Many Government contractors have on-site cafeterias for their employees where it makes economic sense to do so. Obviously, there needs to be quite a few (potential) users of such services, the cost to employees must be reasonable, quality must be descent, and there needs to be a variety of daily offerings. A nice atmosphere helps as well. If its too expensive, the quality is diminished or there is not enough variety, employees will migrate to off-site establishments or perhaps, bring their own lunches.
Most contractors providing cafeteria services do not try and operate the facilities themselves. There are many food service providers (e.g. Aramark, Guckenheimer, and a host of regional companies) that provide such services more efficiently and cost-effective than can be performed in-house. Some contractors will subsidize food services and this is where things get a little contentious when contract auditors start asking questions.
The FAR cost principles at 31.205-13 has something to say about cafeteria losses. Essentially, losses from operating cafeterias will be allowed only if the contractor's objective is to operate such services on a break-even basis (there are a couple of exceptions that we'll get to in a moment). That should be fairly easy to figure out, right? Contract with a food service provider, to come in and operate your cafeteria at no cost to the company; easy.
But its not that easy at all. You see, contract auditors are going to want to add in "occupancy costs" (and they're correct). That would include the facilities, utilities, depreciation, repair and maintenance, taxes, janitorial, and any other kind of directly associated costs they can conjure up. Adding in the cost of facilities, which are often significant, make is more difficult to prove intent to operate at break-even.
FAR does allow cafeteria losses in limited situations. A loss may be allowable, provided the contractor can demonstrate that unusual circumstances exist such that even with efficient management, operating the service on a break-even basis would require charging inordinately high prices or prices higher than those charged by commercial establishments. Examples of unusual circumstances include (i) adequate commercial facilities are not available and (ii) reasonable prices are a necessary incentive to keep employees on-site to avoid the more significant costs of lost productive time due to longer lunch periods.
When cafeteria losses are claimed, it is always the contractor's responsibility to demonstrate that unusual circumstances exist and to provide sufficient supporting documentation. This could be difficult but would probably include price comparisons with similar commercial establishments or the distance to off-site restaurants. Contractors having cafeteria facilities can always expect contract auditors to inquire concerning the break-even analysis. Failure to sufficiently justify cafeteria losses will always result in questioned costs.