What’s in This Article:
Understanding Advertising and Public Relations Costs
Recording Allowable and Unallowable Costs
Understanding Advertising and Public Relations Costs
Many companies incur advertising and public relations costs. For government contractors, the complication comes in determining whether these costs are allowable under the Federal Acquisition Regulation (FAR).
A common approach is to assume all advertising and public relations expenses are unallowable. While this may seem like the safest option, some costs can be allowable under specific circumstances.
If an allowable cost is incorrectly classified as unallowable, it may be excluded from the contractor’s indirect cost calculations and applicable government billings. On the other hand, treating an unallowable cost as allowable can lead to questioned costs and compliance issues.
To avoid these problems, there are several steps contractors can take.
Understand the Terminology
The best place to start is with the definitions provided in FAR 31.205-1.
Public relations generally includes activities intended to maintain or improve a company’s image or its relationships with the public.
Advertising refers to the use of media to promote products or services, including publications, direct mail, exhibits, and other promotional activities.
The FAR also considers related expenses, such as outside services, employee compensation, and travel associated with advertising and public relations activities.
Understanding the purpose of the expense is important when determining whether it is allowable.
Analyze the Parameters
After reviewing the definitions, the next step is to consider the specific circumstances under which advertising and public relations costs may be allowable.
Under FAR 31.205-1(d), allowable advertising costs are limited to certain activities, including:
- Advertising specifically required by a government contract or arising from contract requirements exclusively to acquire scarce items or dispose of scrap or surplus materials acquired for contract performance.
- Activities promoting products normally sold to the U.S. Government, including qualifying trade shows, when they involve a significant effort to promote U.S. export sales.
- Certain recruiting-related advertising costs allowable under FAR 31.205-34.
Allowable public relations costs under FAR 31.205-1(e) can include:
- Activities specifically required by a contract.
- Responding to inquiries about company policies and activities.
- Communicating with the public, press, customers, creditors, and stockholders.
- Certain communications involving matters of public concern, such as contract awards or business operations.
- Participation in certain community service activities.
- Plant tours and open houses, subject to applicable restrictions.
These are specific exceptions, not a general allowance for marketing to government customers.
What Is Really Unallowable?
Another important step, which is sometimes overlooked, is reviewing the costs that the FAR specifically identifies as unallowable.
Under FAR 31.205-1(f), these generally include:
- Advertising intended primarily to promote sales or improve the company’s image to sell its products or services, except where a specific FAR exception applies.
- Trade shows and special events that do not meet the applicable export-promotion exception.
- Corporate celebrations and new product announcement ceremonies.
- Promotional brochures, videos, and other materials intended to draw favorable attention to the company.
- Souvenirs and promotional items such as branded mugs, pens, or clothing distributed to customers or the public.
- Certain event sponsorships and civic or community organization memberships.
For example, attending a trade show to attract more government customers does not, by itself, make the expense allowable. The event must meet an applicable FAR exception.
Contractors should review the complete regulation before classifying an advertising or public relations expense.
Recording Allowable and Unallowable Costs
Once an expense appears to qualify under FAR 31.205-1, there is another important step.
FAR 31.201-2, Determining Allowability, establishes general requirements that apply to contract costs. Among other things, costs must be reasonable, allocable, consistent with applicable accounting standards and practices, and compliant with the contract terms.
Contractors are responsible for maintaining documentation supporting the allowability of their costs.
An expense that is unallowable for government contract purposes should still be recorded in the company’s accounting records. However, it must be properly identified and excluded from costs charged to the government, including applicable indirect cost calculations.
Misclassifying advertising and public relations costs can affect billing, budgeting, indirect rates, and proposals.
Knowing the rules is important, but applying them correctly is just as important. When in doubt about how to record an expense, consult an accountant familiar with government contract cost principles.
At Cheryl Jefferson & Associates, we help government contractors understand cost allowability and maintain compliant accounting practices. Learn more about our Government Contract Consulting services or contact CJA to discuss your accounting needs.
Frequently Asked Questions
Are advertising costs allowable under government contracts?
Generally, advertising costs are unallowable unless they meet one of the specific exceptions in FAR 31.205-1 or another applicable FAR provision.
Are trade show expenses allowable for government contractors?
Not automatically. FAR 31.205-1 provides a limited exception for certain activities involving significant efforts to promote U.S. export sales of products normally sold to the government.
Should unallowable advertising expenses still be recorded?
Yes. They should be recorded in the company’s accounting records but properly identified and excluded from costs charged to the government.
