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Applying Profit to Travel - A Contract Interpretation Question

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Hello All!

I have read enough of the posts on this forum to know I dare not ask whether one can apply G&A or profit when invoicing for travel on a cost reimbursable CLIN. A crude summary would be that "in absence of a prohibition within the terms of the contract, G&A (or profit) may be proposed to be added to cost reimbursable CLINs consistent with the contractor's disclosed accounting practices. In such a case, the amounts are a matter of negotiation between the parties."

I work for a Government contractor, and I manage a contract that, at the IDIQ level, states as follows with regard to travel:

"Travel and Per Diem authorized under CPFF and Fixed Price Task Orders under this contract shall be reimbursed in accordance with the Government Travel Regulations currently in effect.

Travel requirements under this contract shall be met using the most economical form of transportation available. If economy class transportation is not available, the request for payment voucher must be submitted with justification for use of higher class travel indicating dates, times, and flight numbers. All travel shall be scheduled sufficiently in advance to take advantage of offered discount rates, unless authorized by the Contracting Officer. All travel shall be reimbursed at cost." (Emphasis in original)

My supervisor has advised that this paragraph does not prohibit adding profit to travel (I understand that G&A is a "cost" and therefore can be reimbursed, so it is not at issue). She asserts that the fact that "all travel shall be reimbursed a cost" merely answers the question of when/how the contractor can invoice travel: the Contractor bills for travel as it incurs the cost. Further, where adding profit to travel is prohibited, such prohibition is clearly stated.

I do agree with her that some contracts are quite clear that profit may not be added to travel costs. I'm not sure I agree with the rest. In any case, I want to pose a question to the Contracting Officer advising that we cannot find anything in the contract that would preclude proposing profit to be added to reimbursed travel costs, and I want to be certain we have an argument that passes muster.

Executive Summary - Without more, does the phrase "All travel shall be reimbursed at cost" settle the question as to whether profit may be proposed to be added to reimbursed travel costs (subject to negotiation between the parties)?"

I humbly welcome all thoughts, as always.

-MuchToLearn

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Who knows? In any case, nothing anyone here says that disagrees with your supervisor will satisfy your supervisor.

The easy way to resolve the issue is include "profit on travel" in your next invoice or voucher that includes travel and see what happens.

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It's unclear to me how to interpret the language with respect to FFP task orders. It simply makes no sense to me. Once the price is fixed then the costs are irrelevant. So is the "fee".

With respect to the CPFF task orders, how would you add profit to travel in your invoice if the fee was actually fixed? Wouldn't the restriction apply to the proposed costs and not to the invoiced costs?

Bottom-line: I am confused.

H2H

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H2H - Fair point, I should clarify.

The question has arisen in the context of FFP task order solicitations that provide for "cost reimbursable" travel CLINs (so perhaps it is accurate to call them hybrid?).

So, we are not required to propose travel costs as part of the proposed fixed price. Occasionally we will be given a plug number to propose for the travel figure, but in 85% cases we have the discretion to propose an estimated travel budget we believe will be necessary to complete the tasks.

For CPFF, to be honest I'm not sure. My instinct is to agree with you outright, since otherwise since any profit would be encompassed in the "fixed fee". I haven't pushed that issue for this reason. I would think it would be possible to set up a task order where the labor portion is CPFF, but the travel component is simply "cost reimbursable", the advantage being the Contractor could propose or the Government could negotiate a lesser fee % on the travel portion (if the addition of fee is not precluded by the terms). We are only just starting to see CPFF task orders under my watch and I believe the previous practice was to exclude travel from any fee/profit calculation due to the cited language.

-MuchToLearn

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I can solve your FFP problem in a heartbeat. Do not propose any fee on travel. Take the fee you would have proposed on the travel dollars and add it to the fee you are proposing for labor and non-travel costs. Et Voila!

Hope this helps.

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https://interact.gsa.gov/blog/how-do-i-add-travel-costs-services-task-order

The approach described in the above link is to treat travel as a direct reimbursement with no profit ot indirect costs, and still to treat the entire order as FFP. Is the approach in your contract is modeled after this approach, it might be that the intent is to reimburse travel at direct cost, period.

Vern's advice in no. 2 makes sense. Submit an invoice or voucher and see what happens.

