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.

Public Relations and Advertising Costs - Part 4

Today we're going to conclude our brief series on Advertising and Public Relations costs and their treatment under Government contracts. This has not been a particularly litigious area since the cost principle was revised in 1986. Prior to that, public relations costs were not specifically addressed in the FAR. In the early 80s, auditors were being very aggressive in their reviews of public relations costs and variously called them "advertising" or sometimes took exception based on "unreasonableness". There were Congressional hearings in 1984 where DCAA and GAO testified about the huge loopholes in the Advertising cost principle that allowed contractors to recover public relations costs. These hearings ultimately led to a significant revision to FAR 31.205-1 to include Public Relations costs in addition to Advertising.

Recent conflicts over allowability seem to focus on the term "primary purpose" about which we discussed yesterday. Depending upon the "primary purpose", the costs could be allowable or unallowable. Contract auditors will often try to build a case to show that the primary purpose was for unallowable activities. Usually however, the contracting officer, who has to adjudicate differences of opinion, are unable to sustain the audit position.

For many FAR cost principles, Agencies have, from time to time, adopted supplemental provisions. That is the case here with the Public Relations and Advertising cost principle. The DoD FAR Supplement (DFARS) adds additional prohibitions to what can be claimed under this cost principle.

Sometimes, Government contractors lease back some of the airplanes, tanks, or ships they build for the Government in order to display them at air shows and the like. The Government usually charges those contractors a leasing fee for the privilege. DFARS prohibits contractors from including those lease fee arrangements, including reimbursements for support services in their proposals and claims - even though the activity itself is allowable under other provisions of the FAR cost principle. This DFARS prohibition does not apply to FMS (Foreign Military Sales) which means that contractors affected by this prohibition will need to calculate separate rates for FMS.

There was a Board case (ASBCA or Armed Services Board of Contract Appeals) from 1973 that addressed the allowably of public relations costs (The Boeing Co., 73-2 BCA 10325). In this case, the Board found that costs incurred in connection with Boeing's 50th Anniversary celebration, including printing and postage expenses for a city-sponsored anniversary banquet, chartering a plane for dignitaries who would otherwise have been prevented from attending the banquet because of an airline strike, producing a movie and paying to have it broadcast on TV, were allowable public relations costs. This decision predates the FAR cost principle revision so it would need to be considered in light of current regulatory framework before using it as precedent.

If you missed the earlier postings in this series, use the following links:

• Part 1
• Part 2
• Part 3

Public Relations and Advertising Costs - Part 3

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:

1. 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.
2. 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.
3. 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.
4. Costs of ceremonies such as corporate celebrations and new product announcements.
5. 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.
6. Costs of souvenirs, models, imprinted clothing, buttons, and other mementos provided to customers or the public (note, it does not say "employees")
7. Costs of memberships in civic and community organizations.
8. 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.

Public Relations and Advertising Costs - Part 2

This is the second in our series on looking into what the Federal Acquisition Regulations have to say concerning the allowability of public relations and adverting costs (refer to FAR 31.205-1). Yesterday we laid out the definitions as FAR would have them. Its important that when contractors consider the allowability of costs, they do so using the correct definitions. The Government often times performs nomenclature reviews based on account titles and often questions entire accounts based simply on a name. Advertising is one of those. The Government sometimes throws out the entire account without analyzing any transactions. It could be that costs charged to, say, an account called "advertising" do not meet the FAR definition of "advertising" and therefore should not be evaluated using the criteria in this standard.

While most advertising costs are unallowable, FAR specifically lists cost that are allowable. These include:

1. Costs specifically required by contract, or that arise from requirements of Government contracts, and that are exclusively for
• Acquiring scarce items for contract performance, or
• Disposing of scrap or surplus materials acquired for contract performance
2. Costs of activities to promote sales of products normally sold to the U.S. Government, including trade shows, which contain a significant effort to promote exports from the United States. Such costs are allowable, notwithstanding restrictions listed elsewhere. However, such costs cannot include memorabilia, alcoholic beverages, entertainment, and physical facilities that are used primarily for entertainment rather than product promotion.
3. Allowable in accordance with FAR 31.205-34; essentially "help-wanted" advertising.

If a cost meets the definition of "advertising" and does not meet one of these "allowable" examples, the cost is unallowable.

FAR also specifically lists the type of public relations that are allowable under Government contracts. These include:

1. Costs specifically required by contract
2. Costs of
• Responding to inquiries on company policies and activities
• Communicating with the public press, stockholders, creditors, and customers, and
• Conducting general liaison with news media and Government public relations officers, to the extent that such activities are limited to communication and liaison necessary to keep the public informed on matters of public concern such as notice of contract awards, plant closings or openings, employee layoffs or retirees, financial information, etc
3. Costs of participation in community service activities (e.g. blood bank drives, charity drives, savings bond drives, disaster assistance, etc (but there are restrictions here that we'll discuss later).
4. Costs of plant tours and open house (also subject to restrictions discussed later)
5. Costs of keep laying, ship launching, commissioning, and roll-out ceremonies, to the extent specifically provided for by contract.

Tomorrow we will look at examples of unallowable public relations costs.

Public Relations and Advertising Costs - Part 1

This is the first of a four-part series on Public Relations and Advertising Costs. To read the subsequent entries in this series, follow these links:

• Part 2
• Part 3
• Part 4

Prior to 1986, FAR 31.205-1, Public Relations and Advertising Costs simply covered costs. In 1986, the standard was revised to include public relations costs in addition to advertising. The "advertising" component of this standard is relatively straight-forward. Most advertising costs are going to be unallowable. The "public relations" part is more complex and each case needs to be considered on its merits. The Government is fond of trying to force fit activities into the public relations definition when in fact, they don't meet the definition of public relations.

Over the next few days, we are going to unpack the FAR cost principle on Public Relations and Advertising costs. To begin, we need the FAR definition of the two terms.

Public relations means all functions and activities dedicated to

• Maintaining, protecting, and enhancing the image of a concern or its products, or
• Maintaining or promoting reciprocal understanding and favorable relations with the public at large, or any segment of the public 

The term public relations includes activities associated with areas such as advertising, customer relations, etc.

Advertising means the use of any media to (i) promote the sale of products or services and (ii) to accomplish activities required by contract, acquiring scarce items for contract performance, or disposing of surplus property and scrap. To be advertising, the advertiser must have control over the form and content of what will appear, the media in which it will appear, and when it will appear. Advertising media include but are not limited to conventions, exhibits, free goods, samples, magazines, newspapers, trade papers, direct mail, dealer cards, window displays, outdoor advertising, radio, and television. Today, we would add the "internet" to this listing of media.

Public relations and advertising costs include the cost of media time and space, purchased services performed by outside organizations, as well as the applicable portion of salaries, travel, and fringe benefits of employees engaged in the functions and activities meeting the definition of public relations and advertising. The later category of costs is something that many contractors overlook - they forget to exclude salaries and related fringe costs (as well as other directly associated costs) from their proposals and incurred cost submissions..

Tomorrow, part 2.