Monday, September 12, 2011

Relocation's "12-month" Rule

A contractor relocated an employee from one coast to the other. After a few months, the employee (and his family) became very unhappy with the new living situation. Since the employee was highly-valued, the contractor relocated him and his family back to their original location. Both of the relocations occurred within a nine month period. The cost of both relocations are unallowable under Government contracts.

Relocation costs are costs incident to the permanent change of assigned work location for a period of twelve months or more of an existing employee or upon recruitment of a new employee. Relocation costs are generally allowable but since it usually represents a significant cost to contractors, FAR 31.205-35 has caps and limitations on different components of relocation costs. One area where auditors are instructed to focus their efforts is on the "twelve-month" minimum relocation period rule. If relocation costs for an employee have been allowed either as an indirect or direct cost and the employee resigns with 12 months for reasons within the employee's control, contractors must refund or credit the relocation costs to the Government (see FAR 31.205-35(d)).

Government contractors should include recapture provisions in relocation agreements so that it can recover relocation payments from the employee if that employee does not fulfill his/her twelve month minimum. Contractors should also implement a follow-up system to collect refunds when appropriate and to ensure that the refunds are appropriately credited back to the Government. Regardless of whether a contractor can recover relocation payments from an employee, it is still required to make appropriate refunds to the Government.

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