Last time we talked about Public Relations and Advertising.  Since the next Selected Cost has been “reserved” I will cover two in this post.  Looking at the brevity of the two costs being covered here, I really should go out to three.  However, a third really would make me include four since 31.205-5 is Reserved also.  Here are FAR 31.205-2 and 31.205-3.

[Reserved 12/31/96] Automatic Data Processing Equipment Leasing Costs

I was tempted to bypass FAR 31.205-2 altogether because it has been “reserved.”  Then I thought twice about it and realized the historic nature of it really could bear some discussion.  FAR 31.205-2 used to be titled “Automatic Data Processing Equipment Leasing Costs.”  Basically, prior to 1996, it was commonplace to lease ADP equipment or systems because it was more cost-effective (now companies just have IT departments).  This “selected cost” helped the government ensure this was the case.  Any costs that were not determined to be more beneficial to the government were excluded as unallowable.  This justification had to be done on an ANNUAL BASIS.

Bad Debts

Under FAR 31.205-3, a contractor may not charge the government for Bad Debts.  The bad debts provision here is a little deeper than just that first sentence, but that is it in a nutshell.  What contractors (and auditors on the other side) have to be aware of are the directly associated bad debts.

Clearly, it doesn’t make sense for a contractor to include the Bad Debt Expense in the incurred cost submission.  However, where do those costs come from?  A directly associated cost is one that is dependent upon the other cost and would not have been incurred had the directly associated cost not existed (Sorry for the sophomoric humor, but I originally used “but for” to describe this, but realized I have heard too many of those jokes).  So, the cost of collection activities (or other costs related to bad debts) is unallowable also.

Stay tuned next time as we dive into Bonding Costs and Civil Defense Costs [Reserved].