FAR 31.205-1 Allowable and Unallowable Advertising Costs

Under FAR 31.205-1, allowable and unallowable advertising costs split along a single line: costs that a federal contract specifically requires, that recruit staff, that help acquire scarce items or dispose of surplus, or that promote exports of products normally sold to the government can be billed; costs aimed at building the company’s brand, image, or commercial sales cannot. Public relations follows a parallel rule, with factual communication allowable and image-building unallowable. Getting the classification wrong can cost a contractor double the disallowed amount plus interest.

What the Regulation Counts as Advertising and Public Relations

The scope is wider than most contractors assume. FAR 31.205-1 defines public relations as any activity meant to maintain or enhance the company’s image or build favorable relations with the public. Advertising is the use of any media to promote products or services, or to carry out the specific allowable activities the regulation lists, with the advertiser controlling the form, content, placement, and timing.¹

Covered costs include media time and space, outside agency fees, and the applicable share of salaries, travel, and fringe benefits for any employee doing this work.¹ A marketing director’s time, a designer’s travel to a shoot, and a monthly PR retainer all fall inside the rule. Every internal resource that touches these functions runs through the same allowability test as the outside invoice.

The Three Allowable Advertising Categories

FAR 31.205-1(d) limits allowable advertising to three narrow situations.¹

The first covers ads specifically required by the contract, or ads arising from contract requirements that are used exclusively to acquire scarce items needed for performance or to dispose of scrap and surplus materials generated during the work. Placing a trade-publication ad to source a rare alloy unavailable through normal supply channels is the classic fit.

The second covers activities that promote sales of products normally sold to the U.S. Government, including trade shows, when those activities contain a significant effort to promote exports from the United States. Even inside this exception, the regulation carves out memorabilia such as models and souvenirs, alcoholic beverages, entertainment, and facilities used primarily for entertainment rather than product promotion.

The third is help-wanted advertising, cross-referenced to FAR 31.205-34. The ad must describe specific positions or classes of positions and cannot include material irrelevant to recruitment, such as extensive illustrations or descriptions of the company’s products and capabilities.² A plain job posting for a systems engineer with required qualifications works. A full-page spread that spends half its space on company history and product lines does not, even with a job listing at the bottom.

Allowable Public Relations Costs

Paragraph (e) is more permissive. Any PR cost specifically required by the contract is allowable, and several categories qualify on their own.¹

Responding to inquiries about company policies and activities, communicating with the press, stockholders, creditors, and customers, and conducting liaison with news media and government PR officers are allowable, as long as the activities stay limited to keeping the public informed on matters of public concern. The regulation gives specific examples: notice of contract awards, plant closings or openings, employee layoffs or rehires, and financial information. Factual communication is the thread; image-building is not.

Community service activities like blood bank drives, charity drives, savings bond campaigns, and disaster assistance qualify. Plant tours and open houses are allowable, though promotional materials handed out during those events can still be unallowable under paragraph (f)(5). For defense contractors, costs related to keel laying, ship launching, commissioning, and roll-out ceremonies are allowable to the extent the contract specifically provides for them.

What Is Always Unallowable

Paragraph (f) is where most contractors stumble. Any advertising or PR cost not made allowable by paragraphs (d) or (e) is unallowable if its primary purpose is promoting product sales, stimulating interest in a product line, or enhancing the company image to drive sales.¹ Auditors focus on what the expenditure was designed to accomplish, not on any ancillary benefit to contract performance.

The regulation then lists categories that are always unallowable:

Trade shows that do not contain a significant export-promotion effort for products normally sold to the government.
Sponsoring meetings, conventions, symposia, and seminars when the principal purpose is something other than disseminating technical information or stimulating production.
Corporate celebrations and new product announcements.
Brochures, videos, handouts, magazines, and other media designed to call favorable attention to the contractor.
Models, imprinted clothing, buttons, and other mementos distributed to customers or the public.
Memberships in civic and community organizations.
Costs associated with donating excess food to nonprofits under the Federal Food Donation Act.

