Marketing Costs Under FAR: When They’re Allowable and When They’re Not

Key Takeaways

• “Marketing” Is Too Broad Under FAR: Lumping all marketing costs together can inflate unallowable expenses and negatively impact overhead rates – costs must be properly categorized.
• Bid & Proposal (B&P) Costs Are Often Allowable: Proposal-related activities (per FAR 31.205-18) are typically allowable indirect costs, but only if they are clearly identified, tracked, and separated from general marketing.
• Direct Selling Can Be Allowable: Customer-specific, person-to-person selling efforts are allowable, unlike broad advertising or brand promotion.
• Clear GL Structure Prevents Compliance Issues: Separating B&P, direct selling, and advertising/PR in the general ledger helps avoid mixing allowable and unallowable costs and reduces audit risk.
• Documentation Is Critical for Audit Readiness: Detailed timekeeping and support (e.g., notes with proposal IDs or client details) are essential to justify cost allowability and avoid issues during audits.

Marketing is a term used broadly by many companies; this broad grouping of “marketing” costs may negatively impact a company’s FAR Overhead Rate (OH Rate) because general marketing is often unallowable. Marketing should be categorized into distinct categories for accurate tracking and calculations of one’s OH Rate. Each category may be governed by a different cost principle. Understanding each category is a great way to reduce questioned costs and maximize a business’s OH Rate. Two often overlooked opportunities, and often buried in marketing, are costs related to Bid & Proposal and Direct Selling costs.

Bid & Proposal (B&P): Often Allowable

If a team is preparing, submitting, or supporting bids and proposals – whether solicited or unsolicited, Government or commercial – those activities generally fall under Bid & Proposal (B&P) costs as defined in FAR 31.205-18. That definition matters because it places proposal activity in its own FAR bucket, separate from general marketing.

B&P is typically treated as an indirect cost category, and audit guidance frequently emphasizes whether B&P is properly identified, accumulated, and allocated consistently. The biggest risk isn’t that proposal costs exist – it’s that they’re tracked inconsistently, buried in generic marketing accounts, or mixed with other marketing costs that are evaluated under a different rule set.

A best practice is if it’s proposal work, label it and track it as B&P – not “marketing,” not “admin,” not “G&A misc.” This applies to both payroll and other indirect costs. Having a payroll code for B&P and a general ledger expense account for B&P costs is recommended.

Direct Selling: Surprisingly Allowable

Many firms assume “selling” is automatically unallowable under FAR, but FAR draws an important distinction: direct selling – person-to-person efforts to induce a particular customer to purchase particular services – can be allowable. FAR describes direct selling as the kind of work that includes customer liaison, negotiation, technical/consulting efforts aimed at adapting services to a customer’s needs, demonstrations, and similar customer-specific efforts.

FAR differentiates between direct selling and promotional advertising. Once activities shift from targeted customer engagement to broad corporate image enhancement or broadly targeted promotion, this starts falling back into the advertising/public relations rules, which are much more restrictive.

A best practice is if a firm wants to include allowable selling activity in its indirect structure, they need documentation and timekeeping that clearly shows the work was direct selling (customer-specific) rather than broad “brand” activity. Implement documentation policies and requirements that require employees to capture customer information, project information, topics discussed, and any other relevant information to support direct selling efforts.

Recommended General Ledger (GL) Structure: Simple and FAR-Aligned

There is no need to overcomplicate a chart of accounts to get this right. Clear separation aligned to the FAR cost principles is recommended, such as:

1.) B&P accounts (allowable/indirect when properly treated):

• B&P Labor;
• B&P Other Costs (proposal printing, graphics, proposal subs).

2.) Advertising/PR accounts (generally unallowable):

• Unallowable – Advertising/Brand Marketing;
• Unallowable – Public Relations/Corporate Image.

3.) Direct Selling (allowable if truly customer-specific):

• Direct Selling – Labor;
• Direct Selling Other Costs (Travel, meals).

This structure prevents “cross-contamination” where unallowable advertising gets buried inside overhead pools and forces year-end reconciliations.

Payroll Tracking

Even more important than GL structure is documentation for labor costs. Most time keeping software has a notes field when entering employee time. Requiring the notes field be used to document the purpose of the time entry to support allowability is recommended. For example, notes could include “Proposal – DOT RFQ ####” for B&P time entered. Another example would be specific client information and topics discussed for Direct Selling time. This information is much easier to add at the point of entry versus trying to support the costs months after the fact.

The Audit Test: A Simple Classification Matrix

When employees or AP staff ask where something belongs, use this model:

• Is it tied to preparing or supporting a proposal? → B&P (FAR 31.205-18).
• Is it broad promotion or brand/image work? → Advertising/PR (FAR 31.205-1; generally unallowable except narrow categories).
• Is it person-to-person work to induce a specific customer to buy, including customer liaison and technical consult to adapt services? → Direct selling (allowable concept under FAR 31.205-38(b)(5)).
• Is the cost tied to an unallowable activity, such as a sporting event? → Most likely unallowable, regardless of the purpose. Unallowable activities, such as golf or professional sporting events, will generally make any cost associated with the event

Bottom Line

It is very common for businesses to generalize all “marketing” related costs. We observe it time and time again, especially for firms going through a first-time audit. B&P and direct selling costs can be significant. Following some (or all!) of the practices outlined above can provide immediate benefit to a firm’s overhead rate and help them to be more audit ready.

For more information about McKonly & Asbury’s Architecture, Engineering, and Construction (AEC) experience, visit the AEC Industry Page and don’t hesitate to contact a member of the AEC team.

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