31.205-27 Organization costs
Source: FAR 31.205-27 on acquisition.gov
Organization and reorganization costs, including those for mergers, acquisitions, and raising capital, are unallowable on government contracts, except for certain compensation-related activities governed by FAR 31.205-6.
Overview
FAR 31.205-27 addresses the allowability of organization costs in government contracts. It establishes that most costs associated with planning or executing the organization or reorganization of a business, such as mergers, acquisitions, changes in ownership, or raising capital, are unallowable for reimbursement under government contracts. This includes fees for legal, accounting, consulting, and related services, regardless of whether the service providers are employees or external parties. The rule also clarifies that costs related to changes in a contractor’s financial structure (except for administrative costs of short-term borrowings for working capital) are unallowable if they alter the rights and interests of security holders. However, costs primarily intended to provide compensation, such as acquiring stock for executive bonuses, employee savings plans, or employee stock ownership plans, are not considered organization costs under this section and are instead governed by FAR 31.205-6 (Compensation for Personal Services).
Key Rules
- Unallowable Organization Costs
- Costs for planning or executing business organization/reorganization, resisting such changes, or raising capital are unallowable.
- Examples of Unallowable Costs
- Includes incorporation fees, legal and accounting fees, and consultant costs related to organization or reorganization.
- Exception for Compensation-Related Activities
- Costs for acquiring stock for executive bonuses, employee savings plans, or ESOPs are not subject to this rule but to FAR 31.205-6.
Responsibilities
- Contracting Officers: Must ensure organization costs are excluded from allowable costs in contract pricing and audits.
- Contractors: Must identify and segregate unallowable organization costs from allowable costs in their accounting systems.
- Agencies: Should review cost proposals and incurred cost submissions for compliance with this rule.
Practical Implications
- This rule prevents contractors from charging the government for costs related to corporate structuring or capital raising.
- Contractors must carefully track and exclude these costs to avoid audit findings or cost disallowances.
- Misclassification of organization costs is a common audit issue and can result in financial penalties or repayment obligations.
(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.