Recruitment Costs

The subject of recruiting costs is getting increased attention by Government auditors, especially as it pertains to the use of employment agencies and "head hunters". In past blog posts, we've danced around the allowability of certain types of recruiting costs. For example, see this one from March 2010 and this one from September 2010. However, neither of these posts dealt comprehensively with the cost principle.

The cost principle itself is fairly brief and straight-forward. Under FAR 31.205-34, the following types of recruiting costs are allowable:

1. Cost of help-wanted advertising as long as it describes specific positions or classes of positions and does not include extensive illustrations or descriptions of the company's products or capabilities.
2. Costs of operating an employment office needed to secure and maintain an adequate labor force.
3. Costs of operating an aptitude and educational testing program.
4. Travel costs of employees engaged in recruiting personnel.
5. Travel costs of applicants for interviews.
6. Costs for employment agencies, not in excess of standard commercial rates.

In reviewing costs for item 1, help-wanted advertising, auditors must often exercise judgment as to whether the cost is for advertising specifically to fill vacant positions or is more for advertising the company's products. Companies can be very clever and creative in dressing up general advertising to look like help-wanted. Auditors are pretty good at differentiating the two.

Item 6, employment agencies (and "head-hunters") is another area that auditors like to spend time. Auditors know from experience that contractors often fail to document that claimed costs do not exceed standard commercial rates. This failure could lead to questioned costs and possibly the application of penalties. Part of the problem is that there doesn't seem to be standard commercial rates in the employment agency industry and therefore it is difficult to fix a baseline for comparison purposes. Contractors then need to subject employment agency contracts to the same rigorous purchasing system practices that it would for purchased parts, subcontracted items, and other support services. There should be a complete audit trail showing how cost reasonableness was assured.

"Help Wanted" Advertising Costs

FAR Part 31 addresses advertising costs in two areas. In FAR 31.205-1 (Public Relations and Advertising Costs) advertising is generally unallowable. There are a few listed exceptions but generally, most advertising is unallowable. However, over in FAR 31.205-34 (Recruitment Costs), the cost of "help wanted" advertising is specifically allowable as long as it meets certain criteria. Some companies are unaware of the "help wanted" exception to advertising costs and categorize it and all other advertising as unallowable. Others leave "help wanted" advertising costs in their proposals, billings, and incurred cost submissions without understanding the specific allowability criteria. That is not good because it opens the possibility of being penalized for claiming unallowable costs.

According to FAR 31.205-34 "help wanted" advertising is allowable unless it

1. Does not describe specific positions or classes of positions, or
2. Includes materials that is not relevant for recruitment purposes, such as extensive illustrations or descriptions of the company's products or capabilities

So, for example, advertising aimed at building a backlog of resumes, rather than filling specific job openings would be unallowable. So would the cost of glossy ads in trade journals that only tangentially reference job openings (e.g. "come join our team" or "for employment information, call...").

Generally, if you limit "help wanted" advertising to the following information, you should be safe:

• Description of the position(s) being offered.
• Description of the compensation and fringe benefits.
• Qualifications of the applicant(s).
• Opportunities for advancement.
• Brief description of the company and its work.
• Pertinent illustrations, conservative in size, that do not evidence promotion of the sale of the contractor's products or fostering of its image.
• Name of the company, conservatively presented in relation to the other information in the advertisement.

Concerning "help wanted" advertising, DCAA has added "reasonableness" criteria to the guidance it offers its auditors when reviewing those costs.  

Advertising which is excessive in relation to the number and importance of the positions, or in relation to the practices of the industry, is unreasonable and therefore unallowable. Inherent in any such determination is not only the size of a particular advertisement in a publication, but also the length and frequency of recruitment advertising in all media (including radio and television). Consideration must also be given to the effectiveness of the advertising program in terms of responses by qualified personnel and the number of hires. This is an area in which technical assistance from the administrative contracting officer can be most useful.

This "reasonableness" criteria does not come from the recruitment cost principle. It is inferred from other guidelines that require costs charged to Government contracts to be reasonable. The guidance is highly subjective but contractors are not likely to encounter this level of scrutiny unless the costs were very significant.

Prior to 1999, cost of "help-wanted" advertising designed to pirate employees away from other Government contractors was unallowable. Also prior to 1999, the cost of color advertising was unallowable but black and white was okay.