Friday, September 26, 2014

Cost of Donating Excess Food Is not an Allowable Business Expense

Contracts greater than $25 thousand for the provision, service, or sale of food in the United States include FAR Clause 52.226-3, Promoting Excess Food Donation to Nonprofit Organization. This provision encourages contractors, to the maximum extent practicable and safe, to donate excess apparently wholesome food to nonprofit organizations that provide assistance to food-insecure people in the United States. The prescription for this clause comes from another FAR provision, FAR 26.4, Food Donations to Nonprofit Organizations.

That's a pretty nice gesture isn't it? After all, why throw away food that meets all quality and labeling standards but may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions? Contractors would probably donate their surplus food anyway (grocery stores donate food to local food banks all the time) without Government intervention but now, the Government is encouraging them to do it. How? How is the Government encouraging contractors to donate surplus food? That is a good question.

The only "encouragement" we can find in the relevant FAR passages is freedom from being sued. FAR exempts the Government and contractor personnel from civil and criminal liability to the extent provided under the Good Samaritan Food Donation Act (see 42 USC 1791). This means that if someone gets sick from eating donated food, they can't sue the Government or the contractor. We guess they could still sue the poor 501(c)(3) organization that distributed the food to the "food-insecure" people, but contractors, you're home free on this one.

Perhaps indemnification is not enough incentive or "encouragement". Maybe the contractor needs to be reimbursed for the cost and logistics of collecting, warehousing, transporting, maintaining the safety of, and distributing the food. That could get expensive. Certainly there is some incremental costs associated with these activities - we're not talking about fixed costs here. Reimbursing contractors for such costs would certainly encourage them to donate their surplus food. Yes, it would, but it isn't going to happen. FAR is not going to allow it.

FAR 31.205-1(f) lists eight specific public relations and advertising activities that are unallowable under Government contracts. The eighth item, added in 2009, disallows costs associated with the donation of excess food to nonprofit organizations in accordance with the Federal Food donation Act of 2008. That would, of course, include labor costs as well as transportation costs.

So from a contractor's perspective, there's not much here to "encourage" contractors to donate surplus food. If funds are tight, contractors are going to dispose of excess food in the most cost-efficient method, FAR or no FAR.

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