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Is this for a DoD contract? If so, is DCAA reviewing your cost-reimbursement vouchers? I would submit to you that any DCAA auditor who briefed the contract and read the phrase "reimbursed at cost" would disallow profit on a CR CLIN. Also, I would venture to suggest that DCAA would at least consider filing a fraud report. You should talk to the contracting officer before you include profit.

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Not fee -- profit. That's the word the OP used -- "profit". Pay attention.

How would they include it? Just put it on there! What's hard about that?

Of course, the government should reject the invoice -- most of us know that, but if the invoice is rejected it will teach the supervisor something.

Then again, one never knows: maybe they'll pay the profit.

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I'm not sure why it is difficult to understand the concept of reimbursement of travel expenses at cost or "... All travel shall be reimbursed at cost."

See some examples that can establish some commonly understood usage, at least as with respect to whether or not to allow profit -

http://www.merriam-webster.com/dictionary/reimburse "re·im·burse

verb \ˌrē-əm-ˈbərs\

: to pay someone an amount of money equal to an amount that person has spent"

"For consumers, cost describes the price paid for goods and services."

Cost definition "1a: the amount or equivalent paid or charged for something : price"

"...at cost: for the price of production <buys clothes at cost directly from the manufacturer>"

https://answers.yahoo.com/question/index?qid=20100517215232AAXxczf

"What does 'at cost' mean?"

"Best Answer:

"Emily answered 4 years ago

It means whatever the seller paid for it.
For example if a grocery store buys milk from a farmer for $1, and then sells it to you for $1, they are selling the milk to you 'at cost'."

From a Google Search for "define term: "at cost" "

This was the first entry:

"at cost
phrase of cost
1.at cost price; without profit to the seller."

As to whether or not G&A or other admin costs to process travel are allowed, that could be ambiguous. If patently ambiguous or unclear, then it would seem to me that the contractor should inquire of the government before award.

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The way to provide for reimbursement of travel at cost and without fee under an FFP contract is to have two line items:

0001 Perform in accordance with Section C, the statement of work. 1 JO $X,XXX,XXX

To that CLIN you apply FAR and agency supplement clauses appropriate to the FFP work.

0002 Travel ("as required", "as directed", or "in accordance with the attached schedule") Estimated Cost $XX,XXX (No fee)

To that CLIN you apply the FAR and agency supplement clauses appropriate to a cost (no fee) contract, including, hmmm, let's see, FAR 52.216-11, Cost Contract -- No Fee (APR 1984)

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Vern,

As usual, you make the answer seem so clear and obvious. Unfortunately, from a contractor perspective there are not enough people in the government's acquisition corps who have the ability to craft such simple and unambiguous contract structures.

As a tangentially related comment not directed at anybody in particular, would government people please understand that when a contractor is not allowed to propose, earn or bill profit/fee on travel costs, then you are asking the contractor to incur those costs at a loss. There are unavoidable unallowable costs associated with contractor travel because the contractor cannot (as a rule) obtain the same lodging rates as a government employee would receive, but is (generally) limited to the same daily per diem rates to which a government employee is subject. As a favor to contractors, if you are going to ask the contractor to take a loss on travel costs, would you please consider allowing additional profit/fee on the non-travel costs?

In a similar vein, if you have an otherwise FFP contract for which some travel will be required, adding a cost-reimbursable CLIN significantly increases the contractor's administrative burden (and costs!). The reasons why that would be the case should be obvious, but I'll mention just two: (1) the requirements of 52.216-7, and (2) the requirements of 16.301-3(3). It would be so nice if there were another way to accomplish the goal of funding travel... I'm just saying.

Off soapbox now.

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Thank you, help.

Many years ago, I was told that on average at least three percent of legitimate business costs are unallowable under Government contracts and that those costs had to be recovered from profit or fee. Since the trend in the rules governing cost allowability is to make ever more amounts unallowable, that figure might be higher now, especially for firms that cannot segregate their government business from their other business.

But why bother pointing this out? We all know that government contracting is not really about business in the usual sense of that term.

