Selected Costs Series, Part 9 (FAR 31.205-13, Employee Morale, etc.)

employee-motivation-1In the last post, we partied, but the government wasn’t paying for it because it was definitely ENTERTAINMENT.  Now, we may be able to party a little bit (as long as we don’t call it a party) and charge the government under the auspices of “morale.”  I am sure we have all seen or read or heard the line:

“The beatings will continue until morale improves.”

The government wants contractors to have environments in which employees are doing their best in order to provide the best quality to the government.  They aren’t quite wanting it to be on the order of the GSA morale-booster, but you get the point.

In all seriousness though, there are certainly legitimate functions a company may provide to its employees that would qualify as morale-boosters, team-building, etc.  The hard part is trying to figure out where the thin line is drawn.  Also included in this discussion is the topic of gifts, fitness clubs, food service… the list really goes on, but I have a few examples that I will note below in which the BCA denied appeals by the contractor for things like this.

FAR 31.205-13, Employee Morale, Health, Welfare, Food Service, and Dormitory Costs and Credits

Employee morale is defined as “activities designed to improve working conditions, employer-employee relations, employee morale, and employee performance.”  The cost principle even provides some examples:

  • House publications;
  • Health clinics;
  • Wellness/fitness centers;
  • Employee counseling services; and
  • Food and dormitory services for the contractor’s employees at or near the contractor’s facilities.

The problem is with the definitions of things like “wellness/fitness centers” and where to draw a line.  For example, in a recent conclusion by the BCA, Thomas Associates, Inc. (TAI) brought suit that some of its costs that were deemed expressly unallowable were indeed allowable.  In part of the decision,

TAI argues that the Pintail Point Club “is not a social or dining club” and its 2004 costs were for “wellness/fitness center” activities designed to improve its employee morale and performance, allowable under FAR 31.205-13(a). Respondent contends that the Pintail Point Club is not a fitness center contemplated by FAR 31.205-13(a), but is a hunting, fishing and sport shooting club, with a dining room and bed and breakfast accommodations available to the five TAI employees who had Pintail Point Club memberships in 2004. Thus, TAI’s membership cost was expressly unallowable as recreation per FAR 31.205-13(c), or as social, dining or country club entertainment per FAR 31.205-14.

Pintail Point Club made available to five TAI employees the amenities of sporting clay instruction, shooting, tournaments, a full-day fishing trip, a night at “Manor House Bed & Breakfast,” a one-time use of a banquet room and five rounds of golf. These Pintail Point Club amenities sufficiently correspond to those provided by “country clubs,” and bear no resemblance to a wellness/fitness center. We hold that respondent has sustained its burden of proof that TAI’s $9,908 corporate membership cost is expressly unallowable pursuant to FAR 31.205-14.

And let’s not try to even get into the whole “Christmas Party” versus “Employee of the Year Banquet” which was also part of this case.  Instead, let’s turn to the gift issue.

Now, I have to admit, I do have a slight problem with the decision made here, but as part of the larger picture, I am OK with the disallowance.  TAI held that providing flowers at times of significant events in an employee’s life served to improve working conditions and employee-employer relations as defined in 31.205-13(a).  Instead, the government turned to 31.205-13(b) and said it was an unallowable gift.  My thought is there was probably no policy in place to show that this would be done for all events – births, deaths, etc – for all employees and there was more to this story.  However, the “burden of proof that the flowers cost was expressly unallowable” was upheld.  OUCH!

It is also worth noting that the subscript to the unallowable gifts section of 31.205-13 is gifts are not awards for performance.  I think this is where the government tries to make the right push toward morale/team-building, but leaves it as a parenthetical aside instead.  Employee achievement should be recognized, so give your employee a watch or trinket, but let’s pass on the flowers for a birth or anniversary of employment.

I will end with recreation.  Rather than just closing the entire loophole, the regulation to further foster employee morale through the sanctioning of company-sponsored sports teams and the like, but disallows recreation.    I bet if TAI would have gone the route of company-sponsored loyalty and team work in relation to the Pintail Point Club, they may have made a better justification.  The auditor tried to disallow it because of 31.205-13(c), the contractor should have tried to get it allowed by the same token.


For some of these topics, I will admit it is probably the luck of the draw.  Whether a certain cost is selected to be audited or not is a matter of stat-sampling.  Whether a certain cost is questioned or not is a matter of auditor judgment.  Whether the cost gets into the final report or not is up to supervisory signoff.  Whether the CO agrees or not is up to the contractor relations at some level.  I try only to provide more insight into the types of costs and the types of questions you may be asked about.

About Marty Herbert

With 13 years of government contract administration, analysis, finance, and audit experience, I have established a firm baseline in ethics and a specialization in government contracts that has prepared me to become a subject matter expert in my field. I am currently working on enhancing government contracts management and compliance through workflow tools and product offerings - attempting to make the process proactive as opposed to reactive.
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