Relocation Costs

Back in 2005, the FAR cost principle for Relocation Costs, FAR 331.205-35, was revised so that certain types of relocation costs could be reimbursed to employees based on a lump-sum basis in lieu of actual costs. Prior to this revision, only miscellaneous costs up to a ceiling of $5,000 could be reimbursed on a lump sum basis. These three new types of costs eligible for lump sum reimbursement are:

• costs of finding a new home
• costs of traveling to the new location, and
• costs of temporary lodging.

Companies that are still reimbursing employees based on actual costs, might want to consider whether it is more cost effective to switch to a lump sum basis. One contractor with a significant number of relocations because of its overseas work, believes it has saved money (and therefore saved the Government some money) by switching to the lump sum reimbursement. The lump-sum method significantly reduces the administrative effort required to review and process the claims. Record-keeping is minimized. The time it takes to support external audits of contract costs is reduced. And, here's a dirty little secret, it keeps employees from padding their claims.

There is a catch however to implementing a lump-sum reimbursement policy. FAR states that reimbursement on a lump-sum basis may be allowed when adequately supported by data on the individual elements (e.g., transportation, lodging, and meals) comprising the build-up of the lump-sum amount to be paid based on the circumstances of the particular employee’s relocation.

The new provision does not impose a ceiling amount for the additional three types of relocation costs reimbursed on a lump-sum basis. However, a lump-sum reimbursement is required to be adequately supported to be allowable. DCAA is instructing its auditors to question any portion of the lump-sum payment that is not adequately supported. According to DCAA,

adequate support should include detailed calculations of the individual cost elements (e.g., airfare, car rental, lodging, and meals) that reflect specific factors, such as the number of travelers involved, travel destination, and the estimated number of travel days required based on the particular employee’s circumstances. For example, the estimated number of days required for house hunting trips may vary depending on whether the employee is single or married with dependent children, buying a home or renting an apartment, and the availability of housing at the new location.

The choice to reimburse on lump-sum basis versus an actual cost basis comes down to the number of relocations that happen in your organization. Where sporadic, its probably more cost effective to use the actual cost method. Where frequent, regular, and recurring, it might be more cost effective to establish a lump-sum policy. Contractors who adopt a lump-sum reimbursement of these relocation costs should establish policies and procedures that identify the group/class of employees eligible for lump-sum reimbursements and provide guidelines or criteria for determining the estimated lump-sum amount.

Audit evaluations of lump-sum provisions will include a review of the contractor’s policies and procedures and the documentation that supports the calculation of the estimated lump-sum amount for the particular employee. The auditor will also ensure that the contractor’s practice is consistently followed and that lump-sum payments reflect the individual circumstances of the relocated employees.

Finally, the new lump-sum reimbursement provision envisions that the lump-sum amount will be established before the employee actually incurs the costs and it prohibits subsequent adjustments to reflect actual costs incurred by the employee.