FAR 31.205-38—Selling costs.
Plain-English Summary
FAR 31.205-38 explains which selling costs are allowable and which are unallowable under the cost principles for government contracts. It defines “selling” broadly and then sorts selling-related activities into specific buckets: advertising, corporate image enhancement/public relations, bid and proposal costs, market planning, and direct selling. The section also cross-references other FAR cost principles that control allowability for advertising, public relations, bid and proposal, and long-range market planning, so contractors must read this rule together with 31.205-1, 31.205-12, and 31.205-18. In practice, the rule is meant to prevent contractors from charging general marketing, image-building, and proposal-development efforts to the Government unless a specific cost principle allows them. At the same time, it recognizes that some selling activity is legitimate and allowable, especially direct selling and certain market planning costs. The final clause imposes a special restriction on commissions and similar compensation, allowing them only when paid to bona fide employees or established commercial or selling agencies maintained to secure business. For contractors, this section is a cost-accounting and compliance checkpoint; for contracting officers and auditors, it is a basis for testing whether claimed selling costs are properly classified and supported.
Key Rules
Selling is broadly defined
“Selling” covers all efforts to market the contractor’s products or services, but only the categories specifically addressed in this subsection are potentially allowable. Any selling effort not covered by an applicable rule in Part 31 is unallowable.
Advertising follows 31.205-1
Advertising costs are not governed by this section alone; they must be evaluated under the advertising cost principle in 31.205-1. Allowability depends on the specific limitations in that subsection.
Corporate image costs are public relations
Corporate image enhancement and broadly targeted sales efforts other than advertising are treated as public relations under 31.205-1. Their allowability is controlled by the public relations rules in 31.205-1.
Bid and proposal costs are separate
Bid and proposal costs are handled under 31.205-18, not under the general selling-cost rule. Contractors must apply the bid-and-proposal allowability standards in that subsection.
Market planning is partly allowable
Market planning includes market research, analysis, and general management planning for business development. Long-range market planning is subject to 31.205-12, while other market planning costs are allowable under this section.
Direct selling is allowable
Direct selling means person-to-person efforts to induce a particular customer to buy particular products or services, including demonstrations, negotiation, liaison, technical support, and adaptation efforts. The cost of direct selling efforts is allowable.
Commissions have a special limit
Sellers’ or agents’ compensation, fees, commissions, percentages, retainers, and brokerage fees are allowable only if paid to bona fide employees or established commercial or selling agencies maintained by the contractor to secure business, even if the payment is contingent on contract award.
Responsibilities
Contractor
Classify selling-related costs correctly, apply the proper FAR cost principle for each type of activity, and ensure unallowable marketing or image-building costs are excluded from claims, billings, and indirect cost pools. The contractor must also verify that commissions and similar fees are paid only to bona fide employees or established commercial/selling agencies and maintain adequate support for allowability.
Contracting Officer
Review proposed or claimed costs for proper treatment under the applicable FAR cost principles and ensure contract pricing, audits, and cost allowability determinations reflect the distinctions among advertising, public relations, bid and proposal, market planning, and direct selling.
Auditor or DCAA
Test whether selling costs are properly segregated, whether cross-referenced cost principles were applied, and whether commissions or agency fees meet the bona fide employee or established agency requirement. The auditor should also identify misclassified marketing or proposal costs that are unallowable.
Agency
Apply the FAR cost principles consistently in procurement and cost-reimbursement administration, and ensure internal guidance and oversight distinguish allowable direct selling and certain market planning from unallowable general selling efforts.
Practical Implications
Contractors cannot assume all sales and marketing costs are allowable just because they support business development; many must be charged as unallowable or evaluated under another FAR subsection.
The biggest compliance risk is misclassification: advertising, public relations, and bid-and-proposal costs are often mixed with allowable direct selling or market planning, so accounting records need clear segregation.
Commission arrangements deserve special scrutiny because the payment method alone does not make them allowable; the recipient must be a bona fide employee or an established commercial/selling agency maintained to secure business.
Direct selling is one of the few selling activities expressly allowable, but contractors should document the customer-specific nature of the effort to distinguish it from general promotion or corporate image work.
Long-range market planning is not automatically allowable; contractors must check 31.205-12 before charging those costs and should expect auditors to question broad strategic planning expenses.
Official Regulatory Text
(a) "Selling" is a generic term encompassing all efforts to market the contractor’s products or services, some of which are covered specifically in other subsections of 31.205 . The costs of any selling efforts other than those addressed in this cost principle are unallowable. (b) Selling activity includes the following broad categories: (1) Advertising . Advertising is defined at 31.205-1 (b), and advertising costs are subject to the allowability provisions of 31.205-1 (d) and (f). (2) Corporate image enhancement . Corporate image enhancement activities, including broadly targeted sales efforts, other than advertising, are included within the definition of public relations at 31.205-1 (a), and the costs of such efforts are subject to the allowability provisions at 31.205-1 (e) and (f). (3) Bid and proposal costs . Bid and proposal costs are defined at 31.205-18 and are subject to the allowability provisions of that subsection. (4) Market planning . Market planning involves market research and analysis and general management planning concerned with development of the contractor’s business. Long-range market planning costs are subject to the allowability provisions of 31.205-12 . Other market planning costs are allowable. (5) Direct selling . Direct selling efforts are those acts or actions to induce particular customers to purchase particular products or services of the contractor. Direct selling is characterized by person-to-person contact and includes such efforts as familiarizing a potential customer with the contractor’s products or services, conditions of sale, service capabilities, etc. It also includes negotiation, liaison between customer and contractor personnel, technical and consulting efforts, individual demonstrations, and any other efforts having as their purpose the application or adaptation of the contractor’s products or services for a particular customer’s use. The cost of direct selling efforts is allowable. (c) Notwithstanding any other provision of this subsection, sellers’ or agents’ compensation, fees, commissions, percentages, retainer or brokerage fees, whether or not contingent upon the award of contracts, are allowable only when paid to bona fide employees or established commercial or selling agencies maintained by the contractor for the purpose of securing business.