FAR Advertising and Marketing Expense Rules for A&E Overhead Rates

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Every year, architectural and engineering firms invest significant resources in generating new business opportunities and winning new projects. Your firm’s investment in marketing can take many forms, from advertising and direct mail to website development and public relations efforts, as well as entering design competitions in hopes of winning new work. Employee time devoted to these promotional activities also represents a significant investment.

FAR Rules for Overhead Rate Audits

The rules for overhead rate calculations are very restrictive and, for-profit companies are governed by part 31 of the Federal Acquisition Regulations (FAR). The American Association of State Highway and Transportation Officials (AASHTO) Uniform Audit & Accounting Guide provides an excellent interpretation of the FAR as it applies to engineering firms. According to AASHTO advertising and public relations costs include “the costs of media time and space, purchased services performed by outside organizations, as well as the applicable portion of salaries, travel, and fringe benefits of employees engaged in the function and activities” of marketing a firm.

The list of unallowable public relations and advertising costs is lengthy. It includes “all costs of tradeshows and other special events” (unless they contain a significant effort to promote the export sales of products normally sold to the U.S. government), which means that costs such as tradeshow booths and booth space, promotional items, and labor for booth attendants is not allowable.

The list of disallowed items goes on to include “public relations” activities such as:

Promotional material
Motion pictures and videotapes
Brochures and handouts
Magazines
Memberships in civic and community organizations
Souvenirs and other mementos
Imprinted clothing
Buttons

What about that seminar you presented? Sponsorship of meetings, symposia, seminars and other special events is not an allowable cost unless the principal purpose of the event is the dissemination of technical information.

So, what is allowed to be included under FAR rules? A very limited list of marketing expenses, including costs incurred for responding to inquiries on company policies and activities; normal communications with the public, press, stockholders, creditors and customers; routine liaison with the news media and government public relations officers.

Tracking Marketing Labor Costs for Overhead Rate Calculations

A significant aspect of accounting for marketing expenses is the portion of employee time devoted to the task. Payroll costs associated with allowable marketing activities can be included in the overhead cost pool. This includes any full-time or part-time staff members who are focused on marketing, as well as other personnel who participate in marketing (such as seminar presentations, tradeshow attendance, etc.). Likewise, time spent on unallowable marketing time is not allowed in the indirect cost pool.

This is why it is so important that a firm’s time tracking system differentiates between allowable marketing time and marketing activities that are not allowable under the regulations.

We find that this time tracking task is one that many architectural and engineering firms struggle with, either misclassifying activities, or overstating or underestimating the hours devoted to allowable marketing actions. In some cases employee time spent on marketing, whether allowable or unallowable, is simply ignored altogether, potentially causing significant misstatements of a company’s overhead rate.

In an increasingly competitive market, architects and engineers must invest in marketing to attract new clients and projects. However, determining which marketing costs may be included in an indirect cost rate remains a complex issue. Getting it wrong can create significant challenges during a government overhead audit.

A proactive review of your accounting practices and time tracking procedures can help ensure your overhead rate is accurate and audit ready. Contact our team today to learn how FD can help your firm navigate FAR compliance.

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