Allowable vs. Unallowable PR and Advertising Costs

Section 31 of government contracts goes over contract cost principles and procedures. Section 31.205-1 is specifically related to Public Relations and Advertising. A key part in government contracts is being able to understand and determine which costs are allowable and unallowable. I will first go over the unallowable public relations and advertising costs, followed by allowable costs, and finish with a few examples.

Section 31.205-1 states that in general, public relations and advertising costs are unallowable if: the primary purpose is to promote the sale of products or services by stimulating interest in product, calling favorable attention to the company, or enhancing the company image to sell the company’s products.

Section 31.205-1 explains that the only allowable advertising costs are those that are specifically required by contract – the acquisition of scarce items or disposal of scrap or surplus items, recruiting needed personnel, or promoting the sales of products as exports normally sold to the U.S. Government including trade shows but excluding gifts, souvenirs, entertainment, or company image items. In regards to public relations, costs are allowable if they are required by contract, if costs are incurred by responding to inquiries on company policy or communicating with media liaison, the press, or stockholders. Costs for participating in community service related activities such as charity drives, disaster relief, blood drives, etc. are allowable costs for public relations, as well as plant tours or open houses.

Once you understand which costs for public relations and advertising are allowable and unallowable, there can still be some difficulty in determining if the costs are allowable. A prime example would be trade shows. As mentioned above, trade shows are allowable advertising costs; unless the emphasis is not on the export sales of products normally sold to the government. Other public relations and advertising costs that are unallowable would include promotional materials, brochures, souvenirs, and other such items whose purpose is promote products or the company image. Company celebrations and new product announcements are also unallowable costs.

Another interesting area that could cause costs to be unallowable if you do not have a clear understanding of advertising costs is with how you handle recruiting. As stated above, advertising to recruit needed personnel is an allowable advertising cost. If you were to put an ad in the local newspaper looking to hire an employee with a specific set of skills to help fulfill on the contract, the costs associated with placing that ad would be allowable. However, if the advertisement to recruit generally only promotes the company image, that cost will be deemed unallowable.

When it comes to public relations and advertising in government contracts, be sure that you understand completely which costs are allowable and unallowable. Trade shows and recruiting needed personnel are allowable costs, but having promotional materials at a trade show or a few choice words in a recruiting ad can easily make those costs unallowable. If you are ever uncertain on if a cost may be allowable or unallowable, seek professional help. Our staff here at TGG can help simplify these rules.

Written by:
Alex Messina
TGG Accounting

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