DCAA contends the amount provided to the housing program was a donation and therefore unallowable as an incurred cost per FAR 31.205-8. The KTR contends it was an incentive with (possible) reciprocal work production and retention requirements, therefore not a one-way donation and therefore an allowable incurred cost. Who is right? If allowable, at what point does the amount of contribution become problematic ($500K, $1M, ...)? Should the KTR have negotiated an Advance Agreement with the ACO before engaging in the program?
A few thoughts come to mind:
1) "It was implied (but not yet confirmed) that employees had to meet retention requirements or else pay back loan." If this can be confirmed, it could support the idea that the money could reasonably be considered as an incentive rather than a donation. Donations do not have reciprocity, but “pay back loan” suggests reciprocity. The incentive was to retain employees in a geographical area to complete their contracts due to force majeure. (I'm assuming they are federal government contracts.) In some sense, the intent of the incentive has elements of the underlying purpose for Recruitment costs (FAR 31.205-34) and Relocation costs (FAR 31.205-35), both of which are allowable costs…even though the circumstances you describe do not meet the strict definition of those costs.
2) If it is confirmed the contractor did not deduct the monies as charitable expenses for federal tax purposes, this could be used as additional support for considering the money as incentive payments.
3) If it is agreed the funds can be classified more as an incentive cost (and possibly “reverse relocation” cost) rather than a charitable donation, then yes — an advance agreement should have been negotiated. Per FAR 31.109(h)(1), advance agreements are “particularly important” for incentive pay and relocation allowances.
The points stated above are simply presented for the ACO and DCAA to consider when making a final determination on the matter.