Organization Costs - FAR 31.205-27

Allowable or Unallowable: Unallowable, Allowable

Source: FAR, DFAR

31.205-27 Organization Costs

Generally, unallowable, but only after the Management decision is made to pursue a specific merger, acquisition or divestiture. Prior to that, it is a routine management and decision making required to run a business, which is reasonable, and allowable.

However, under DFAR 231.205-70 External Restructuring Costs may be allowable. Please read the rules related to this topic (See Related Pages section) before making a determination of allowability on these costs.

FAR Citation

(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.

Related Topics

DFAR 231.205-70 External Restructuring Costs

External Restructuring Activities

Definitions

Business Combination

External Restructuring Activities

Restructuring Activities

Restructuring Costs

Restructuring Savings

Related Guidance

DCAA Contract Audit Manual, 7-1900 Section 19 ---Restructuring Costs