RULES and REGULATIONS

DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Part 31

[FAC 90-25, FAR Case 94-750]

RIN 9000-AG33

Federal Acquisition Regulation; Entertainment, Gift, and Recreation Costs for

Contractor Employees

Friday, January 13, 1995

AGENCIES: Department of Defense (DOD), General Services

Administration (GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Interim rule with request for comment.

SUMMARY: This interim rule amends the Federal Acquisition Regulation to revise

the cost principles governing entertainment, gift and recreation costs for

contractor employees. This regulatory action was not subject to Office of

Management and Budget review under Executive Order 12866, dated September 30,

1993.

DATES: Effective Date: January 13, 1995.

Comment Date: Comments should be submitted to the FAR Secretariat at the

address shown below on or before March 14, 1995 to be considered in the

formulation of a final rule.

ADDRESSES: All interested parties should submit written comments to: General

Services Administration, FAR Secretariat (VRS), 18th & F Streets, NW, Room

4035, Attn: Ms. Beverly Fayson, Washington, DC 20405.

Please cite FAC 90-25, FAR case 94-750 in all correspondence related to this

case.

FOR FURTHER INFORMATION CONTACT: Mr. Clarence M. Belton, Team Leader, Cost

Principles Team, at (703) 602-2357, in reference to this FAR case. For general

information, contact the FAR Secretariat, Room 4037, GS Building, Washington,

DC 20405 (202) 501-4755. Please cite FAC 90-25, FAR case 94-750.

SUPPLEMENTARY INFORMATION:

A. Background

The Federal Acquisition Streamlining Act of 1994, Pub. L. 103-355, provides

authorities that streamline the acquisition process and minimize burdensome

government-unique requirements. Major changes that can be expected in the

acquisition process as a result of the Act's implementation include changes in

the areas of Commercial Item Acquisition, Simplified Acquisition Procedures,

the Truth in Negotiations Act, and introduction of the Federal Acquisition

Computer Network.

This notice announces Federal Acquisition Regulation (FAR) revisions developed

under FAR case 94-750 to implement Section 2192 of the Act. This interim rule

revises the cost principles at FAR 31.205-13 and 31.205-14.

To comply with the requirements of paragraph (a)(1) of Section 2192 of the

Act, the interim rule provides that the costs of gifts are expressly

unallowable and that the costs of recreation are expressly unallowable, except

for the costs of employee sports teams. The allowability of costs for employee

sports teams is further limited to off-duty activities and to a nominal cost

per participating employee. "Recreation" is removed from the examples of

allowable costs at 31.205-13, and "wellness/fitness centers" are added to that

listing to differentiate them from recreation costs. The entire listing of

allowable costs for morale, health, welfare, food service, and dormitory costs

is further limited in allowability to reasonable amounts per employee.

To comply with the requirements of paragraph (a)(2) of Section 2192 of

the Act, the interim rule revises the cost principle at 31.205-14 to

incorporate the statutory wording relating to unallowability of entertainment

costs under any other cost principle.

These revisions specifically disallow gift, recreation, and entertainment

costs which some may have previously considered allowable.

Paragraph (c) of Section 2192 of the Act states that "[a]ny amendments to the

FAR made pursuant to subsection (a) shall apply with respect to costs incurred

after the date on which the amendments made by Section 2101 apply (as provided

in Section 10001) or the date on which the amendments made by Section 2151

apply (as provided in Section 10001), whichever is later." Therefore, this

interim rule is being published now in order to meet the statutory deadlines

imposed by paragraph (a) of Section 2192 and is effective immediately.

However, the revised cost principles will apply only to costs incurred after

all of the proposed rules implementing requirements of Sections 2101 and 2151

become effective. The proposed rules at issue are being processed under FAR

cases 94-751, 94-752, and 94-754.

The FAR Council is interested in an exchange of ideas and opinions with

respect to the regulatory implementation of the Act. For that reason, the FAR

Council is conducting a series of public meetings. However, the FAR Council

has not scheduled a public meeting on this rule (FAR case 94-750). If the

public believes such a meeting is needed with respect to this rule, a letter

requesting a public meeting and outlining the nature of the requested meeting

shall be submitted to and received by the FAR Secretariat (see ADDRESSES

caption) on or before February 13, 1995. The FAR Council will consider such

requests in determining whether a public meeting on this rule should be

scheduled.

