FAR 31.205-13—Employee morale, health, welfare, food service, and dormitory costs and credits.
Plain-English Summary
FAR 31.205-13 addresses the allowability of employee morale, health, welfare, food service, and dormitory costs, along with related credits and limits on gifts, recreation, employee organizations, and losses from operating food and lodging services. It explains which employee-support activities are generally allowable, such as house publications, health clinics, wellness and fitness centers, counseling services, cafeterias, canteens, lunch wagons, vending machines, and living accommodations, and it requires that any income generated by these activities be offset against the costs. The section also draws a firm line between allowable morale/welfare support and unallowable gifts and recreation, while carving out narrow exceptions for certain awards and employee participation in company-sponsored teams or organizations. A major practical focus is the treatment of food and dormitory losses: these are allowable only when the contractor’s objective is break-even operation, and even then only if losses are justified by unusual circumstances such as remote locations, excessive unproductive labor costs, or situations where stopping the service would not reduce net costs. The rule further requires allocation of indirect expenses to food and dormitory services and addresses arrangements where employee associations operate services and keep the profits, as well as contractor contributions to employee organizations, which are allowable only to the extent the underlying costs would have been allowable if incurred directly by the contractor. In practice, this section is important because it determines whether employee-support programs can be charged to government contracts, how credits must be applied, and when contractor-provided amenities become unallowable overhead or expressly disallowed costs.
Key Rules
General morale and welfare allowability
Costs incurred to improve working conditions, employer-employee relations, employee morale, and employee performance are generally allowable, but only within the limits of this subsection. Any income generated by these activities must be netted against the costs.
Examples of allowable activities
The rule specifically identifies house publications, health clinics, wellness and fitness centers, employee counseling services, and food and dormitory services for employees at or near contractor facilities as examples of potentially allowable activities.
Gifts are unallowable
Costs of gifts are unallowable. The only exceptions are performance awards under FAR 31.205-6(f) and awards for employee achievements made under an established contractor plan or policy.
Recreation is generally unallowable
Recreation costs are unallowable except for employee participation in company-sponsored sports teams or employee organizations that are designed to improve company loyalty, teamwork, or physical fitness.
Food and dormitory losses require break-even intent
Losses from operating food and dormitory services are allowable only if the contractor’s objective is to operate the services on a break-even basis. If the contractor provides food or lodging free or at rates that do not support that objective, the losses are generally unallowable.
Unusual circumstances can justify losses
A loss may be allowable if the contractor proves unusual circumstances make break-even pricing impractical even with efficient management, such as remote locations without adequate commercial facilities, excessive unproductive labor costs if services are unavailable, or no net savings from reducing or stopping the services.
Indirect costs must be included
Costs of food and dormitory services must include an allocable share of indirect expenses related to those activities, so the contractor cannot isolate only direct costs when determining allowability or loss.
Employee association profits and contributions
If an employee association operates a service and keeps the profits, those profits are treated as if the contractor operated the service itself, subject to the same allowability rules. Contractor contributions to employee organizations, including vending machine receipts or similar funds, are allowable only to the extent the related costs would have been allowable if directly incurred by the contractor.
Responsibilities
Contracting Officer
Evaluate claimed employee morale, welfare, food service, dormitory, recreation, gift, and employee-organization costs for compliance with the rule. The contracting officer must ensure credits are applied, losses are supported by evidence of break-even intent or unusual circumstances, and unallowable costs are excluded from reimbursement.
Contractor
Document the purpose, operation, and cost structure of morale and welfare activities; net income generated by those activities against costs; exclude gifts and generally unallowable recreation; and prove any claimed food or dormitory losses meet the break-even and unusual-circumstances standards. The contractor must also allocate indirect costs properly and support any contributions to employee organizations with allowability evidence.
Employee Organization
If operating a service or receiving contractor contributions, the organization must be treated consistently with the contractor’s own operation of the service for allowability purposes. It should maintain records showing how funds are used so the contractor can demonstrate that the underlying costs would have been allowable if directly incurred.
Agency/Cost Auditor
Review accounting treatment, credits, and supporting documentation to verify that claimed costs are properly classified, indirect expenses are allocated, and losses or contributions are not used to shift unallowable employee-benefit expenses to the Government.
Practical Implications
Contractors should separate allowable morale/welfare programs from unallowable gifts and most recreation, because misclassification is a common audit finding.
Food service and dormitory operations need clear break-even analysis, pricing records, and evidence of unusual circumstances if losses are claimed; otherwise, losses are likely to be disallowed.
Any revenue from cafeterias, vending machines, publications, or similar activities must be credited against the related costs, not ignored or buried in overhead.
Indirect costs tied to food and dormitory services must be allocated to those activities, which can materially affect whether a loss exists and whether it is allowable.
Employee association arrangements do not create a loophole: if the contractor could not directly incur the cost allowably, routing funds through an association will not make it allowable.
Official Regulatory Text
(a) 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, subject to the limitations contained in this subsection. Some examples of allowable activities are- (1) House publications; (2) Health clinics; (3) Wellness/fitness centers; (4) Employee counseling services; and (5) Food and dormitory services for the contractor’s employees at or near the contractor’s facilities. These services include- (i) Operating or furnishing facilities for cafeterias, dining rooms, canteens, lunch wagons, vending machines, living accommodations; and (ii) Similar types of services. (b) Costs of gifts are unallowable. (Gifts do not include awards for performance made pursuant to 31.205-6 (f) or awards made in recognition of employee achievements pursuant to an established contractor plan or policy.) (c) Costs of recreation are unallowable, except for the costs of employees’ participation in company sponsored sports teams or employee organizations designed to improve company loyalty, team work, or physical fitness. (d) (1) The allowability of food and dormitory losses are determined by the following factors: (i) Losses from operating food and dormitory services are allowable only if the contractor’s objective is to operate such services on a break-even basis. (ii) 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 objective in paragraph (d)(1)(i) of this subsection are not allowable, except as described in paragraph (d)(1)(iii) of this subsection. (iii) A loss may be allowed to the extent that the contractor can demonstrate that unusual circumstances exist 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. The following are examples of unusual circumstances: (A) The contractor must provide food or dormitory services at remote locations where adequate commercial facilities are not reasonably available. (B) The contractor’s charged (but unproductive) labor costs would be excessive if the services were not available. (C) If cessation or reduction of food or dormitory operations will not otherwise yield net cost savings. (2) Costs of food and dormitory services shall include an allocable share of indirect expenses pertaining to these activities. (e) 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 (f) of this subsection). (f) Contributions by the contractor to an employee organization, including funds from vending machine receipts or similar sources, are allowable 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.