of FAR under which the allowability of the related costs should be determined are dis-cussed below.
a. Employee Welfare and Industrial Relations
(1) The most common publications of this type are regularly issued newspapers or magazines. These publications generally provide information as to events of interest within the organization or of the employ-ees' outside activities. Although there are frequently articles on company achieve-ments, the intent here is to instill a feeling of accomplishment rather than to advertise.
Other industrial relations publications in-corporate information on available em-ployee benefits, safety, and education. Dis-tribution of the above types of publications is usually limited to immediate employees and/or their families. The related costs of the foregoing publications are considered allowable under FAR 31.205-13.
(2) Recruitment pamphlets which are used primarily to explain the available fringe benefits to prospective employees should be considered in conjunction with the review of help wanted advertisements and as such are allowable under FAR 31.205-1 subject to the limitations of FAR 31.205-34 (see 7-2104).
b. Professional and Technical Articles (1) These publications are disseminated to a professional or technical type audience and generally take the form of dissertations on technical subjects that are related to the contractor's products or activities. This type of publication has generated much of DoD's interest in contractors' house publi-cations. In most instances the costs of pub-lishing such material can better be related to professional activity costs since they are the result of, or are copies of, papers deliv-ered at professional meetings. Others are reprints of magazine articles of scientific interest.
(2) In evaluating individual publications of this nature, difficulty may be experi-enced in determining whether they should be classified as capability advertising or as technical treatises. Some difficulties will normally arise where there are subtle, even though infrequent, references to the con-tractor. Where such references are the only questionable aspect of the publication, it
would be extremely difficult to support a position that these references necessitate consideration of the publication as an ad-vertisement. Therefore, to the extent that the publication costs incidental to technical presentations at meetings and conferences and reprinting such technical papers for use in contractors' house publications are rea-sonable and allocable, and can be con-strued as dissemination of technical infor-mation rather than advertising, such publications are considered allowable within the intent of FAR 31.205-43.
c. Selling, Marketing, and Advertising In those instances where the material provides little or no technical assistance to the recipient and is distributed to all cus-tomers and/or potential cuscus-tomers, the cost should be treated as advertising (FAR 1) or selling costs (FAR 31.205-38). More specific guidance in determining the allowability of selling costs is in 7-1300. Advertising costs of this nature are unallowable (see 7-1202.2a).
d. Contractor and Product Capability Promotional Items
(1) These differ from normal selling, marketing, and advertising publications in that they stress the superior capabilities of the contractor's facilities and/or personnel in research and/or development of new products. They may also advertise achievements of the contractor, but gener-ally do not supply detailed technical data.
Advertising costs of this nature are unal-lowable under FAR 31.205-1(f) (see 7-1202.2a). Accordingly, such costs should not be accepted under cost-type contracts and should be questioned in advisory audit reports for price negotiation purposes.
(2) Certain publications can be clearly identified as capability advertising; how-ever, in some cases publications that pro-vide technical data necessary for equip-ment operation may include some descriptive data that could be construed as capability advertising if taken out of con-text. The primary purpose of the publica-tion and type of distribupublica-tion, such as, oper-ating manuals delivered with the equipment, would be the significant factor in determining allowability.
e. Public Relations
This category includes pictures, de-cals, and promotional material that
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phasize the contractor's accomplishments in producing equipment or providing ser-vices. They do not contribute to the per-formance of the Government contracts, even if they are related to items produced under such contracts, but merely serve to enhance the contractor's reputation. The costs of such items are unallowable (see 7-1202.2).
7-1205 Contractor Logos and Emblems 7-1205.1 Contracting Officers' Position A common practice for a company is to identify its products using logos and em-blems. Some contracting officers are con-cerned over the costs being incurred for contractors' logos and emblems being placed on Government systems. These contracting officers are treating the direct and indirect costs for logos and emblems produced by means of a special mold or casting (not simple stick-on adhesive de-cals) as unallowable advertising costs un-der FAR 31.205-1.
7-1205.2 Audit Procedures a. Applicable FAR Provisions
The contracting officers' position re-flects an internal negotiating/contracting policy. This policy is enforceable to the extent that contracting officers obtain con-tractor concurrence and include a specific clause in contracts making such costs ex-pressly unallowable or issue a notice of intent to disallow. Unless contracts contain such a clause, contractors need only com-ply with FAR 31.205-1 and FAR 31.201-3, Reasonableness.
b. The use of the terminology “logos and emblems” may be misleading. Logo is an abbreviation for the word logotype, which actually means the standard ways in which to letter or set in type the company trade name, while emblem represents the mark of a nonprofit organization. However,
"contractor logos and emblems" as used in Government contracting represent the ac-tual design and typesetting of all company marks. Company marks can be trademarks (companies who manufacture products) or service marks (companies who provide services to their customers). Regardless of
the type of mark, the key factor is the pur-pose for which the marks are designed.
Marks are initially designed to meet three main purposes, (1) to indicate the origin of the product or service provided, (2) to guarantee quality consistency (the mark tells the buyer that the product or service is the same as that provided previously), and (3) to serve as an advertisement (simple enough to catch attention, complete enough to tell a story, and persuasive enough to move the viewer to action). When a com-pany initially designs a mark, each of these three purposes are relevant. Therefore, disallowance of these costs under FAR 31.205-1 is generally not practicable.
