By Richard Hirschen, CPA, CGMA
Gray, Gray & Gray, LLP
Every year architectural and engineering firms spend money – lots of money – trying to generate new business and new projects. Your firm’s investment in marketing can run the gamut from advertising and direct mail, to a website and public relations, to entering design competitions in hopes of winning the work. And let’s not forget the hours of employee time that go into these promotional activities.
Rules for Overhead 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.1
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.2
The list of disallowed items goes on to include “public relations” activities such as:
- Promotional material
- Motion pictures and videotapes
- Brochures and handouts
- Memberships in civic and community organizations
- Souvenirs and other mementos
- Imprinted clothing
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 Time
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.
Many years ago doing good work was enough to get more work. But in an increasingly competitive market, architects and engineers must invest in marketing their services and promoting their firms. How much of this investment can be included in your indirect cost rate remains a complex and – at times – confusing issue. You don’t want to cross the line, particularly in a government overhead audit. For more information and guidance, please contact Gray, Gray & Gray at (781) 407-0300.
Richard Hirschen is a partner with Gray, Gray & Gray, LLP, an accounting and advisory firm specializing in the architecture, engineering and design industry.
1 FAR 31.205-1(c)
2 FAR 31.205-1(f)(2)