Gail & Jim Greenwood, Greenwood Consulting Group, Inc.

Copyright © 2002 by Greenwood Consulting Group, Inc.

Last month we indicated that we would devote this article to the topic of "marketing expenses." This seems like a pretty straightforward concept for the typical small business, but it gets complicated real quickly if that firm is involved in SBIR contracts and grants.

Per the Federal Acquisition Regulation (FAR), the Federal government does not recognize a cost category of "marketing expense." Instead, the FAR defines a term "selling costs." Per FAR 3.205-18(c), "selling costs" consist of several distinct activities including advertising, image enhancement, bid and proposal, market planning, and direct selling. Let’s take a look at each of these categories, since the FAR clearly states that any selling cost that does not fall into one of these categories is unallowable—translation: if you can’t stuff one of your marketing activities into one of these categories, the expenses related to that activity cannot be billed to the Federal government as either a direct cost or an indirect cost (consisting of overhead and G&A, but called F&A if your working with NIH) in an SBIR grant or contract.

The FAR indicates that advertising is generally an unallowable cost, with two notable exceptions. First, advertising related to the export of products and services outside of the U.S. is allowed. Second, advertising related to recruiting personnel, at least in part to work on government projects, is also allowed.

Corporate image enhancement (e.g., ENRON sponsoring a Little League team to help its corporate image) is mostly unallowable—unless a certain "Big 5" Accounting firm is keeping your books for you. J

Bid and Proposal (B&P) is a very important component of "selling costs." It is defined as preparing, submitting and supporting bids and proposals, or the costs commonly involved in getting on the list for a Request for Proposals (RFP), getting the background information needed to respond to the RFP intelligently, and then actually writing and submitting the proposal. Per FAR 3.205-18(c), Bid & Proposal is an allowed expense as long as it is reasonable and can be fairly allocated as an indirect cost among your various projects.

Market planning is another critical component of "selling costs." It is defined as market research and analysis and long range planning. It is allowed if it is reasonable. This means that the cost of determining the size, characteristics, location, etc. of the market for your SBIR or STTR technology is an allowable indirect expense. You may want to build some market planning into your indirect cost rate during the Phase I and II of your projects, and perhaps even during "Phase O" (if available in your state) —it’s never too early to determine if there is really a market for the results of an SBIR or STTR topic for which you are contemplating submitting a proposal.

The FAR also defines direct selling as part of "selling costs." It includes person-to-person selling, negotiation, and demonstrations. It is an allowed expense if it is reasonable. This category may include a number of marketing activities if they are couched in terms of their relevance and importance to person-to-person selling.

Several important comments about "selling costs" and your company’s SBIR/STTR projects:

The FAR is explicit that any costs that fall outside of the definitions of those categories described above are unallowable. Therefore, you have considerable incentive to try to find justification for any marketing-related expenses as fitting into one of the allowable categories

If you fail to differentiate allowable marketing or selling costs from those that are unallowable, and therefore lump them all together into a single category like "Marketing Expenses," then the entire amount will not be allowed as part of your indirect rate. So, at a minimum, have two categories in your accounting system: marketing expenses allowed, and marketing expenses unallowed.

The government defines "reasonable," as used in the prior discussion, as what a "prudent person in the conduct of competitive business" would do. How’s that for a precise standard? Often, when it comes to selling costs, or a category thereof like Bid and Proposal, "reasonableness" gets considered in the context of whether the amount of marketing expense you are requesting causes your indirect or G&A rate to exceed what your contracting officer or grants administrator thinks is "reasonable." Therefore, don’t be too greedy, and be prepared to defend how much you are requesting for B&P or marketing expenses.

Speaking of greedy, you cannot seek compensation for previous marketing efforts—your indirect rate should reflect your anticipated marketing or selling costs for the current or projected period.

Finally, some auditors, contracting officers and grant administrators do not like the terms "marketing" and "selling." Therefore, you might want to consider categorizing such expenses in your accounting system as "product development expenses."