The following is an adaptation of a discussion I led in a recent workshop:
While preparing your proposed final indirect cost rate submission, you found a receipt for a bottle of champagne in Bob’s expense report file. What do you do with the cost of the champagne? That depends....
Example 1 - Whose Cost Was It? The receipt was included in Bob’s travel expense file, but the company reimbursed Bob for meals and incidental costs at the Government per diem allowance. The expense report showed that the champagne was not reimbursed separately. What do you do with the cost of the champagne? Nothing. The cost to the company of Bob’s travel meals and incidentals is the per diem paid to Bob. What Bob did with his allowance is irrelevant.
What Is Cost?
The total cost of a contract is defined at FAR 31.201-1 and includes direct and indirect costs whether allowable or not, but the word “cost” is not defined. The Oxford English Dictionary defines cost as “that which must be given or surrendered in order to acquire, produce, accomplish, or maintain something; the price paid for a thing.” In the example above, Bob’s trip, the “thing” acquired in this instance was accomplished by providing him with an allowance determined by the Government to be sufficient to purchase reasonable meals at his destination.
“That which must be surrenderd” is so often money that we will not discuss it, but let’s look at the ”thing” that may be acquired, produced, accomplished, or maintained.
Example 2 - Whose “Thing” Was It? The cost of Bob’s trip was reimbursed, in accordance with company policy, at actual cost, supported by receipts, and included the bottle of champagne. Because the company reimbursed the cost of the champagne, the cost of the champagne is part of the cost of accomplishing the trip. The trip is part of the cost of doing a project if charged directly to a project, or part of the cost of supporting operations if charged to overhead, or part of the cost of managing the company if charged to G&A. All of these direct and allocable indirect costs are part of the cost of Government contracts in accordance with FAR 31.201-1.
Assuming the cost of the champagne is recorded as an allowable cost, what should you do with it?
1. If the cost of the trip is charged to a commercial contract or to an indirect cost pool that is not allocable to Government contracts, no adjustment to reclassify the cost as unallowable is required because these are not costs, directly or indirectly, of Government contracts. In this case, the trip was not part of the Government’s “thing”.
2. If the cost of the trip is directly or indirectly allocable to Government contracts, the cost should be reclassified as unallowable. In this case, the trip was part of the Government’s “thing”, and the Government can specify in its contract what it will and will not pay to acquire it.
What Is The “Thing”?
The “thing” that may be acquired, produced, accomplished, or maintained may be determined at multiple levels: the dinner, the trip, the contract, or the indirect cost pool allocable to the contract; but, since FAR 31.205-51 makes the cost of alcoholic beverages unallowable, do we care about defining the broader “thing” being acquired?
Example 3 “A Broader “Thing” Being Acquired” Number 1: Bob bought the champagne for the launching of a ship, as was required under the terms of the contract. What do you do with the cost of the champagne? You record it in accordance with your established cost accounting practices, most likely as an allowable direct cost of the ship. This is an allowable activity in accordance with FAR 31.205-1. The “thing” being acquired is not an alcoholic beverage, but a long established naval tradition recognized even by the US Government.
This shows that the nature of the “thing” may have a determinative effect on the allowability of its cost. What do the components of the “thing” indicate about its nature?
Example 4 “Broader “Thing” Being Acquired” Number 2: Bob called a team meeting that required working through lunch. To support the meeting, Bob acquired a catered lunch of bologna sandwiches, pasta Bolognese, and champagne. The mere existence of the champagne is not determinative, but raises questions as to what was actually acquired. In this case, inquiries of the participants reveal that no business was accomplished in the alleged team meeting; it was, by all accounts, an entertainment. Bob acquired an unallowable “thing”. The cost of the champagne is part of the cost of the entertainment, which includes the champagne, the bologna sandwiches, the pasta, and perhaps the labor charges of the participants for the time before and after lunch. (Issues of total time reporting, use of leave, and making up the time spent on the entertainment would be factors in determining whether the time would have to be charged to unallowable cost or not.) The cost of the entertainment should be classified as unallowable.
The importance of alcoholic beverages lies in their being an indicator of the nature of the “thing” being acquired. Quite frankly, unless a contractor was filling swimming pools with the stuff, why would anyone care about the cost? However, the existence and the cost of the champagne, while not determinative, are important indicators of the nature of the “thing” being acquired.
Example 5 “Broader “Thing” Being Acquired” Number 3: Bob went on a business development trip to a foreign country to meet with a member of its government. It would have been rude not to bring a gift, and since this was an influential member of its government, skimping on the gift would have been unthinkable. So Bob bought a $1,500 bottle of champagne. Further inquiries under the direction of legal counsel disclosed that Bob’s trip was one of a series of trips and other purchases made in an effort to develop business with this country. Each of the trips and many of the other purchases included items that could be classified as personal luxury items which were available for the use of influential government officials. The “thing” being acquired appears to be the corruption of foreign government officials. The total cost of the “thing” acquired is not limited to the cost of the champagne. The amount and disposition of the cost should be determined with the aid of legal counsel. The existence of the champagne and the cost of it are indicators that it is not merely a bottle of champagne and that additional effort is required to determine exactly what it is and what should be done with it.
Conclusion: When is a bottle of champagne not just a bottle of champagne? Except when dining in certain European countries, it is almost never just a bottle of champagne.
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