Most Government contractors and potential contractors figure that some expenses should not be included in proposals or picked up by taxpayer dollars. We usually omit alcohol and entertainment from requests for payments of Government funds.
Many types of expenses are either unallowable or unsupportable and typically excluded from recommended costs by Government Auditors and Cost Analysts. These are not always obvious from descriptions in Part 31 of the FAR. Common examples are discussed below.
Although Advertising is specifically unallowable, we do not always equate our company website with advertising. The Government does. Registration, design, maintenance, keyword enrichment, and all other costs related to the company website are unallowable as advertising.
Note that costs to create and maintain any Intranet website (or portion of a website), which is intended only for internal (e.g., employees’) access – such as password-protected areas with policies, procedures, and forms for H.R. or purchasing or other functions – are allowable.
Business mileage at the GSA mileage rate is allowable. Simply document the date and purpose of each business trip, with the number of miles claimed. This supporting documentation uses a mileage rate that includes oil, gas, depreciation, and all other vehicle costs.
Note that trips from home to work and from work to home are personal and excluded from business mileage.
Charges for specific vehicle costs represent one hundred percent of the costs for a vehicle. Unless the vehicle is only used for business (See Note, above.), the next step is to track documented support of the portion used for business (excluding personal mileage). How do we satisfy Government Auditors?
Document the odometer reading at the beginning of each month and at the end of each month. For each business trip, track (document) the following information:
- Date of trip
- Purpose of trip
- Odometer at start
- Odometer at end
- Number of miles
Show calculations of the sum of all business-trip mileage for the month, total (odometer readings) mileage for the month, and the portion that is business mileage.
For each charge related to the vehicle, show the business portion. If the entire charge is paid by the company, the non-business portion is recorded as unallowable. The business portion, for each vehicle, is calculated (separately) and applied each month.
Meals and Food
Allowable meals fall into one of two categories: travel meals or business meetings. Actual restaurant and grocery charges are not acceptable for travel meals. Travel meals are proposed and recorded at GSA per diem rates. The net amount of actual charge minus per diem is unallowable.
Remember that per diem meals are charged at seventy-five percent (75%) on the first and the last day of travel. No per diem meals are charged for travel of less than 12 hours.
Other meals incurred for a business purpose usually coincide with a business meeting. A business meeting includes an employment candidate interview and a State of the Company staff meeting.
Except while on travel and absent a business meeting, the cost of food and meals is unallowable. For example, the company might choose to buy a meal for employees as incentive to work through – rather than go out for – lunch when an important deadline approaches. This cost is unallowable.
Actual restaurant charges support the cost of business meetings. The detailed receipt shows what was purchased, not merely that it was purchased, to verify that alcohol (and other unallowable costs) is excluded from allowable transactions. Neither per diem rates nor ceilings (except for reasonableness) apply.
If supported as a business meeting, a business meeting can replace a meal during a business trip.
Business Purchases for Person
Regardless whether charged on a company credit card, the costs of personal items are not allowable. These include business-related items such as computer peripherals (including chargers) not exclusively for company use, a coat required for business travel, and a briefcase.
To be allowable, employee bonuses must be given to all employees in a class. A class of employees can have any objective parameters. Examples are all exempt full-time salaried, all employees with more than five continuous years of employment with the company, and all hourly wage earners.
Also, to be allowable, employee bonuses must be calculated on objective bases. One-half percent of annual salary is objective. One percent of revenue (income) for which the recipient was the Project Manager is objective. Ten dollars for every earned but not used hour of PTO is objective. A percentage of annual company sales is objective. These can be verified by an Auditor as yes-no, on-off, objective criteria.
When not on objective bases, the entire bonus is unallowable. Examples are bonuses:
- Dependent upon an employee evaluation; the evaluation is subjective and reflects the opinions of the author
- Judgmentally established by any person(s)
- Not equally distributed to all employees in a class
To avoid the appearance of subjective bonuses, establish a policy that details how each bonus is calculated, by class of employee, and specifically when the bonus is issued. The calculations may use ranges, such as all monthly sales between $50,000.00 and $99,999.99, for which the recipient was the Project Manager, result in a $250 bonus; monthly sales between $100,000.00 and $199,999.99 result in a bonus of $500; and monthly sales of $200,000.00 or more result in a bonus of $1,000. The bonus is issued with the first regular payroll after December 31 of each year, for the previous 12 months.
Life Insurance on Executives
Fringe Benefits might include company-paid premiums on life insurance for employees. All employees in a class of employees have access to the same benefits as other employees in their class.
In addition, the company might pay for life insurance on certain executives. For “going concern” continuity, the beneficiary is the company. For such a policy, where the beneficiary is other than the company, the cost of premiums in unallowable.
So, you do your customer a favor by investing employee labor in the project, in excess of the ceiling specified by the contract. You were in the middle of something when the hours ran out – so you chose to exceed the ceiling or fixed number of hours.
That is excess labor. It was invested in that one project, so is Direct Labor; it is not G&A Labor or Overhead Labor or any other indirect cost. It benefits only that one project, and (like under-ceiling labor) is charged to Direct Labor.
It cannot be billed or recorded (in the general ledger) as allowable on the contract. Excess labor is unallowable.
In addition, that labor – like any other labor – causes expenses for Fringe Benefits and all other indirect expenses normally absorbed by Direct Labor. All of the indirect expenses absorbed by unallowable labor is also unallowable.
Not so eager to do favors for your customer, huh?
Generally, contractual awards funded by the Government require adherence to the Joint Travel Regulations (JTR). The JTR requires adherence to GSA rules. GSA rules encompass mileage rates for vehicles, including automobiles; meals per diem for travel status of more than 12 hours; and lodging ceilings, which do not include taxes, hotel parking, or other necessary related-charges.
This is an area of particular focus for Government Auditors, because it typically represents both high dollars and fertile ground. The following costs are unallowable:
- Mileage for or in place of travel from home to work and from work to home
- Meals per diem, when that meal is furnished elsewhere (e.g., provided by the seminar or host, or claimed as a business meeting)
- 25% of meals per diem on the first and last day of travel
- Unreceipted lodging (Note that Lodging per diem is a ceiling, not a fixed amount.)
- Gifts to a host in lieu of lodging
The meals per diem includes incidentals; no additional costs for bottled water or other incidentals may be added as allowable. Mileage rates include oil, gasoline, and all other costs of ownership; no such costs in addition to mileage may be added as allowable. When actual lodging exceeds the lodging ceiling rate, the same portion of taxes, hotel parking, and other lodging-related costs are unallowable as the portion of actual (excess of allowable) lodging costs.