FAR 31.205-21—Labor relations costs.
Plain-English Summary
FAR 31.205-21 addresses which labor relations costs are allowable and which are unallowable in contractor cost accounting. It covers ordinary employee-relations activities that help maintain satisfactory relations between the contractor and its workforce, such as shop stewards, labor-management committees, employee publications, and similar related activities. It also imposes a specific prohibition, required by Executive Order 13494, on costs tied to efforts to persuade employees about whether to organize or bargain collectively, or how to exercise those rights. In practice, this section draws a line between routine, permissible labor-management administration and lobbying-style or campaign-style activity aimed at influencing employees’ collective-bargaining choices. For contractors, the rule affects how they charge labor-relations expenses to contracts and indirect pools; for contracting officers and auditors, it provides a basis for questioning costs that look like union-organizing or anti-organizing activity. The section is important because misclassification can lead to unallowable cost determinations, billing adjustments, and potential False Claims Act or defective pricing-type exposure if unallowable costs are included in proposals, invoices, or indirect rate submissions.
Key Rules
Routine labor relations allowed
Costs incurred to maintain satisfactory relations between the contractor and its employees are generally allowable. This includes shop stewards, labor-management committees, employee publications, and other similar activities, so long as the costs are not otherwise made unallowable by paragraph (b).
Persuasion costs are unallowable
Costs of activities undertaken to persuade employees about whether to organize or bargain collectively, or about how to exercise those rights, are unallowable. The prohibition applies whether the activity is pro-union, anti-union, or otherwise intended to influence employees’ protected labor-relations choices.
Broad list of disallowed examples
The rule specifically identifies unallowable costs for preparing and distributing materials, hiring or consulting legal counsel or consultants, holding meetings, and planning or conducting activities by managers, supervisors, or union representatives during work hours when those activities are for the prohibited persuasive purpose.
Purpose controls allowability
The key question is why the cost was incurred. A meeting, publication, or legal consultation may be allowable if it is part of ordinary labor relations, but it becomes unallowable if its purpose is to persuade employees regarding organizing or collective bargaining rights.
Applies to any entity’s employees
The prohibition is not limited to the contractor’s own workforce. Costs of persuading employees of any entity are unallowable, which means contractors must be careful when supporting labor-relations campaigns involving subcontractors, affiliates, or other organizations.
Responsibilities
Contractor
Identify, segregate, and exclude unallowable persuasion-related labor relations costs from billings, indirect pools, and proposals. Maintain documentation showing the business purpose of labor-relations activities and ensure that allowable employee-relations costs are not mixed with prohibited organizing-related costs.
Contracting Officer
Review claimed labor relations costs for reasonableness and allowability, and disallow or question costs that appear to be aimed at influencing employee organizing or collective-bargaining decisions. Ensure contract administration and cost negotiations reflect the FAR prohibition.
Auditor / DCAA or other audit function
Test labor-relations charges for compliance, trace costs to their actual purpose, and identify mixed-purpose or improperly allocated costs. Recommend adjustments when materials, meetings, counsel, or labor-relations campaigns are tied to prohibited persuasion activities.
Agency
Apply the cost principle consistently in cost-reimbursement, flexibly priced, and indirect rate contexts, and support enforcement of the Executive Order-based prohibition through contract oversight and audit resolution.
Practical Implications
Contractors should separate ordinary employee-relations spending from any union-organizing or anti-organizing campaign costs at the accounting-code level whenever possible.
Legal fees and consultant costs are not automatically allowable just because they relate to labor matters; if they support persuasion about organizing or bargaining rights, they are unallowable.
Meeting costs can be allowable or unallowable depending on purpose, so agendas, minutes, and internal approvals matter when documenting allowability.
Because the rule covers employees of any entity, contractors should scrutinize costs associated with subcontractor labor relations, affiliate campaigns, or third-party workforce activities.
A common pitfall is charging mixed-purpose labor-relations expenses to overhead without allocating out the unallowable portion; contractors should have written policies and review controls to prevent this.
Official Regulatory Text
(a) Costs incurred in maintaining satisfactory relations between the contractor and its employees (other than those made unallowable in paragraph (b) of this section), including costs of shop stewards, labor management committees, employee publications, and other related activities, are allowable. (b) As required by Executive Order 13494, Economy in Government Contracting, costs of any activities undertaken to persuade employees, of any entity, to exercise or not to exercise, or concerning the manner of exercising, the right to organize and bargain collectively through representatives of the employees’ own choosing are unallowable. Examples of unallowable costs under this paragraph include, but are not limited to, the costs of- (1) Preparing and distributing materials; (2) Hiring or consulting legal counsel or consultants; (3) Meetings (including paying the salaries of the attendees at meetings held for this purpose); and (4) Planning or conducting activities by managers, supervisors, or union representatives during work hours.