I believe most prudent businesspeople would consider providing water and coffee to their employees and customers a reasonable business expense and consider it an allowable cost. Well, Defense Contract Audit Agency (DCAA) auditors are not most people and, in most cases, have little to no business experience, so they believe providing water and coffee is an unallowable cost.
What Does DCAA Base Its Position On?
Over my many years dealing with this, I have seen DCAA auditors challenge the allowability based on the following:
- It is unreasonable per FAR 31.201-3 for the contractor to provide water and coffee because the Government does not provide water and coffee to its employees.
- FAR 31.205-13(d)(1) does not allow the contractor to provide food (i.e., water and coffee) at a loss.
- The provision of water and coffee is a gift to the employees, which is unallowable per FAR 31.205-13(b).
How Do I See the DCAA Positions?
Let me address these one by one:
- FAR 31.201-3 establishes reasonableness based on what “a prudent person in the conduct of competitive business” would incur. If Congress and the Federal Acquisition Regulation Council had intended that the regulations governing government employees be applied to contractor employees, they would have done so as they did with the limitation on daily per diem in FAR 31.205-46. I believe few, if any, prudent businesspeople in the competitive marketplace would not incur the cost of providing water and coffee, and likely a few small snack items, to their employees.
- FAR 31.205-13(d)(1) addresses a loss incurred as a result of operating or furnishing facilities for cafeterias, dining rooms, canteens, lunch wagons, and vending machines. FAR 31.205-13(a)(5) provides food service as an example of an allowable cost “designed to improve working conditions, employer-employee relations, employee morale, and employee performance.” A food service operation where the contractor collects money from its employees for each bottle of water or cup of coffee is simply not feasible or cost-effective. Therefore, the FAR 31.205-13(d)(1)(iii) “unusual circumstances” exception to allow the loss should be applied.
- FAR 31.205-13(b) introduces examples of gifts that are not considered gifts under this provision. So, it is clear that the term “gift” needs to be applied with subjectivity. I do not believe we could find a single employee or employer who would consider a bottle of water or a cup of coffee to be a gift. In fact, most ethics policies specifically consider water and coffee at a meeting to be a reasonable accommodation rather than a gift.
Is it Worth the Fight?
I would love to say “yes,” however, this must be a decision for each contractor. As stated above, I believe there are good positions to take against DCAA. However, DCAA auditors are aware that this is a low-dollar issue, and most contractors are not going to expend the effort and incur the legal costs to fight it.
We must remember that DCAA questions little to no cost based on its incurred cost audit effort. In the DCAA FY 2024 Report to Congress, DCAA examined $255,707M in incurred costs and questioned $760M, which represents 0.3% of the total. The report goes on to show that of the incurred costs questioned by DCAA, only 31.4% are sustained by contracting officers. So, the odds are in your favor to fight; however, a cost-benefit analysis may say otherwise.
That said, I believe, based on my interaction with clients, that DCAA’s less-than-objective interpretations of the cost principles have a significantly greater impact on small businesses. While the DCAA’s report to Congress professes a significant level of outreach to small businesses, DCAA auditors, at least based on what I have seen, are still questioning everything they can from small businesses. For example, a client provides support for all but a few audited transactions, and the auditor still questions what appear to be clearly allowable costs based on FAR 31.201-2(d) due to missing documentation.
Supporting Your Cost Compliance Efforts
Navigating the complexities of allowable and unallowable costs can be challenging, especially when facing strict interpretations from auditors. Our team at Redstone GCI helps government contractors understand and apply FAR cost principles, prepare for audits, and develop strong internal policies to support compliance. Whether you need assistance with cost allowability assessments, audit support, or ongoing training for your team, we’re here to help you confidently manage your obligations and maintain positive government relationships.
John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama Certified Public Accountant