FAR 31.205-14—Entertainment costs.
Plain-English Summary
FAR 31.205-14 addresses the allowability of entertainment costs under government contracts. It covers amusement, diversions, social activities, and all directly associated costs, including tickets to shows or sporting events, meals, lodging, rentals, transportation, and gratuities tied to those activities. It also covers membership costs for social, dining, country clubs, and similar organizations with the same purposes. The section exists to prevent contractors from charging the Government for expenses that are primarily personal, social, or recreational rather than necessary for contract performance. In practice, it means contractors must identify and exclude entertainment-related costs from indirect pools, direct charges, and any other cost category, even if the expense is treated as taxable compensation to employees. The rule is broad and strict, so contractors and contracting officers should treat these costs as unallowable regardless of how they are labeled or where they are recorded.
Key Rules
Entertainment is unallowable
Costs for amusement, diversions, and social activities are unallowable. This includes events or activities whose primary purpose is entertainment rather than a direct business or contract purpose.
Associated costs are also unallowable
If the underlying activity is entertainment, all directly associated costs are unallowable too. This includes tickets, meals, lodging, rentals, transportation, and gratuities connected to the entertainment event.
No alternate allowability
Costs made specifically unallowable under this cost principle cannot be made allowable under another cost principle. Contractors cannot reclassify or justify these costs under a different FAR cost category.
Club memberships are unallowable
Membership costs for social, dining, country clubs, and similar organizations are unallowable. The rule applies even if the cost is treated as taxable income to employees.
Tax treatment does not control allowability
Whether an entertainment or club membership cost is reported as employee taxable income does not make it allowable. Tax reporting and FAR allowability are separate determinations.
Responsibilities
Contractor
Identify entertainment and club membership costs, exclude them from billings and indirect cost pools, and ensure they are not charged to the Government under any cost principle. Maintain accounting controls so associated costs are properly captured and removed.
Contracting Officer
Review proposed or billed costs for entertainment-related items and disallow them when identified. Ensure contractors do not shift these costs into other categories to make them appear allowable.
Agency
Apply the cost principle consistently in audits, incurred cost reviews, and payment determinations. Support oversight processes that detect misclassification of entertainment and club-related expenses.
Accounting/Finance Staff
Code, segregate, and document entertainment and club membership expenses correctly so they are excluded from claimed costs. Prevent indirect allocation of these costs into government-reimbursable accounts.
Practical Implications
Contractors should assume that social events, holiday parties, sporting events, and similar activities are unallowable unless a separate FAR rule clearly applies and the cost is not entertainment in nature.
A common pitfall is trying to charge associated expenses—such as catering, travel, or lodging for an entertainment event—through another account; if the underlying activity is entertainment, the related costs are also unallowable.
Club dues are a frequent audit issue because they may be paid for business networking or employee morale, but FAR still treats social, dining, and country club memberships as unallowable.
Even if employees report the benefit as taxable income, the Government still cannot reimburse the cost, so tax compliance does not cure unallowability.
Strong internal controls, expense coding, and review of employee reimbursements are important to prevent unallowable entertainment costs from entering indirect rates or billings.
Official Regulatory Text
Costs of amusement, diversions, 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.