Lets look a little closer at the basic guidance. Then you must make a determination on activities cost allowability and be prepared to support your conclusion.

Employee Welfare and Morale Expense -

Employee welfare and morale expenses are costs incurred on activities to improve working conditions, employer-employee relations, employee morale, and employee performance. Expenses and income generated by employee welfare and morale activities should be reviewed for compliance with FAR 31.205-13. Note that employee morale type expenses are often covered by the entertainment cost principle at 31.205-14. Entertainment costs are not allowable under any other cost principle.

By statute, entertainment costs are expressly unallowable, without exception. Consequently, the entertainment cost principle at FAR 31.205-14 takes precedence over any other cost principle.

General

(1) Aggregate costs incurred for employee welfare and morale, less credits for income generated by these activities, are allowable except as noted below, to the extent that the net amount is reasonable. In applying the provisions of FAR 31.201-3, Reasonableness, consider whether the expenditure is reasonable in nature and amount both for the contractor as a whole and for the employee(s) benefited by the expenditure.

(2) Costs relating to welfare and morale activities, if significant, should be subjected to the test of reasonableness as to purpose and amount. When reasonableness as to purpose has been established, reasonableness of amount should ordinarily be applied to overall amounts and not to individual items of cost, provided the items are not made specifically unallowable by FAR Part 31.

Gifts, Recreation, and Entertainment

Costs of gifts, recreation, and entertainment are specifically unallowable, with a few exceptions.

(1) Although Gifts are an expressly unallowable expense, the cost principle specifically excludes two categories of awards from the unallowable gift definition:

(a) Awards covered by the compensation cost principle at 31.205-6; and

(b) Awards made pursuant to an established plan or policy for recognition of employee achievements.

(2) Recreation expenses are an expressly unallowable expense with the following exception: Costs of employees participation in company sponsored sports teams or employee organizations designed to improve company loyalty, teamwork, or physical fitness. The exception does not allow general recreation activities and does not allow any costs disallowed by FAR 31.205-14, Entertainment. If the Government challenges the allowability of claimed recreation costs, it is the contractors responsibility to establish that the cost claimed meets the following criteria:

(a) The cost is for employee participation in a sports team or employee organization.

(b) The team or organization is company sponsored.

(c) The team or organizations activity is designed to improve company loyalty, teamwork, or physical fitness.

(3) Entertainment costs are expressly unallowable, without exception. Therefore, even if the principal purpose for incurring an entertainment cost is other than for entertainment, the entertainment cost is unallowable. For example, while the cost of a contractor open house for employee families is generally allowable, the cost of entertainment provided as part of the open house is unallowable.

(4) Taken together, the statute and the cost principles at 31.205-13, Employee morale, and 31.205-14, Entertainment, expressly disallow costs that some contractors may consider reasonable and allowable. Examples of such costs include, but are not limited to:

(a) Entertainment provided as part of public relations, employee relations, or corporate celebrations;

(b) Gifts to anyone who is not an employee;

(c) Gifts to employees that are not for performance or achievement or are not made according to an established plan or policy;

(d) Compensation awards of entertainment, including tickets to shows or sports events, or travel; and

(e) Recreational trips, shows, picnics, or parties.

Therefore, choose carefully how any planned activity under this cost principle is presented to your employees and the public. Use the guidelines above and sound, reasonable judgment. And be prepared to support your decision based on how all aspects of various cost principles apply.