Many organizations have the misguided belief that all Marketing/Sales Department expenses are unallowable and exclude them entirely from their allocation of indirect costs. This is not correct and organizations both large and small that exclude selling costs are leaving money on the table and not reflecting the true cost of doing business in their pricing.
First, we need to understand the difference between marketing and direct selling. As defined in FAR 31.205-38, Selling Costs, direct selling encompasses all efforts to induce a particular customer or group of customers to purchase a particular product or service. It is characterized by person-to-person contact, including such activities familiarizing a potential customer with products and/or services, conditions of sale, service capabilities and pricing. It also includes negotiation, liaison with the customer, technical and consulting efforts, individual demonstrations and any other efforts having as their purpose the application or adaptation of your products and/or services for a particular customers use. These efforts are allowable.
Marketing efforts are generally more broad-brush utilizing a “shotgun” approach to potential customer contact. It includes advertising, trade shows or symposiums where efforts are not targeted toward a particular customer or market segment. These efforts may lead to direct selling but in themselves are not designed to induce a particular customer or group of customers to purchase your products or services in an effort to solve their specific needs. These efforts are generally unallowable.
To identify the allowable direct selling efforts from the unallowable marketing, will require the following:
- Education of your sales and marketing personnel as to the difference between direct selling and marketing efforts and the financial importance of correctly identifying these efforts,
- Establishment of ledger accounts to collect charges of these efforts through your labor and expense recording process, and
- Encouraging your sales and marketing personnel to accurately charge the proper ledger accounts.
Keep in mind that collateral costs associated with unallowable marketing efforts such as travel, lodging, meals, marketing materials, trade show participation costs and employee time are also unallowable.