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Vern,

"why bother pointing this out?" .... Well, my experience is that the government programs are asking contractors to shoulder more of the financial burden than ever. More investments in IR&D, more focus on upping TRLs, more focus on finding creative ways to do more with less. In addition, DCAA is questioning roughly 8 or 9 percent of total costs these days (per most recent DOD IG Semi-Annual Report to Congress, Appendix D), which is actually DOWN from the double-digit levels in recent years.

Government contracting may not be about business in the usual sense, but contractors are (for the most part) businesses that have to make a profit. Otherwise, they go out of business. And then the government loses capabilities.

Obvious stuff, I acknowledge. But I like to point out the obvious from time to time, just as a reminder.

H2H

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Vern,

Thanks for the clarification!

H2H

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Thank you everyone, this has been very enlightening and helpful.

Two quick points -

As a tangentially related comment not directed at anybody in particular, would government people please understand that when a contractor is not allowed to propose, earn or bill profit/fee on travel costs, then you are asking the contractor to incur those costs at a loss. There are unavoidable unallowable costs associated with contractor travel because the contractor cannot (as a rule) obtain the same lodging rates as a government employee would receive, but is (generally) limited to the same daily per diem rates to which a government employee is subject. As a favor to contractors, if you are going to ask the contractor to take a loss on travel costs, would you please consider allowing additional profit/fee on the non-travel costs?

In a similar vein, if you have an otherwise FFP contract for which some travel will be required, adding a cost-reimbursable CLIN significantly increases the contractor's administrative burden (and costs!). The reasons why that would be the case should be obvious, but I'll mention just two: (1) the requirements of 52.216-7, and (2) the requirements of 16.301-3(3). It would be so nice if there were another way to accomplish the goal of funding travel... I'm just saying.

In my market, we have discussed the issue to the point where we would attempt / desire to propose profit on travel costs only when travel is a substantial cost component of the work. Everything said above rings true, but even then as a business we are willing to forego profit on travel except where it can have a significant impact on the bottom line.

Who knows? In any case, nothing anyone here says that disagrees with your supervisor will satisfy your supervisor.

I don't know Vern, your name carries a good bit of weight in my neck of the woods... :)

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The way to provide for reimbursement of travel at cost and without fee under an FFP contract is to have two line items:

0001 Perform in accordance with Section C, the statement of work. 1 JO $X,XXX,XXX

To that CLIN you apply FAR and agency supplement clauses appropriate to the FFP work.

0002 Travel ("as required", "as directed", or "in accordance with the attached schedule") Estimated Cost $XX,XXX (No fee)

To that CLIN you apply the FAR and agency supplement clauses appropriate to a cost (no fee) contract, including, hmmm, let's see, FAR 52.216-11, Cost Contract -- No Fee (APR 1984)

I agree that the method of reimbursemernt for the travel CLIN could be stated more clearly. However, the prescription at FAR 16.307(e) for FAR 52.216-11, Cost Contract -- No Fee (APR 1984) and the clause itself pertain to cost reimbursement CONTRACTS, so could be confusing under a FFP or CPFF contract or task order, unless there is some clarification that this clause is only applicable to a specific CLIN or CLINs. Rather than adding the clause and additional language explaining that the clause only applies to the travel CLIN, I would recommend using the gist of the language directly., e.g.:

"The Government will reimburse the Contractor for Travel and Per Diem authorized under CPFF and Fixed Price Task Orders under this contract in accordance with the Government Travel Regulations currently in effect. Use the most economical form of transportation available for travel requirements. If economy class transportation is not available, submit the request for payment voucher with justification for use of higher class travel indicating dates, times, and flight numbers. Schedule all travel sufficiently in advance to take advantage of offered discount rates, unless the Contracting Officer authorizes other arrangements. The Government will reimburse travel at cost, without any fee. " (In addition, if you want to the contractor to advise the government that the CLIN is running near the CLIN total or will possibly run over, add additional wording about advising the government when expenditures reach 80% of the total CLIN amount, etc.)

We don't know the type of work encompassed by the particular contract or how travel would be arranged and administered. For instance, the contractor's contract staff might handle this. Those costs would then likely be included in the main contract CLIN. Otherwise, the administrative labor costs might be covered under the applicable overhead and/or G&A pools. If the government doesn't intend to specifically exclude any otherwise applicable administrative costs for FFP task orders, to avoid ambiguitiy it could state something to the effect:

"The Government will reimburse travel at cost (including applicable overhead and/or G&A costs), without any fee."

