers (including the Government) to place orders, to inform the public, or to provide contact information. So, what is the "primary purpose" of a company website? And who's going to make that call? Perhaps someday, this area will be litigated but so far, we haven't seen the Government take aggressive stances against the cost of websites.
Tomorrow we will look at a couple of board cases where public relations and advertising costs were considered.