Government Regulations on Organizational Costs

Organizational costs are expenses incurred during “launch” states in a firm. These expenses typically include startup costs, attorney’s fees, incorporation or registration fees, and merger/acquisition fees. Organizational costs can be difficult to allocate to government contracts due to the unallowable nature of certain expenses. These expenses need to be scrutinized and classified as either allowable or unallowable in order to comply with government regulations. This process should be done by a qualified and knowledgeable accountant. TGG will be able to provide the expertise in determining these costs. In this article, we will walk through both allowable and unallowable organizational expenses.

Organizational costs charged to the government must meet three strict criteria: costs must be allocable, allowable, and reasonable. Government contracting revolves around one main focus, protecting the tax payer. The government has determined that if the tax payer is going to pay for any public works contract, the expense must be allocable to the project, allowable under the circumstance, and reasonable in nature. Costs incurred to acquire stock for executive bonuses, employee savings plans, and ESOP’s are allowed if they are directly tied to the contract/job.

All organizational costs are going to be scrutinized by the DCAA to determine allowablility. Costs incurred for planning, organizing or restructuring corporate structure are strictly unallowable. Unallowable restructuring costs include costs directed towards mergers and acquisitions, change in ownership, raising capital through long term debt and equity, incorporation fees, or broker consultant fees. It is important to note that costs involved with revolving credit are allowed to be expensed and charged to the government contract. If your company decides to sell or merge with another company, unallowable costs should be recorded immediately. If your company were to undergo a DCAA audit, the auditor would want a clear and concise allocation of unallowable expenses; a lack of unallowable expenses will immediately trigger the auditor to dig deeper into every expense billed on the contract. In order to properly record unallowable expenses, analyze when the “planning” starts. Planning usually begins when management starts to make initial decisions to merge/sell the company. Be sure to keep board minutes as back up to support your cost allocations.

It is important to note that fixed price contracts generally do not undergo the same scrutiny as variable or cost plus contracts. On a fixed price contract, you are paid specifically to perform a job or complete a project, individual costs are not charged back to the government. However, variable or cost plus contracts require special attention to cost allocation. Organizational costs can be tricky to allocate. Before charging any transaction to a government contract, always remember the three criteria: allowable, allocable, and reasonable. Government auditors do pay attention and specifically seek out unallowable cost allocation. Proper recording of organizational costs is just one of the steps necessary to make sure your company protects its own interest in obtaining/maintaining government contracts.

Written by:
Jake Cavanagh
TGG Accounting
Copyright 2011. Beason & Naley, Inc. Organization Costs FAR 31.205-27.

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