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If a contract is CAS-covered, is it in accordance with CAS 401 for a defense contractor to propose the maximum per diem rate for hotel (which is estimated to be 50-75% more than expected actual cost) when the defense contractor will only bill/voucher the DoD for actual cost? Assume that there is a current proposal for a contract modification over TINA for a cost-reimbursement CLIN. Also, assume that the defense contractor's disclosure statement and travel policies both say lodging cost will be reimbursed at the lower of actual cost or per diem. Is there any materiality threshold applicable to CAS 401 besides "significant cost" and "reasonable"? It looks like proposing lodging at the maximum per diem rate simply inflates the NTE ceiling. If the cost reimbursable CLIN is only for travel, there seems to be a low risk of the defense contractor billing the DoD for "unnecessary" costs to cover its fixed expenses.

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The purpose of this Cost Accounting Standard is to ensure that each contractor's practices used in estimating costs for a proposal are consistent with cost accounting practices used by him in accumulating and reporting costs. Consistency in the application of cost accounting practices is necessary to enhance the likelihood that comparable transactions are treated alike. With respect to individual contracts, the consistent application of cost accounting practices will facilitate the preparation of reliable cost estimates used in pricing a proposal and their comparison with the costs of performance of the resulting contract. Such comparisons provide one important basis for financial control over costs during contract performance and aid in establishing accountability for cost in the manner agreed to by both parties at the time of contracting. The comparisons also provide an improved basis for evaluating estimating capabilities.

Someone who works with CAS will probably give a better response, but what is inconsistent between the practice used in estimating the cost and the practice used in accumulating and reporting the cost? The basis for estimating the cost is actual cost, with the amount estimated to be the Government established per diem for the location of the travel. The basis for accumulating and reporting the cost is actual cost (no estimates are needed since the contractor has actuals). I sort of understand the disagreement with the amount that is estimated, but I do not see how that becomes a CAS question.

I also am not sure of your concern about the effect on the NTE. What is the impact of "inflating the NTE," and if there is an impact can't you just negotiate the NTE down if you disagree with the amount estimated? Is there fee attached to the CLIN (typically, at least at my agency, a cost CLIN for travel does not include fee)? If there is no fee, what is the problem? If there is an incentive contract, either do not include travel among the costs subject to the incentive, or negotiate the cost down (it may be proposed at per diem, but you are not required to negotiate at per diem).

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...what is inconsistent between the practice used in estimating the cost and the practice used in accumulating and reporting the cost?

What is the impact of "inflating the NTE," and if there is an impact can't you just negotiate the NTE down if you disagree with the amount estimated?

Is there fee attached to the CLIN (typically, at least at my agency, a cost CLIN for travel does not include fee)?

If there is no fee, what is the problem?

Great Questions! :) This helps me to get a sanity check and put any potential issue in perspective. The starting point for this thread is that the hypothetical defense contractor actually stated in the proposal that lodging was being proposed at actual cost. If the defense contractor had the premise that estimated actual cost equaled the maximum per diem allowance, then the proposal makes perfect sense.

You are right about an inflated NTE limit having limited or no impact for a CR travel CLIN. If the defense contractor knew actual lodging costs were going to be 50% to 70% of per diem AND there was only one CLIN with all cost elements included, the defense contractor could put "unnecessary" direct labor on the contract that would otherwise have been charged to overhead as idle time.

Yes, there is no fee on the CR CLIN for travel. I appreciate your perspective inside a government agency. I am actually on the other side trying to help a defense contractor stay out of trouble. :) If no one sees a serious problem with the situation, it looks like the hypothetical defense contractor would just need to clarify its statement about proposing lodging at "actual cost" (i.e. per diem). Thank you for your help.

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You are right about an inflated NTE limit having limited or no impact for a CR travel CLIN. If the defense contractor knew actual lodging costs were going to be 50% to 70% of per diem AND there was only one CLIN with all cost elements included, the defense contractor could put "unnecessary" direct labor on the contract that would otherwise have been charged to overhead as idle time.

How can the contractor do this without violating CAS?

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How can the contractor do this without violating CAS?

I am glad you asked. :) You are right that if the "unnecessary" labor charged to the contract was determined by the contracting officer to be unauthorized, it would not be allowable; and the contractor would violate CAS 405 if it billed this cost instead of segregating it appropriately as unallowable.

When I say "unnecessary" labor, I am thinking more of "inefficient" labor that would otherwise be unproductive and charged to overhead. The likelihood of this hypothetical situation is increasing with the significant decreases in defense spending. If the company does not lay off these unproductive people, they may find "less-than-efficient" ways to keep them on hoping for future contracts.

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I think wvanpup nailed it. Let me clarify for others.

