Advertising and Public Relations Costs

The investment in advertising and public relations costs is one many business owners are willing to make. These costs often provide a return on investment, ultimately helping to grow your business. As a government contractor though, these costs can cause quite the headache. The classification of Advertising and public relations costs can be tricky for government contractors. Knowing the distinction between allowable and unallowable costs can help you remain compliant, while reaping many benefits.

Advertising is ‘the use of media to promote the sale of products or services.’ Examples of advertising media are magazines, newspapers, conventions, and direct mail. Public relations are ‘all functions and activities dedicated to maintaining, protecting, and enhancing the company image or maintaining or promoting favorable relations with the public.’ Public relations include activities that relate to advertising and customer relations. Advertising and public relations costs include:

• Costs of media time and space
• Purchase of services outside organizations perform
• Applicable portion of salaries, travel and fringe benefits of employees that engage in the functions and activities that FAR 31.205-1 identifies.

Allowability of Advertising and Public Relations Costs

When determining the allowability of advertising and public relations costs a basic rule of thumb exists. If these costs relate to benefiting the government, then they are most likely allowable. If not, they are unallowable. Government contractors often take a conservative approach to these costs and classify them as unallowable. However, in doing this they take the chance of not recouping the costs from the government.

The Federal Acquisition Regulation (FAR) sets specific guidelines to determine the allowability of these costs. Advertising costs are allowable only if FAR 31.205-1(d) indicates they are. Allowable advertising costs include:

• Costs that arise from requirements of government contracts
• Costs to promote sales of products normally sold to the U.S. government
• Costs that are allowable in accordance with FAR 31.205-34

The guidelines for allowable public relations costs include that they must be a requirement for contracts. Also, there are other guidelines for these costs to be allowable that FAR 31.205-1(e) addresses. Examples of allowable public relations costs are:

• Responding to inquiries about a company’s policies
• Communicating with the public
• Costs of participation in community service activities such as blood bank drives and disaster assistance.

Unallowable Advertising and Public Relations Costs

These costs can, however, also be unallowable. FAR 31.205-1(f) provides guidance for the determination of unallowable costs. If a cost does not meet the requirements above, then it is unallowable. Some common examples of these unallowable costs are:

• Events that do not focus on the promotion of sales to the government
• Costs of corporate celebrations
• Cost of promotional material

Understanding the aspects of advertising and public relation costs is imperative as a government contractor. These costs can be tricky for government contractors. The misclassification of them can negatively impact your business. Having a team of experts to provide you with guidance can help ‘tackle’ this challenging subject.

Originally written by Jamie M. Shryock, CPA

Updated and additional content provided by Elizabeth Partlow

Common Problems for the Incurred Cost Submission

The Federal Acquisition Regulations (FAR) requires government contractors with certain contracts to submit an incurred cost submission (ICS). FAR 52.216-7 requires contractors who have time and material (T&M) or cost-reimbursable contracts to submit an ICS. The ICS schedules reconcile a contractor’s billings with the government. It does this by calculating the final indirect cost rates contractors incur. Government contractors have six months to submit an ICS after their fiscal year is over.

An ICS can be an overwhelming task to complete. The ICS model includes several schedules. Each of these schedules takes time, and usually many documents to complete. With at least fifteen schedules to complete, common problems may happen.

Job Cost Errors

As a government contractor, it is important to classify costs correctly. Therefore, classifying costs as direct, fringe, overhead, general & administrative, and unallowable is necessary. The proper classification minimizes the reporting errors of costs on the ICS schedules.

Segregating costs, such as allowable and unallowable costs, also prevents government contractors from incurring any penalties. The FAR clause 52.242-3 describes how contractors may face penalties as a result of including unallowable costs in their indirect cost pools.

Similarly, the job cost ledger not reconciling with the general ledger is another common problem for the ICS. Examples of why the two ledgers do not reconcile are:

• Not assigning direct costs to a job
• Assigning direct costs to a customer, not to a specific job
• Tagging indirect costs to a job

Invoice Errors

It is important to make sure invoicing for government contracts is done correctly. However, there are different requirements for each type of contract. Some contracts include restrictions or limits on the invoicing for certain costs. On the other hand, other contracts may require to invoice at negotiated rates. Common errors that occur during the invoicing process are:

• T&M contracts are not billed at negotiated rates
• T&M contracts are billed with labor rates and hours as lump sums
• Cost reimbursable contracts are billed like a T&M project.

In addition, over or under billings may exist on Schedule I as a result of job costs or invoicing errors. Due to this, the government contractor may owe the government money, or vice versa.

In conclusion, completing an incurred cost submission is necessary if government contractors have cost reimbursable or T&M contracts. Your virtual CFO should be proactive during the year to help minimize errors when completing an ICS. Ultimately, working having a virtual CFO who specializes in government contracting is the best.

Originally written by Jamie M. Shryock, CPA 

Updated and additional content provided by Elizabeth Partlow