The souvenirs and promotional-materials categories catch a lot of routine spending. Branded pens at a reception, a company-history video shown on a facility tour, or a glossy capabilities brochure left with potential teaming partners all land in unallowable territory.

Reasonableness Still Applies

An allowable category is not a green light on any amount. FAR 31.201-3 requires that costs be reasonable, meaning they do not exceed what a prudent person would spend running a competitive business. Reasonableness turns on whether the cost is ordinary and necessary, whether it reflects sound business practices, and whether it deviates significantly from the contractor’s own established practices.³

No presumption of reasonableness attaches to any cost. If the contracting officer challenges an expense, the contractor carries the burden of proving the amount was justified.³ A help-wanted ad in a national newspaper for a role that could have been filled through a local job board may fail the reasonableness test even though recruitment advertising is technically allowable.

Penalties for Including Unallowable Costs

The financial consequences are structured to bite. FAR 42.709 sets a two-tier penalty when a contractor includes expressly unallowable indirect costs in a proposal:

The standard penalty equals the amount of the disallowed costs allocated to covered contracts, plus interest on any portion already paid.
If the cost was previously determined unallowable for that contractor before the proposal was submitted, the penalty doubles to two times the disallowed amount.

These penalties stack on top of other administrative, civil, and criminal remedies. The government does not need to have paid the contractor for the unallowable costs before assessing the penalty.⁴ A contractor told in a prior audit that branded giveaways were unallowable, who then includes them again the following year, faces double the disallowed amount plus interest plus whatever else the government pursues.

Common Audit Pitfalls

DCAA auditors give this area extra scrutiny because the line is easy to blur. A few patterns recur.

The most common mistake is misclassifying an unallowable cost under a more favorable cost principle. A corporate celebration charged to the employee morale and welfare account under FAR 31.205-13, rather than treated as an unallowable ceremony under 31.205-1(f)(4), is the textbook example. Auditors look at the substance of the activity, not the account label.

Logo and brand-identity work is another frequent issue. Creating a company mark for the first time may not trigger the advertising cost principle, but redesigning an existing logo almost always does, because the primary purpose is enhancing company image.

Large year-over-year jumps in PR spending draw attention on their own. If most of a contractor’s work is government-funded and PR spending suddenly doubles, expect questions about whether the increase is genuinely necessary for contract performance or is being subsidized by federal dollars.

Documentation That Survives an Audit

Every advertising and PR expenditure needs records showing what the activity was, why it was incurred, and which allowable category it maps to. Classify costs at the time they are incurred, not after the fact when an auditor is asking.

For each claimed cost, keep the third-party invoice or internal cost record, a description that maps to a specific allowable paragraph in FAR 31.205-1, and supporting evidence of intent: meeting minutes authorizing a recruitment ad buy, an email chain documenting the export-promotion element of a trade show, or the contract clause requiring community outreach. Vague accounting entries like “marketing services” create risk because auditors look for a direct correlation between each invoice and a specific allowable category.

Overlap With Lobbying Costs

Some PR spending shades into lobbying, which is governed separately by FAR 31.205-22. Any attempt to influence elections, legislation, or government officials on regulatory or contract decisions is unallowable, along with the costs of political action committees and legislative liaison work supporting lobbying.⁵ A campaign badged as “government affairs” or “stakeholder engagement” will be tested under both 31.205-1 and 31.205-22, and failing either test makes the cost unallowable.

1
Acquisition.GOV. FAR 31.205-1 – Public Relations and Advertising Costs
2
eCFR. 48 CFR 31.205-34 – Recruitment Costs
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eCFR. 48 CFR 31.201-3 – Determining Reasonableness
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Acquisition.GOV. FAR 42.709-2 – General
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Acquisition.GOV. FAR 31.205-22 – Lobbying and Political Activity Costs