CAS 401 has to do with consistency in cost accounting practices. Cost accounting practices used to estimate costs must be consistent with cost accounting practices used to accumulate and report costs. Cost accounting practices are practices that involve measurement of costs, assignment of costs to cost accounting periods, and allocation of costs. As wvanpup wrote, the contractor's cost accounting practice is to reimburse employees at the per diem rate or actual cost incurred, whichever is lower. The contractor proposes costs at the maximum amount -- the lodging portion of the per diem rate -- but expects to only reimburse employees for a fraction of that amount. That is not a CAS 401 noncompliance (though it may be defective pricing). Do not confuse cost accounting practices with estimating techniques; they are different creatures.

That being said, I have a couple of issues with the scenario as posted. First, contractors are not subject to separate limitations for lodging and meals/incidental expenses -- which is the case for government employees. Instead (unless the contract specifies otherwise), contractors are subject only to the single per diem (lodging + M&IE) ceiling. They can offset an overage in one area with an underrun in another area. (See DCAA MRD 13-PAC-002 dated March 22, 2013.) So it simply doesn't make sense for a contractor to disclose it will apply a separate FTR/JTR lodging ceiling when one is not applicable. If it chooses to impose an inapposite ceiling, shame on it.

And that where's I suspect the source of the issue comes from. Contractors do not find lodging that is 50% of the maximum lodging amounts in any given locality. I'm not saying it's impossible, but it's really really unlikely. The GSA methodology used to calculate the lodging amount for any given locality almost ensures that any lodging more luxurious than a Courtyard is going to exceed the limit. I would be shocked if a contractor could find lodging in a major locality that was half of what GSA computed to be a reasonable amount. But if you compare lodging to the total per diem (lodging + M&IE) then you could perhaps (in some localities) find lodging that was about 50% of the total per diem. But that assumes the employees don't eat on travel, which I think is somewhat unlikely.

So in a nutshell, this scenario just doesn't smell right to me. It may be that the original poster is getting the terms wrong -- confusing "per diem" with lodging limits. Or it may be that I'm not seeing the picture correctly. But as originally posted, I find the scenario unlikely.

Hope this helps.

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...The contractor proposes costs at the maximum amount -- the lodging portion of the per diem rate -- but expects to only reimburse employees for a fraction of that amount. That is not a CAS 401 noncompliance (though it may be defective pricing). Do not confuse cost accounting practices with estimating techniques; they are different creatures....

...Contractors do not find lodging that is 50% of the maximum lodging amounts in any given locality. I'm not saying it's impossible, but it's really really unlikely. The GSA methodology used to calculate the lodging amount for any given locality almost ensures that any lodging more luxurious than a Courtyard is going to exceed the limit...

Thank You, H2H. I am learning about CAS. What you say makes sense. It might be defective pricing if the defense contractor did not let the customer know how much its actual costs were expected to be, but it should not be a CAS 401 non-compliance. Actual cost is allowed to be estimated at per diem.

I am with you in thinking that the situation doesn't "smell right." You might be amazed with what happens OCONUS (v. CONUS). When defense contractor employees get to pocket the difference between actual lodging cost and per diem lodging cost, they find very creative ways to maximize their return.

In the above hypothetical example, the defense contractor had a history of allowing its employees to pocket the difference between actual cost and per diem. After the disclosure statement inconsistency was identified, they started billing the government for only actual cost (or per diem, if lower).

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Thank You, H2H. I am learning about CAS. What you say makes sense. It might be defective pricing if the defense contractor did not let the customer know how much its actual costs were expected to be, but it should not be a CAS 401 non-compliance. Actual cost is allowed to be estimated at per diem.

I am with you in thinking that the situation doesn't "smell right." You might be amazed with what happens OCONUS (v. CONUS). When defense contractor employees get to pocket the difference between actual lodging cost and per diem lodging cost, they find very creative ways to maximize their return.

In the above hypothetical example, the defense contractor had a history of allowing its employees to pocket the difference between actual cost and per diem. After the disclosure statement inconsistency was identified, they started billing the government for only actual cost (or per diem, if lower).

it still happens. And it isn't just contractor employees. I know some government employees that used to perform disaster recovery duties for FEMA before FEMA switched to paying actual lodging costs instead of per diem rates. Sharing apartments, rented houses, pulling campers, staying in tents, on boats, sleeping in their vehicles, etc. were common ways to make extra tax free money (government employees).

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InNeed, looking at your post 7, I hope you do not think there is anything improper about a contractor providing its employees a flat per diem rate (lodging plus M&IE) and leaving it up to the employee to live within that flat rate and permitting the employees to keep any difference between their actual expenses and what they are provided by their employer.

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InNeed, looking at your post 7, I hope you do not think there is anything improper about a contractor providing its employees a flat per diem rate (lodging plus M&IE) and leaving it up to the employee to live within that flat rate and permitting the employees to keep any difference between their actual expenses and what they are provided by their employer.

You are right. :) It is just improper when the defense contractor says (by disclosure statement and company policy) that it will reimburse employees at the lower of actual cost or per diem, but then bills the government for per diem (even when actual cost paid by the employee is 50-75% lower).

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It is just improper when the defense contractor says (by disclosure statement and company policy) that it will reimburse employees at the lower of actual cost or per diem, but then bills the government for per diem (even when actual cost paid by the employee is 50-75% lower).

