Restructuring costs with less than a $2.5 million impact on government contracts or that can demonstrate a two for one cost savings are allowable but several cost principles and rules of cost allocation set up substantial barriers to full cost recovery.

Organizations costs. FAR 31.205-27 restricts the allowability of these costs by stating merger and acquisition costs and the costs for resisting mergers and acquisitions as well as costs for divesting organizations are unallowable. These costs include such fees for professional services like attorneys, accountants, investment bankers and consultants as well as other expenses such as banking and incorporation fees.

We should note the wording of this cost principle uses the phrase "reorganization" which is often confused by both contractors and auditors because "internal reorganization" of contractor activities is commonly used for reorganizing existing businesses not involving a merger, acquisition or divestment. The cost principle was never intended to restrict the cost allowability of such activities.

Environmental remediation. Environmental cleanup effort frequently arises in connection with restructuring activities but, in general, DCAA asserts the remediation costs (e.g. soil or water contamination cleanup, asbestos removal, etc.) do not meet the DFARS definition of restructuring costs. Hence, these costs should be excluded from any cost versus savings analysis provided to the government and should be negotiated under a separate agreement.

There are several facility related costs subject to various cost limitations that affect otherwise allowable restructuring costs. For instance (1) idle facilities and idle capacity under FAR 31.205-17 limits reimbursement to one year unless the ACO agrees to a longer period (2) FAR 31.205-52 restricts asset write-up costs such as depreciation, cost of money, etc to costs that would have been incurred had the reorganization not occurred (3) FAR 31.205-16 limits estimates on gain/loss on asset sales only to contingencies where there is a ready market where sales are reasonably foreseeable (4) FAR 31.205-31 precludes plant rearrangement costs for returning a plant to commercial use unless there is an advance agreement and (5) FAR 31.205-21 restricts extraordinary maintenance and repairs to a factor calculated for gain and loss on a sale rather than a normal period cost.

There are also several employee related costs that limit full recovery of otherwise allowable restructuring costs. For example (1) employee termination costs such as early retirement incentives and severance pay have certain restrictions in accordance with FAR 31.205-6 (2) retention pay, especially "golden handcuff" arrangements are unallowable in accordance with FAR 31.205-6(l) (3) relocation costs have several limitations under FAR 31.205-35 and 46 (4) recruitment costs under FAR 31.205-34 has certain restrictions (5) employee training costs must pass muster with FAR 31.205-44 and (6) bonuses must meet several conditions in FAR 31.205-6 before they are allowable, In addition, any increase in costs resulting from changes in pension plans and post-retirement health benefits are not considered restructuring costs according to DFARS 231.205-70 and hence are subject to separate review by specialized auditors who will evaluate changes in accordance with FAR 31.205-6 and CAS 412 and 413.

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