Government Contracts Monitor

Employee “Morale” Costs Under the FAR – “Lunch Wagons” are OK but a $10,000 Holiday Party with a Jazz Ensemble is Not

November 9, 2012

The Armed Services Board of Contract Appeals (ASBCA) recently ruled on an appeal of a decision by the Defense Contract Management Agency (“DCMA”) regarding allowable costs under the FAR.  Although the case involves a relatively small amount of money, it is instructive regarding the types of indirect costs that are allowable and chargeable to the Government.

In Thomas Associates, Inc., ASBCA No. 57795, Thomas Associates (“Thomas”), an 8(a) small business, was awarded an indefinite quantity contract with the Naval Surface War Centers in Panama City, Florida and Dahlgren, Virginia.  Thomas submitted to the Defense Contract Audit Agency (“DCAA”) a Certificate of Final Indirect Costs pursuant to the FAR.   DCAA questioned $33,890 in unallowable overhead costs and $4,498 in unallowable general and administrative (“G&A”) costs.  By the terms of the contracts, the government participation percentages of the overhead and G&A costs resulted in $13,096 of total unallowable costs.

The Board listed the specific items of Thomas’s costs that were not allowable:  (1) $9,908 for a hunting club “corporate deluxe” membership, which included sporting clay instruction, shooting, tournaments, a full-day fishing trip, a night at a bed and breakfast, use of a banquet room, and five rounds of golf; (2) $9,848 for a holiday party at the Chesapeake Bay Beach Club in Maryland for 38 employees and 43 guests, which included limousine transportation, and a full meal with liquor and wine; (3) $1,500 for the U.S. Naval Academy’s “Unified Jazz Ensemble” to play at the holiday party; (4) $138.58 in flowers sent to employees, and (5) $16,215 for office rent charged unallowably by Thomas’s principal, who owned the leased office building in her personal capacity.

Regarding the hunting club membership and related activities, the holiday party, and the jazz ensemble, Thomas alleged that the costs were allowable as a “wellness/fitness center” and “employee morale costs,” noting that the holiday party was the one event where all employees gathered together and the “Employee of the Year” award was given.  Additionally, Thomas argued that the jazz ensemble was an allowable cost because hiring the Naval Academy’s ensemble demonstrated support for the Navy, Thomas’s most significant customer.

The Board cited FAR 31.205-13, which sets forth the allowable costs for employee morale, health and welfare.  The FAR cites examples of such allowable costs, such as “health clinics, welfare/fitness centers, employee counseling services, food and dormitory services . . . operating or furnishing facilities for cafeterias, dining rooms, canteens, lunch wagons . . . ,” or “similar types of services.”  The Board also cited FAR 31.205-14, which states that “[c]osts of amusement, diversions, social activities, and any directly associated costs such as tickets to shows or sports events, meals, lodging rentals transportation, and gratuities are unallowable.”  That FAR section also explicitly disallows memberships in country clubs.

The Board held that the hunting club membership bore “no resemblance to a wellness/fitness center,” and the amenities were more consistent with unallowable country club membership costs. With respect to the holiday party, the Board held that the party was not an employee morale event, but rather an unallowable social event, noting that of the 26 hours of holiday party activities, the corporate meeting took at most two hours, and the majority of the attendees were guests, thereby underscoring its social aspect.  With respect to the Naval Academy’s jazz ensemble, the Board held that notwithstanding the fact that the jazz was played by Navy cadets, the cost was an unallowable entertainment cost.  With respect to the flowers, the Board held that even though the cost of the flowers was de minimus, they were still an unallowable gift. Finally, regarding the unallowable rent costs, the Board held that because the principal owned the building in her personal capacity, only the normal ownership costs are permitted under the FAR, and anything above those costs was unallowable.  Therefore, the Board denied the appeal and affirmed the DCMA’s determinations.

Although a small case, this case is instructive regarding the types of costs that are allowable and those that are not.  Contractors can buy their employees a sandwich for lunch and even get them gym
memberships, but country club memberships, fishing, golf, holiday parties, and finely played jazz, as morale-boosting as they may be, cannot be passed along as costs to the Government.

 

Brian Stolarz is the attorney responsible for the content of this article.