Chapter 7-1004 of the Defense Contract Audit Manual (DCAM) addresses employee relocations costs. In addition to merely reflecting the FAR, one can reasonably assert the points emphasized in DCAM actually adds elements to the cost principle. We recommend your human resources and project manager personnel become familiar with this section when considering policies, employee agreements and relocation plans. The guidance contains seven sections summarized below:

7-1004.1. General. This section states FAR 31.205-35 addresses relocation costs and applies to costs incident to permanent changes of duty assignments of not less than 12 months. It identifies eight type of costs that are usually associated with relocation costs – (1) travel and transportation of household goods (2) advanced trips to find a permanent residence (3) closing costs incidental to sale of prior residence (4) miscellaneous expenses such as cancelling a lease or disconnecting and reinstalling appliances (5) acquiring a new house (6) continuing mortgage interest at the old residence (7) interest differential between the old and new mortgage and rental differential where relocated employee retains ownership of a vacated house in the old locations and rents at the new location and (8) other miscellaneous expenses. Travel costs associated with relocation should be considered allowable per diem costs in accordance with FAR 31.205-46, travel costs.

This section stresses that the auditor should evaluate the contractor’s policies and procedures and employment agreements to assure they are reasonable and in compliance with FAR requirements. In addition to ensuring they are allowable, the auditor should assure the contractor’s allocation methods provide the costs are properly allocated to benefiting contracts with special attention to whether they are charged to the appropriate business segment. The auditor should test whether these policies and procedures are adhered to and if the contractor’s policies and procedures are inadequate, additional tests of individual vouchers should be conducted.

7-1004.2. Conditions for allowability. This section focuses on the meaning of the 12 month threshold period. Relocation must involve a permanent change of duty assignment or for an indefinite period as long as more than 12 months are expected. The auditor should question relocation costs "in excess of constructive temporary duty assignment costs" if the contractor should have known at the time of assignment it would not have continued for a period of 12 months or more.

Failure to fulfill a permanent change of duty requires the contractor to refund or credit the cost charged to the government. The auditor is told to encourage contractors to include recapture provisions in their relocation agreements with employees and that this provision should be monitored by the auditor to assure the contractor adequately collects refunds from employees and these refunds are credited to the government.

The guidance states the recapture rule is not applicable to new employees who are (1) hired specifically for long term (at least 12 months) field projects or contract assignments (2) entitled to a return relocation under the terms of their employment contract and (3) not permanent employees and are released from employment upon completion of their assignment. All three conditions are required to meet the recapture waiver so, for example, existing employees reassigned to field projects do not apply.

7-1004.3. Applicability of Joint Travel Regulations (JTR). JTR per diem rates for lodging, meals and incidentals are to apply to employees traveling on official business which includes house-hunting trips and travel to new duty stations. JTR per diem rates do not apply to temporary quarters allowances because employees are not considered to be on official business travel while in temporary quarters.

7-1004.4. Employee assignments not considered relocations. Certain duty assignments, principally overseas locations, often include "location allowances." These "location advances" are considered inducements to work at these locations and should be considered additions to normal wages and salaries covered by FAR 31.205-6, "compensation for personal services" and not relocation costs. Also, costs of travel to overseas locations should be considered travel not relocation if dependents are not permitted and the expenses do not include costs of transporting household goods. Under these circumstances, the move is considered a temporary rather than permanent change of duty station.

7-1004.5. Unallowable relocation costs. The guidance reflects the type of costs in FAR 31.205-35(c) identified above. The section does state the contractors should not be compelled to refund or credit relocation costs for less than 12 months of relocation when the termination of employment was due to illness, disabling injury or death.

7-1004.6. Mass relocations. The guidance alludes to FAR 31.205-35(e) that states both reasonableness and allocation questions may arise over large scale or mass relocations and stresses that when an advanced agreement is not in place FAR 31.2 should be used by the auditor to determine reasonableness and allocation of costs. When the auditor learns of impending mass relocation costs they are told to report the matter to the cognizant ACO and recommend an advanced agreement be prepared for allowability of costs that addresses (1) the appropriate segment where the costs should be allocated (2) length of time over which the costs are to be amortized and (3) eligible employees.

7-1004.7. State and local transfer tax. When a state or local government imposes a tax on the sale of a home by law, the guidance in FAR 31.205-35(a)(3) allows the costs. However, if an agreement to pay the tax is not imposed on the seller (i.e. employee) by law but is agreed to in order to help make the sell or other reasons, the tax is not considered a legitimate closing cost and is to be questioned by the auditor.

{TAG_FORM_TITLE}