If, as has been posited, travel is a cost CLIN, it is fraud, not just "improper," for a contractor to bill the Government at per diem when it reimburses its employees at actual cost. On the other hand, there is nothing improper about a contractor who always reimburses employees at per diem, regardless of actual costs incurred by the employee, to bill the Government at per diem. Where travel is a cost CLIN, per diem represents the actual cost to the contractor.

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If, as has been posited, travel is a cost CLIN, it is fraud, not just "improper," for a contractor to bill the Government at per diem when it reimburses its employees at actual cost. On the other hand, there is nothing improper about a contractor who always reimburses employees at per diem, regardless of actual costs incurred by the employee, to bill the Government at per diem...

I agree with you. :) When you say, "...always reimburses employees at per diem..." that means (for CAS covered contracts) that the defense contractor follows its disclosure statement and (for all contracts) its company policy. In the hypothetical example, a fraud alert was given to investigators.

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It may not be "improper" but it may also be a wasteful practice, unless the administrative cost to the company/customer to track and pay actual lodging costs up to the daily limit exceeds any savings in direct lodging costs. Even though it is taxable income, a friend of mine has been making a boat load of extra money by renting an apartment on TDY as a contractor while being paid the daily per diem. Another contractor friend said that he recently parked his camper for months at a campground while being paid per diem.

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Joel, you have raised internal control and policy issues. Contractors should have controls in place to avoid per diem payments when an employee has not incurred lodging costs such as in the situations you described. The JTR specifically addresses this situation. Although those provisions are not applicable to contractors, they are good policies to adopt.

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Actually, there is something I do not like in the JTR provision. IIRC, if I save the Government money by staying with a friend or family (no lodging), I forfeit my entitlement to the meals and incidental expenses payment. If I stay in a hotel, the Government does not care how much I spend on my meals (whether or not I eat, where I eat, or if I bring my meals with me and use the hotel refrigerator and microwave). Why does the Government suddenly care about this when I do not have lodging expenses?

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Right, sometimes the rules seem arbitrary. The 50 mile radius for TDY is another example. When employees are told they are entitled to something, but then restrictions are put in place to limit the entitlement, it does not seem like an entitlement anymore. On behalf of the taxpayer, "THANK YOU." :)

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Guest Vern Edwards

Wait a minute. So the scenario is that the contractor submits a proposal for, say, a CPFF or CPIF contract or mod and proposes an estimated cost that is based on "the maximum per diem rate for hotel", but plans to seek reimbursement based on the actual hotel charge, which is likely to be lower. The contractor plans to pay the employee the max per diem rate and let the employee keep the difference. Is there anything wrong with that?

Well, the answer might depend on the CO. If the fee negotiation is based on estimated cost, of which travel is a (small) part, and if the contractor will incur the max per diem rate as a cost because it is giving ("hidden" "unacknowledged" "unreported") income to its employees, it might be wise for the contractor to reveal that plan during negotiations. Otherwise, the CO might think herself fooled into compensating the contractor for an unallowable cost by unknowingly negotiating a higher fee than she otherwise would have. (She might also wonder if the contractor is reporting the difference between the actual hotel rate and the max per diem rate as employee income.)

It might turn out to be okay, depending on exactly what is happening, but somebody might incur a lot of legal costs before it's sorted out. Then again, it might not turn out to be okay.

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INoW -- The remaining question in my mind is whether in the hypothetical you describe the contractor's Disclosure Statement is adequate. If the actual practice is to reimburse at the max applicable per diem rates, then the disclosed practice of "the lower of actual or per diem" is not accurate. Consequently the Disclosure Statement is not adequate and needs to be revised to accurately disclose the actual cost accounting practice.

Let's revisit your original question, assuming that the D/S has been revised. Now the D/S says "we reimburse employees at the maximum per diem (lodging + M&IE) for the locality as published on the GSA site on the date of the trip -- REGARDLESS of actual expenses incurred" (or something very similar). The contractor proposes travel at the max applicable per diem rate, and that's what the employees receive, and that's what gets billed. Your problem is solved.

Now nobody cares about how much the employees spend on lodging or meals or incidentals. Whatever they spend is irrelevant to what they get reimbursed. They can all share one room and split the savings, or they can eat at Ruth's Chris Steakhouse every night and swill Cabernet like tap water.... it's their call to make, and the company and government customers are no longer stakeholders in the travel reimbursement game.

It's been my experience that contractors should take the time at least once every two years to thoroughly examine their Disclosure Statements to make sure that all practices are being accurately disclosed. Further, it's been my experience that far too many don't make the effort and, as a result, their D/S is not the robust disclosure document the government intends it to be. On the other hand, I could tell you stories about DCAA adequacy reviews that would have some of you laughing while the rest groaned. Based on several recent DCAA reviews, it's hard to take the Form CASB DS-1 seriously any more. (The jury's still out on quality of the DCMA adequacy reviews, though I'm very hopeful.)

Hope this helps.

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