New Year’s Resolution #8: I will remember that employee bonuses are allocable and allowable

January 16, 2023

At a glance

Most government contractors offer incentive bonuses or awards to retain good employees.
Employee bonuses are allocable and allowable, but you must know where and how to claim the cost.
To ensure your bonuses are considered allocable and allowable by DCAA, consider these four factors.

The full story:

Per the Federal Acquisition Regulation (FAR), employee bonuses are allocable and allowable. The catch is knowing where and how to claim the cost.

Where should bonuses be recorded and how are they allowable?

Most government contractors offer incentive bonuses or awards to retain good employees. After a performance period, short- and long-term bonuses are paid to the employee in cash.

The cost of these bonuses is recoverable through a company’s indirect rate structure, which makes them subject to the review of allowability and allocability by the Defense Contract Audit Agency (DCAA).

How to ensure your bonuses are allocable

To ensure that your bonuses are considered allocable (FAR 31.201-4) and allowable (FAR 31.205-6(f)) by DCAA, here are a few things to consider.

For the bonus to be claimed as fringe cost, the bonus eligibility must be the same across all employees.
If bonus plan availability varies by type of employee, it should follow labor.
Direct employee bonuses should be in their respective overhead pool.
Create a Written Bonus Plan that addresses the following:
- Who is eligible to receive the bonus
- When the bonus will be paid
- How the amount will be calculated
- What period of performance is applicable for the bonus

If you don’t have a written bonus plan, now may be the time to create one.