Having recently returned from a higher-than-normal amount of travel, I believe this is a good time to rant (again) about the overall stupidity of the cost allowability rules that pertain to travel.

When I travel for work, I comply strictly with the FAR travel rules (FAR 31.205-46). Those rules are based (to a limited extent) on the Federal Travel Regulations (FTR) and Joint Travel Regulations (JTR) that apply to Federal government personnel. In other words, government contractors are (generally) required to travel within the same rule set as applies to Federal government employees—and that is simply not possible.

For example, it’s very difficult—if not impossible—for contractors to get the “government employee” rates provided to Federal workers. If you book a reservation at that lowered rate, you will almost certainly be asked to show your Federal ID when you check in. If you don’t have it (because you’re not a Federal employee) then there are several possible outcomes. Maybe you’ll get the rate anyway, because it’s too much trouble to change the reservation. Maybe you’ll have to pay the higher “room rate.” Maybe your reservation will be cancelled. Or maybe you’ll be arrested and charged with attempting to defraud an innkeeper, which is a crime in many states. Rather than deal with those risks, you will probably opt to simply book the cheapest rate you can get, knowing that most “good” hotels are outside the GSA’s lodging limits.

Of course—as any auditor will tell you—contractors certainly don’t have to live within Federal per diem limits. They are free to spend whatever they wish; the limits simply pertain to the amount of travel costs that will be reimbursed in direct costs and in indirect cost calculations. In other words, the difference comes from profit. (In a future rant, we might explore how the DoD’s “weighted guidelines” approach to setting profit objectives ignores this little factoid.) The problem is, that profit also funds other things, such as capital investments. Taking unallowable travel costs out of profit puts pressure on contractors’ ability to invest in their business.

But the Federal travel rules and the FAR travel cost principle are stupid. They are stupid because they focus on the individual elements of travel and therefore don’t lead to the lowest overall trip cost.

Scenario: The airport is 10 miles from the office where you will be meeting and working for the next five days. You need a hotel for four nights.

Example #1: There is a hotel right next to the office but it’s $5.00 over the local lodging ceiling, so your travel agency books a hotel that’s 5 miles away—meaning it’s 15 miles from the airport. You saved $20.00 in unallowable lodging expense ($5.00 x 4 nights) but you are now spending an extra $100.00 in taxi fare. (The trip from the airport to the hotel is longer, and each day you need to take a taxi from the hotel to the office, and back again.) You saved $20.00 but spent an extra $100.00 transportation. Nice. That extra $100.00 is fully allowable, of course.

Example #2: You are flying Monday thru Friday. The airfare is $1,000.00. But if you were to return on Sunday, the airfare would only be $600.00, because of the Saturday night stay rule. You could save $400.00 by extending your trip by two days. And the lodging is only $130.00 per night; and the daily M&IE rate is only $48.00! Doing the math, by spending an extra $346.00 you save $400 in airfare, for a net savings of $54.00. Thus (all things being equal), it makes perfectly reasonable business sense to extend the business trip by the weekend. But good luck explaining all that to your boss, who thinks you are boondoggling. And good luck explaining all that to the people who process your expense report—and the auditors—who only see two days of unallowable “personal” travel tacked-on to the business trip.

Example #3: Same facts as Example #2, above. You can save $400 in airfare by adding two days to your trip. But instead of asking the company to pay for two days of lodging and M&IE expense, you want to apply that $400 towards an upgrade to Business Class. You’ll cover the weekend hotel and meals on your own dime (perhaps by staying an Aunt Betsy’ house and letting her cook for you), but you want to fly on that plane in a place where that teenage brat in the seat in front of you isn’t going to cram her seat down on your knees. Plus, if you fly Business Class, you might be able to actually get some work done on the plane! It’s a win-win, right? No, it’s not. Because the FAR travel rules on airfare don’t permit you to do this. Therefore, you must fly the “lowest available airfare” unless you can find some other reason for upgrading.

The fix for this seeming conundrum isn’t hard, and the FAR already has a precedent that could be applicable.

Looking at the compensation cost principle (31.205-6), we see the following language at (b), which discusses compensation reasonableness: “Compensation is reasonable if the aggregate of each measurable and allowable element sums to a reasonable total.” The regulation implies that offsets are allowed. In other words, if one compensation element is higher than would seem reasonable, another (lower cost) element can offset it. What’s important is the aggregate total, not the individual compensation elements.

DCAA audit guidance confirms this approach. The DCAA Contract Audit Manual (at 6-413.7) states “Offsets between individual compensation elements are implied in this concept. By using offsets, the contractor can provide proof that, in total, the cost of the compensation package is reasonable.” (We note that the offset calculation must be made between allowable elements of compensation.)

