FAR 31.205-27—Organization costs.
Plain-English Summary
FAR 31.205-27 addresses the allowability of organization costs, reorganization costs, and capital-raising costs under government contracts. It makes clear that expenses tied to forming, restructuring, or defending the corporate structure of a business are generally unallowable, including mergers and acquisitions, changes in controlling interest, and efforts to resist those changes. The section also covers costs of raising capital, such as increasing net worth or long-term liabilities, and specifically identifies common examples like incorporation fees and professional fees for attorneys, accountants, brokers, promoters, organizers, management consultants, and investment counselors. It further defines unallowable reorganization costs to include changes in financial structure that alter the rights and interests of security holders, even if no new capital is raised, while excluding administrative costs of short-term borrowings for working capital. Finally, it carves out an important exception for activities primarily intended to provide compensation, such as stock acquired for executive bonuses, employee savings plans, and employee stock ownership plans, which are governed instead by FAR 31.205-6. In practice, this section matters because contractors must separate ordinary compensation-related equity activities from corporate finance and restructuring costs, and must ensure unallowable organization costs are excluded from proposals, billings, and indirect cost pools.
Key Rules
Organization costs are unallowable
Costs incurred to plan or execute the organization or reorganization of a business’s corporate structure are unallowable. This includes forming the business, mergers, acquisitions, and similar structural transactions.
Defense against structural change is unallowable
Costs to resist a reorganization of the corporate structure or a change in controlling interest are also unallowable. The rule applies whether the effort is defensive planning or active resistance.
Capital-raising costs are unallowable
Costs incurred to raise capital, meaning net worth plus long-term liabilities, are unallowable. This covers efforts to obtain financing that change the contractor’s capital structure.
Professional and transaction fees are included
The rule expressly includes incorporation fees and fees paid to attorneys, accountants, brokers, promoters, organizers, management consultants, and investment counselors. These costs remain unallowable even if the service providers are not employees.
Reorganization includes financial structure changes
Unallowable reorganization costs include changes in financial structure that alter the rights and interests of security holders, even if no additional capital is raised. Administrative costs of short-term borrowings for working capital are excluded from this definition.
Compensation-related equity activities are excluded
Activities primarily intended to provide compensation are not treated as organizational costs under this section. Stock acquired for executive bonuses, employee savings plans, and employee stock ownership plans is governed by FAR 31.205-6 instead.
Responsibilities
Contracting Officer
Review contractor cost submissions and indirect rate proposals to ensure organization, reorganization, and capital-raising costs are excluded from allowable costs. Question any charges that appear tied to mergers, acquisitions, restructuring, financing, or defensive corporate transactions.
Contractor
Identify and segregate unallowable organization and reorganization costs from allowable contract costs, and ensure they are not billed to the Government. Properly classify compensation-related stock activities under FAR 31.205-6 rather than this section.
Agency
Apply cost principles consistently when evaluating proposals, incurred cost submissions, and audits. Ensure that unallowable corporate transaction costs are not reimbursed through contract pricing or indirect cost allocations.
Accounting/Finance Staff
Track legal, consulting, banking, and transaction-related expenses to determine whether they relate to organization, reorganization, capital raising, or compensation plans. Maintain records that support the exclusion of unallowable costs from billings and allocations.
Practical Implications
Contractors should expect merger, acquisition, restructuring, and financing-related professional fees to be unallowable, even when those costs are common business expenses outside government contracting.
A frequent pitfall is misclassifying stock-based compensation activities as organization costs; if the primary purpose is compensation, FAR 31.205-6 controls instead.
Companies should carefully separate short-term working-capital borrowing costs from broader capital-raising or restructuring costs, because only the administrative costs of short-term borrowings are excluded from the unallowable reorganization category.
Legal and advisory fees often need detailed tracing to the underlying transaction purpose; vague descriptions can lead to disallowance in audits or incurred cost reviews.
Contractors should build internal controls to prevent these costs from flowing into indirect pools, provisional billing rates, or final vouchers, since improper allocation can create repayment and penalty risk.
Official Regulatory Text
(a) Except as provided in paragraph (b) of this subsection, expenditures in connection with (1) planning or executing the organization or reorganization of the corporate structure of a business, including mergers and acquisitions, (2) resisting or planning to resist the reorganization of the corporate structure of a business or a change in the controlling interest in the ownership of a business, and (3) raising capital (net worth plus long-term liabilities), are unallowable. Such expenditures include but are not limited to incorporation fees and costs of attorneys, accountants, brokers, promoters and organizers, management consultants and investment counselors, whether or not employees of the contractor. Unallowable "reorganization" costs include the cost of any change in the contractor’s financial structure, excluding administrative costs of short-term borrowings for working capital, resulting in alterations in the rights and interests of security holders, whether or not additional capital is raised. (b) The cost of activities primarily intended to provide compensation will not be considered organizational costs subject to this subsection, but will be governed by 31.205-6 . These activities include acquiring stock for- (1) Executive bonuses, (2) Employee savings plans, and (3) Employee stock ownership plans.