Then the Contractor could justify applicable indirect costs that aren't otherwise already covered by the contract. Conversely, if the government doesn't intend to separately reimburse the contractor for anything but the traveller's direct expenses under this CLIN on FFP task orders , it should make it clear what "at cost" includes or doesn't include. Then the contractor can decide whether or not to cover such other costs under the main contract CLIN.

There might be a better way to say this but I think it is probably wise to clarify what "at cost" means. And - for Gosh sakes, quit using passive voice when writing contracts!

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Joel,

"The Government will reimburse the Contractor for Travel and Per Diem authorized under CPFF and Fixed Price Task Orders under this contract in accordance with the Government Travel Regulations currently in effect."

Currently in effect at the time the contract is executed, or currently in effect at the time of the travel?

On such ambiguities disputes are born.

H2H

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Joel,

"The Government will reimburse the Contractor for Travel and Per Diem authorized under CPFF and Fixed Price Task Orders under this contract in accordance with the Government Travel Regulations currently in effect."

Currently in effect at the time the contract is executed, or currently in effect at the time of the travel?

On such ambiguities disputes are born.

H2H

Another good point.

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When you combine contract types, you do it by including separate line items for each type and applying the appropriate clauses to each line item. Period. If you have a cost, no fee line item you use the cost contract no fee clause, along with the limitation of cost or limitation of funds clause and any other applicable FAR clauses.

That is the right way to do it. Don't make up language that you do not have to make up.

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"By the way -- what is 'travel'?"

What a great question! And how important it is for the parties to agree on the definition before performance starts.

Hopefully the contractor's "command media" will define that term. I know travel policies have always been among the longest and most complicated documents to draft, because it is critical to make sure the employees' and management's expectations regarding reimbursement are consistent. You can be sure any ambiguity or possible loophole will be exploited by the travelers, because they are already sacrificing their time for the company and are looking to be "made whole" wherever possible. Those policies generally form the basis for the estimating assumptions used in the cost proposal. The customer's notions may vary, of course, which is where things get dicey. A well-written contract will (or should) define that term if the parties expect travel costs to be a significant component of total contract costs.

I remember a Navy contract back in the 90's that specified a contractor employee had to travel a distance of at least 50 miles from his/her official work location to the location at which contract work was being performed in order to qualify as being in travel status. I don't know if that was or still is a standard Navy clause, or what, but it gave us fits.

It was exactly 48 miles between our office and the base's front gate. We argued and argued that the front gate did not represent the actual work location (which was deeper inside the base about 12 miles from the front gate) but the CO would not budge. No local mileage, no per diem, nothing, nada. We paid the employees for their reimbursable travel costs in accordance with our policies, which were more lenient as I recall. That resulted in a fairly significant profit erosion over the life of the multi-year contract. The only good news was that we had flowed the clause down to our cost-reimbursable SubKs, so we didn't have the additional write-off from paying them for travel that was then unallowable in our prime contract billings. But still, it was painful.

And I think we argued that if the front gate represented the work location, then arrival at the front gate was when the employee should start recording time and charging the contract, so we did have a little revenge. But it was a Pyrrhic victory because the travel cost write-off was a visible reminder of our failure to better define "travel" for that contract and customer before execution, whereas the additional 40 minutes a day of labor charges was not nearly as visible to management. And that write-off continued for years and years.

Because of my experience in drafting travel policies I can define "travel" but I'll not do so here to give others an opportunity post their thoughts. (I can also distinguish travel from long-term temporary assignments and from permanent changes of duty station.)

H2H

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Just to throw in another opinion, I work in industry and have been told by several Contracting officers that under a cost reimbursable contract, you can add in travel costs into your initial quote and calculate your fixed fee on the total dollar amount of labor, travel and ODCs.

However, where travel is not included in the base cost/fee calculation and it is not possible to accurately predict travel so that it is "funded" under a separate CLIN or even separately on a case by case basis, allowing fee or profit on this type of travel travel would be a Cost Plus Percentage of Cost CLIN and thus against the FAR.

Of course if it is a Firm Fixed Price contract or Task Order, then this would not apply.

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