In order to address some of the concerns we’ve raised in this article, the FAR travel cost principle should be revised to add language such as the following—

Travel costs are reasonable and allowable if the aggregate cost of each trip is less than would it would have been, had each allowability rule provided below been followed exactly. Offsets between individual travel elements, including otherwise unallowable travel costs, may be used, where the result provides a demonstrable cost savings to the government.

How nice that flexibility would be, for travelers, for contractors, and for the taxpayers.

Lots of regulatory actions recently. We told readers about rules going bye-bye, rules being sunsetted, and rules being added. This article focuses on DFARS Case 2017-D019, a proposed rule that impacts contract financing payments.

Remember, this is a proposed rule, not a final rule. Public comments are being solicited and it’s possible (though unlikely) that they could affect the language of the final rule. So if you don’t like what you’re reading, we urge you to submit a comment to the rule-makers. Instructions for how to submit comments are in the text of the rule (link in the second sentence above). There will also be a public meeting on the topic, and you can offer comments in that forum, if you have a mind to do so. The point is: the rule is likely to be controversial and the rule-makers know it.

So what does this proposed rule propose to do?

Well, quite a bit, actually.

First, the rule purportedly implements Section 831 of the 2017 National Defense Authorization Act (NDAA). That piece of legislation pointedly reminded DoD that it was not following the requirements of FAR 32.1001, “which established performance-based payments as the preferred Government financing mechanism.” As we’ve noted in this blog from time to time, DoD has decided that it doesn’t like performance-based payments (PBPs) and has tried to disincentivize their use, despite statutory and regulatory language to the contrary. Section 831 was Congress’ way of telling DoD to stop it.

Did it work? You be the judge. The following are exact quotes from the comments in the proposed rule.

• DoD proposes to amend DFARS 232.1004 to remove the procedures for analysis of proposed performance-based payments using the performance-based payments analysis tool, and also removes the requirement that the contractor provide consideration to the Government, if the performance-based payments payment schedule will be more favorable to the contractor than customary progress payments. The current solicitation provisions at DFARS 252.232-7012 and 252.232-7013 are no longer required and will be removed, thus reducing burden on contractors.

• For maximum performance-based payments, DoD proposes rates and procedures comparable to those for determining the customary progress payment rate. The same representation will be used to determine both the customary progress payment rate and the maximum performance-based payment rate.

• … the contracting officer will not withhold progress or performance-based payments from a contract that includes the clause 252.232-7004 or the provision 252.232-70YY, unless the contractor is receiving progress payments or performance-based payments under the contract at a rate specified in CBAR that includes the 10 percent incentive based on having acceptable business systems without significant deficiencies.

• DoD proposes a customary progress payment rate of 50 percent for other than small businesses and retains the 90 percent rate for small businesses, but provides criteria by which contractors can achieve a customary progress payment rate of up to 95 percent. However, if a contractor or any of its principals has within the preceding Government fiscal year been convicted of or had a civil judgment rendered against the contractor or any of its principals for commission of fraud or a criminal offense in connection with obtaining, attempting to obtain, or performing a public (Federal, State, or local) contract or subcontract; violation of Federal or State antitrust statutes relating to the submission of offers; or commission of embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, tax evasion, violating Federal criminal tax laws, or receiving stolen property, then the contractor will not be eligible for any incentives and the customary progress payment rate will be 25 percent for that contractor.

  • On December 1 of each year, a contractor, or higher-level owner of a contractor, may submit a representation as to which criteria it meets and request a higher customary progress payment rate. Based on the representation received, the Director of Defense Pricing and Contracting will determine the appropriate customary progress payment rate for the following calendar year, and that data will be entered into the Contract Business Analysis Repository (CBAR) by December 31.

  • If a contractor fails to submit by the December 1 deadline, then the rate for that contractor in CBAR will be 50 percent if the offeror is other than a small business and 90 percent if the offeror is a small business, unless the rate is 25 percent as provided in DFARS 232.501-1(a)(ii). If the offeror subsequently submits a representation after the December 1 deadline, any increase in rates will not be effective in CBAR until 30 days after submission.

  • The rate may be adjusted at any time during the year if it is subsequently determined that the representation provided by a contractor was not accurate.

So how did the rule-makers do?

Our reading of the proposed rule is that they did not do very well. The customary progress payment rate for large businesses would fall to 50 percent of incurred costs; even though a contractor could earn a higher payment rate, our experience tells us that doing so would be difficult. The PBP valuations would be pegged to the same analysis used for progress payments based on costs—i.e., starting at 50 percent of contract value. In our view, this defeats the intent of PBPs, which is to divorce financial payments from cost incurrence and, instead, tie them to programmatic progress.

If you are a large business that currently receives customary progress payments based on costs incurred, you really should dig into the proposed language and see what it does to your cash flow. Our prediction: nothing good.

On the other hand, the DoD will be rescinding its nonsense about PBPs, which is nice. Too bad the rule-makers had to tie those actions to somethings that were less nice.