Please advise whether the apartment lease expense is an allowable cost.
In a side communication with the questioner, it was determined that the Federal Acquisition Regulations (FAR) would be treated as governing allowability for purposes of answering this question. For a cost to be allowable the cost must be: (1) reasonable, (2) allocable to the contract, (3) compliant with Cost Accounting Standards (as applicable, otherwise generally accepted accounting principles), (4) compliant with the terms of the contract, and (5) compliant with any specific limitations set forth in FAR subpart 31.2. (see FAR 31.201-2(a)). To properly apply these five requirements, one must obtain a thorough understanding of facts (e.g., the contract requirements, industry competitive conditions and business practices, and such) and then exercise contracting officer judgment.
Open full Question Details
Although it is not possible to determine the allowability of the apartment lease expenses without further facts and analysis, below are some comments and concerns using the 5 FAR criteria identified above.
• Are the apartment lease expenses reasonable? To be determined reasonable costs, the decision maker must determine that the costs do not exceed that which would be incurred by a prudent person in the conduct of competitive business. (see FAR 31.201-3) The question states that “the company’s total lodging expenses are [ ] high in comparison with similar engineering firms.” (see the question) This stated conclusion suggestions the reasonableness may not be obvious. Maybe additional study is necessary. No presumption of reasonableness is attached to the fact that the cost was incurred. (see FAR 31.201-3)
• Are the apartment lease expenses allocable to the contract at issue? A cost is allocable to a Government contract if it --
(a) Is incurred specifically for the contract;
(b) Benefits both the contract and other work, and can be distributed to then in reasonable proportion to the benefits received; or
(c ) Is necessary to the overall operations of the business, although a direct relationship to any particular cost objective cannot be shown. (see FAR 31.201-4)
It is mentioned that employees use the apartment for a “variety of reasons including both project and non-project related.” The allowability analysis should likely take a closer look at the apartment lease expense to determine allocability in accord with FAR 31.204-4. Attention might need to be given to whether the “non project” related expense benefits a Government contract.
• Are the apartment lease expenses compliant with the terms of the contract?
The question is silent regarding any comments or conclusions about compliance of the apartment lease costs with the contract terms. As this is a requirement for a cost to be allowable, ensuring that it has been considered is necessary.
• Are the apartment lease expenses compliant with any specific limitations set forth in FAR subpart 31.2?
Of particular interest when evaluating the apartment lease expense may be FAR 31.205-46 Travel Costs. The likely relevant limits found in this cost principle are summarized below:
- With limited exception spelled out in FAR 31.205-46, costs of lodging are reasonable and allocable only to the extent that they do not exceed on a daily basis the maximum per diem rates in effect at the time of travel as set forth in the (i) Federal Travel Regulation, (ii) Joint Travel Regulation (DoD), or (iii) the Standard Regulations (Foreign Areas).
- Costs are allowable only if the following information is documented: (i) Date and place of the expenses; (ii) Purpose of the trip; and (iii) Name of the person on trip and that person’s title or relationship to the contractor.