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  • Question

    How does the government determine the reasonableness and allowability of such expenses? How does the government quantify the intangible benefits, such as increased executive productivity and security, into the reasonableness equation? Does FAR 31.205-46 limit the allowable cost to the lowest priced airfare available, or can the security and executive productivity intangible factors be quantified somehow to increase the allowable cost?


    Answer

    1. The FAR references quoted below in pertinent part are applicable to this response.

    FAR 31.201-3 -- Determining Reasonableness
    (a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints.  … the burden of proof shall be upon the contractor to establish that such cost is reasonable.

    FAR 31.205-46 -- Travel Costs
    (a) Costs for transportation, lodging, meals, and incidental expenses.
      (1) Costs incurred by contractor personnel on official company business are allowable, subject to the limitations contained in this subsection. Costs for transportation may be based on mileage rates, actual costs incurred, or on a combination thereof, provided the method used results in a reasonable charge.

    (b) Airfare costs in excess of the lowest priced airfare available to the contractor during normal business hours are unallowable except when such accommodations require circuitous routing, require travel during unreasonable hours, excessively prolong travel, result in increased cost that would offset transportation savings, are not reasonably adequate for the physical or medical needs of the traveler, or are not reasonably available to meet mission requirements. However, in order for airfare costs in excess of the above standard airfare to be allowable, the applicable condition(s) set forth above [i.e., in paragraph (a)] must be documented and justified.

    (c)
      (2) The costs of travel by contractor-owned, -leased, or -chartered aircraft are limited to the allowable airfare described in paragraph (b) of this subsection for the flight destination unless travel by such aircraft is specifically required by contract specification, term, or condition, or a higher amount is approved by the contracting officer. A higher amount may be agreed to when one or more of the circumstances for justifying higher than allowable airfare listed in paragraph (b) of this subsection are applicable, or when an advance agreement under subparagraph (c)(3) of this subsection has been executed. In all cases, travel by contractor-owned, -leased, or -chartered aircraft must be fully documented and justified.

      (3) Where an advance agreement is proposed (see 31.109), consideration may be given to the following: (i) Whether scheduled commercial airlines or other suitable, less costly, travel facilities are available at reasonable times, with reasonable frequency, and serve the required destinations conveniently; (ii) Whether increased flexibility in scheduling results in time savings and more effective use of personnel that would outweigh additional travel costs.

    2.  DCAA Contract Audit Manual (CAM), DCAAM 7640.1, Chapter 7 – Selected Costs
      7-1003 Travel Costs on Contractor Aircraft -Owned, Leased, or Chartered
      7-1003-3c. The ASBCA ruled (in the General Dynamics case no. 31359, 92-2, BCA 24922) that "time savings, productivity gains, or more effective use of personnel" can be used to demonstrate and justify the higher cost of private aircraft. It is the contractor's responsibility to provide the Government a fully supported submission to demonstrate that these savings exceed the costs of using private aircraft as compared to using commercial airlines. The ASBCA also ruled that it is appropriate for the contractor to consider the value of executive time in the cost-benefit analysis. The ASBCA accepted the concept that the calculation of the value of the executive's time could include an estimate of the executive's value to the corporation in addition to the executive salary and fringe benefits.

    3. How does the Government determine the reasonableness and allowability of such expenses?
    The Government uses the guidance set forth in FAR 31.201-3 and in FAR 31.205-46(a)(1), (b) and (c) to determine the reasonableness and allowability for transportation costs by contractor-owned aircraft, whether such costs are charged or allocated, directly or indirectly, to a Government contract.  In addition, DCAA uses the guidelines described in the DCAA Contract Audit Manual, Chapter 7 – Selected Areas of Cost, Section -1003 Travel Costs on Contractor Aircraft -Owned, Leased, or Chartered.

    4. How does the Government quantify the intangible benefits, such as increased executive productivity and security, into the reasonableness equation?
    As described in the online BusinessDictionary.com, an intangible benefit is a subjective benefit that cannot be measured in monetary terms. Therefore, our review of the FAR, the Cost Accounting Standards, the DoD Contract Pricing Reference Guides, the DCAA Audit Manual, and the Statements of Federal Financial Accounting Standards Board did not reveal any specific methodology for quantifying any intangible benefits from increased executive productivity and security resulting from the use of corporate-owned aircraft. Consequently, we do not believe there is any standard method that the Government uses to quantify any such intangible benefits.

    5. Does FAR 31.205-46 limit the allowable cost to the lowest priced airfare available, or can the security and executive productivity intangible factors be quantified somehow to increase the allowable cost?
    As set forth in FAR 31.205-46(c)(2), normally the costs of travel using contractor-owned aircraft are limited to the lowest priced airfare cost available to the contractor during normal business hours unless travel by such aircraft is specifically required by contract specification, term, or condition, or a higher amount is approved by the Contracting Officer. As indicated in the ASBCA decision described in paragraph 2 above, such higher amount may include "time savings, productivity gains, or more effective use of personnel" to demonstrate and justify the higher cost of private aircraft as compared to using commercial airlines. The ASBCA also ruled that it is appropriate for the contractor to consider the value of executive time in the cost-benefit analysis. Based on the above, FAR 31.205-46 does not strictly limit the allowable cost for the use of corporate aircraft to the cost of the lowest priced commercial airfare, and other factors such as the value of executive time may be included in a higher amount.

    6. However, it is important to note that both FAR 31.201-3(a) and the ASBCA decision place the onus on the contractor to provide the Government with a fully supported cost/benefit analysis to demonstrate that there are cost savings exceeding the costs of using private aircraft as compared to using commercial airlines when such intangible factors as the security and executive productivity are taken into account. In other words, it is the contractor's responsibility to clearly justify and demonstrate that the need for corporate aircraft truly outweighs cost savings arising from the use of commercial airlines and that such cost is therefore reasonable. If the contractor cannot demonstrate that such cost is reasonable, then the allowable cost for using the corporate aircraft would be limited to the lowest priced airfare available.


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