However, the initial design of logos and emblems may be challenged as unreason-able if costs are determined to be exces-sive.
c. While the initial design of a com-pany mark cannot generally be questioned under FAR 31.205-1, the redesign can be.
When a company redesigns its mark, the public is usually already familiar enough with the original mark to know the origin of the product; thus, this purpose is usu-ally not relevant to a redesign. In addi-tion, redesigning the mark does not serve to guarantee quality consistency, since the original mark already told the prospective buyer that the product or service is the same as that previously provided. How-ever, redesigning the mark does serve as an advertisement, since it is intended to catch the attention of those who were previously unaware of the company, tell a story (a new one or the rephrasing of an old one), and be persuasive enough to move a viewer to take a form of action that the old mark could not. Thus, the major purpose of redesigning a company mark will usually be advertising; if this is the case, then these costs are unallowable under FAR 31.205-1.
d. A company mark may be redesigned for other reasons, such as a corporate merger, reorganization, etc. The auditor must carefully consider the purpose of redesigning the company mark in determin-ing the allowability of such costs. For ex-ample, if the redesign results from a reor-ganization, then FAR 31.205-27, Organization Costs, should be considered in evaluating the allowability of these
7-1205 costs. Furthermore, as was the case with
the initial design, the redesign of logos and emblems may also be challenged as unrea-sonable if costs are determined to be exces-sive.
e. Audit Evaluation
(1) Auditors should continue to evalu-ate proposed advertising costs, including the redesign of logos and emblems, in accordance with the FAR. Excessive costs of logos and emblems, even those falling within allowable categories under the FAR provisions, should be questioned based on reasonableness.
(2) Comments may be included, as part of the applicable report exhibit note, on the effect of the contracting officer's position on proposed costs.
(3) FAOs should assure that the audi-tor's review of contract provisions (see 3-202) clearly identify special contract clauses disallowing the costs of logos and emblems. Audit programs for evaluation of direct and indirect costs should include steps to verify compliance with this and other contractual cost limitations.
7-1301
7-1300 Section 13 --- Selling Costs 7-1301 Introduction
This section contains general audit guidance in determining the allowability, allocability, and reasonableness of selling costs under Government contracts includ-ing:
a. Selling costs as discussed in FAR 31.205-38,
b. Selling costs under Foreign Military Sales contracts as discussed in DoD FAR Supplement (DFARS) 225.7303-2 and 225.7303-4, and
c. Contingent fees as discussed in FAR 3.400.
7-1302 General Audit Considerations Selling expenses are subject to the same basic audit procedures and tests for allocability and reasonableness as manu-facturing and administrative expenses.
However, there are certain factors for special consideration. Where a significant amount of selling expense is involved there should be adequate tests of the indi-vidual items and accounts classified under this expense category to enable the audi-tor to fully understand (1) the type and size of the contractor's sales organization, (2) the basis of employee compensation, (3) the nature of the selling and distribu-tion activities involved, (4) their reladistribu-tion- relation-ship to the contractor's different opera-tions, products or product lines, and (5) their applicability to Government and commercial business. A nomenclature review of account titles is not sufficient for this purpose.
7-1303 Proper Classification of Selling Expenses
7-1303.1 Nature of Selling Effort
a. The nature of costs classified and charged as selling expense should be com-patible with the provisions of FAR 31.205-38. The costs of such effort are considered allowable if reasonable in amount. Al-though the generic term "selling" encom-passes all efforts to market a contractor's products, the acceptability of the costs of
this effort are governed by several subsec-tions of FAR 31.205. Costs that fall into the following categories should be classi-fied accordingly. These costs should be evaluated using the appropriate subsection of FAR 31.205:
(1) Advertising costs (FAR 31.205-1).
Also see 7-1200.
(2) Corporate image enhancement and public relations costs (FAR 31.205-1).
Also see 7-1200.
(3) Bid and proposal/independent re-search and development costs (FAR 31.205-18). Also see 7-1500.
(4) Entertainment costs (FAR 31.205-14).
(5) Long-range market planning costs (FAR 31.205-12).
b. FAR 31.205-38(b) states that costs of activities which are correctly classified and disallowed under the above cost principles are not to be considered as allowable costs under FAR 31.205-38 or any other subsec-tion of FAR 31.205.
7-1303.2 Illustrations of Improper Clas-sification
The following illustrations represent the use of other FAR 31.205 subsections in reviewing a contractor's claimed selling costs for proper classification:
a. A contractor incurred engineering costs incident to adapting a system cur-rently being produced for the Government on one program for possible use on another major weapon system. The engineering effort was related to reducing the weight of the current system so it would be suitable for use on the other program. The effort performed included (1) development of a new cooling concept; (2) development of a new mechanical configuration and installa-tion concept; (3) installainstalla-tion analysis of electrical power requirements; and (4) evaluation of reliability predictions and maintainability considerations. The con-tractor classified and claimed these costs as selling expense. Since the nature of the effort was "development," the costs should have been classified as independent re-search and development expenses and the criteria contained in FAR 31.205-18
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