B. Regulatory Flexibility Act

The interim rule is not expected to have a significant economic impact on a

substantial number of small entities within the meaning of the Regulatory

Flexibility Act, 5 U.S.C. 601, et seq., because most contracts awarded to small

businesses are awarded through sealed bidding on a firm fixed price basis. The

cost principles apply only where contracts are based on cost or pricing data.

An Initial Regulatory Flexibility Analysis has, therefore, not been performed.

Comments from small entities concerning the affected FAR subpart will be

considered in accordance with 5 U.S.C. 610. Such comments must be submitted

separately and cite 5 U.S.C 601, et seq. (FAR Case 94-750), in correspondence.

C. Paperwork Reduction Act

The Paperwork Reduction Act does not apply because the changes to the FAR do

not impose recordkeeping or information collection requirements, or collection

of information from offerors, contractors, or members of the public which

require the approval of OMB under 44 U.S.C. 3501, et seq.

D. Determination To Issue an Interim Rule

A determination has been made under the authority of the Secretary of

Defense (DOD), the Administrator of General Services (GSA), and the

Administrator of the National Aeronautics and Space Administration (NASA) that

compelling reasons exist to promulgate this interim rule without prior

opportunity for public comment. This action is necessary because Section 2192

of the Federal Acquisition Streamlining Act of 1994 specifically requires that

the cost principle at FAR 31.205-14 be amended not later than 90 days after

enactment of the Act and that other FAR revisions addressing contractor costs

of gifts or recreation to improve employee morale or welfare be made within 120

days of enactment of the Act. Pubic Law 103-355 was enacted October 13, 1994.

List of Subjects in 48 CFR Part 31

Government procurement.

Dated: January 9, 1995.

Edward Loeb,

Deputy Project Manager for the Implementation of the Federal Acquisition

Streamlining Act of 1994.

Federal Acquisition Circular

Number 90-25

Federal Acquisition Circular (FAC) 90-25 is issued under the authority of the

Secretary of Defense, the Administrator of General Services, and the

Administrator for the National Aeronautics and Space Administration.

Unless otherwise specified, all Federal Acquisition Regulation (FAR) and other

directive material contained in FAC 90-25 is effective January 13, 1995.

Dated: January 4, 1995.

Thomas S. Luedtke,

Deputy Associate Administrator for Procurement, NASA.

Dated: January 9, 1995.

Ida M. Ustad,

Associate Administrator, Office of Acquisition Policy.

Dated: January 8, 1995.

Eleanor R. Spector,

Director, Defense Procurement.

Therefore, 48 CFR Part 31 is amended as set forth below:

PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES

1. The authority citation for 48 CFR Part 31 continues to read as follows:

Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42 U.S.C. 2473(c).

2. Section 31.205-13 is revised to read as follows:

31.205-13 Employee morale, health, welfare, food service, and dormitory costs

and credits.

(a) This paragraph (a) applies to costs incurred before the effective date of

implementation in FAR of sections 2101 and 2151 of the Federal Acquisition

Streamlining Act of 1994 (Pub. L. 103-355).

(1) Aggregate costs incurred on activities designed to improve working

conditions, employer-employee relations, employee morale, and employee

performance (less income generated by these activities) are allowable, except

as limited by paragraph (a)(2) of this section, and to the extent that the net

amount is reasonable. Some examples are house publications, health clinics,

recreation, employee counseling services, and food and dormitory services,

which include operating or furnishing facilities for cafeterias, dining rooms,

canteens, lunch wagons, vending machines, living accommodations, or similar

types of services for the contractor's employees at or near the contractor's

facilities.

(2) Losses from operating food and dormitory services may be included as

costs only if the contractor's objective is to operate such services on a

break-even basis. Losses sustained because food services or lodging

accommodations are furnished without charge or at prices or rates which

obviously would not be conducive to the accomplishment of the above objective

are not allowable. A loss may be allowed, however, to the extent that the

contractor can demonstrate that unusual circumstances exist (e.g., (i) where

the contractor must provide food or dormitory services at remote locations

where adequate commercial facilities are not reasonably available, or (ii)

where charged but unproductive labor costs would be excessive but for the

services provided or where cessation or reduction of food or dormitory

operations will not otherwise yield net cost savings) such that even with

efficient management, operating the services on a break-even basis would

require charging inordinately high prices, or prices or rates higher than those

charged by commercial establishments offering the same services in the same

geographical areas. Costs of food and dormitory services shall include an

allocable share of indirect expenses pertaining to these activities.

(3) When the contractor has an arrangement authorizing an employee association

to provide or operate a service, such as vending machines in the contractor's

plant and retain the profits, such profits shall be treated in the same manner

as if the contractor were providing the service (but see paragraph (a)(4) of

this section).

(4) Contributions by the contractor to an employee organization, including

funds from vending machine receipts or similar sources, may be included as

costs incurred under paragraph (a)(1) of this section only to the extent that

the contractor demonstrates that an equivalent amount of the costs incurred by

the employee organization would be allowable if directly incurred by the

contractor.

(b) This paragraph (b) implements section 2192 of the Federal Acquisition

Streamlining Act of 1994 (Pub. L. 103-355). It applies to costs incurred after

the effective date of implementation in FAR of sections 2101 and 2151 of Pub.

L. 103-355.

(1) Aggregate costs incurred on activities designed to improve working

conditions, employer-employee relations, employee morale, and employee

performance (less income generated by these activities) are allowable, except

as limited by paragraphs (b)(2), (3), and (4) of this section, and to the

extent that the net amount per employee is reasonable. Some examples of

allowable activities are house publications, health clinics, wellness/fitness

centers, employee counseling services, and food and dormitory services, which

include operating or furnishing facilities for cafeterias, dining rooms,

canteens, lunch wagons, vending machines, living accommodations, or similar

types of services for the contractor's employees at or near the contractor's

facilities.

(2) Costs of gifts are unallowable.

(3) Costs of recreation are unallowable, except for the costs of contractor

employees' participation in sports teams designed to improve company loyalty,

team work, or employee physical fitness, conducted during off duty hours at a

nominal cost per participating employee.

(4) Losses from operating food and dormitory services may be included as costs

only if the contractor's objective is to operate such services on a break-even

basis. Losses sustained because food services or lodging accommodations are

furnished without charge or at prices or rates which obviously would not be

conducive to the accomplishment of the above objective are not allowable. A

loss may be allowed, however, to the extent that the contractor can demonstrate

that unusual circumstances exist (e.g., (i) where the contractor must provide

food or dormitory services at remote locations where adequate commercial

facilities are not reasonably available, or (ii) where charged but unproductive

labor costs would be excessive but for the services provided or where cessation

or reduction of food or dormitory operations will not otherwise yield net cost

savings) such that even with efficient management, operating the services on a

break-even basis would require charging inordinately high prices,

establishments offering the same services in the same geographical areas.

Costs of food and dormitory services shall include an allocable share of

indirect expenses pertaining to these activities.

(5) When the contractor has an arrangement authorizing an employee association

to provide or operate a service, such as vending machines in the contractor's

plant and retain the profits, such profits shall be treated in the same manner

as if the contractor were providing the service (but see paragraph (b)(6) of

this section).

(6) Contributions by the contractor to an employee organization,

including funds from vending machine receipts or similar sources, may be

included as costs incurred under paragraph (b)(1) of this section only to the

extent that the contractor demonstrates that an equivalent amount of the costs

incurred by the employee organization would be allowable if directly incurred

by the contractor.

3. Section 31.205-14 is revised to read as follows:

31.205-14 Entertainment costs.

(a) This paragraph (a) applies to costs incurred before the effective date of

implementation in FAR of sections 2101 and 2151 of the Federal Acquisition

Streamlining Act of 1994 (Pub. L. 103-355). Costs of amusement, diversion,

social activities, and any directly associated costs such as tickets to shows

or sports events, meals, lodging, rentals, transportation, and gratuities are

unallowable (but see 31.205-1 and 31.205-13). Costs of membership in social,

dining, or country clubs or other organizations having the same purposes are

also unallowable, regardless of whether the cost is reported as taxable income

to the employees.

(b) This paragraph (b) implements section 2192 of the Federal Acquisition

Streamlining Act of 1994 (Pub. L. 103-355). It applies to costs incurred after

the effective date of implementation in FAR of sections 2101 and 2151 of Pub.

L. 103-355. Costs of amusement, diversion, social activities, and any directly

associated costs such as tickets to shows or sports events, meals, lodging,

rentals, transportation, and gratuities are unallowable. Costs made

specifically unallowable under this cost principle are not allowable under any

other cost principle. Costs of membership in social, dining, or country clubs

or other organizations having the same purposes are also unallowable,

regardless of whether the cost is reported as taxable income to the employees.