1. Navigating the Travel Cost Principle Kristen R. Soles, CPA Jason LeMaire Proprietary and Confidential

2. Agenda FAR regulations – general JTR / FTR / CONUS / OCUNUS – You are not allowed to ask about crossing international date lines. Lowest Cost Airfare Revisions DCAA Audit Procedures and Guidance Record Retention and Substantiation Unallowable Travel Costs Relocation Other (Prime administration, risks, burden, etc.) T&E Proprietary & Confidential 2

3. FAR 31.205-46 Travel Costs Clause notes that travel costs can be based on actual, per diem, or a combination of both as long as the charge is “reasonable” and “reasonable” means less than per diem as set forth in the FTR (put out by GSA), JTR (DoD), or standardized regs (civilians in foreign areas). FTR http://www.gsa.gov/portal/ext/public/site/FTR/file/FTRTOC.html/category/21865/hostUri/portal JTR http://www.defensetravel.dod.mil/perdiem/jtr(ch1-7).pdf Proprietary & Confidential 3

4. FAR 31.205-46 Travel Costs, cont. Maximum per diem rates would not constitute a reasonable daily charge when (1) no lodging costs are incurred or (2) partial travel days. A downward adjustment must be calculated. Proprietary & Confidential 4

5. Partial Travel Days Proprietary & Confidential 5

6. Other Useful Links / Terminology CONUS and OCONUS rates are set October 1 of each year. FTR Per Diem Rates: www.gsa.gov/perdiem JTR Per Diem Rates: http://www.defensetravel.dod.mil/perdiem/pdrates.html Proprietary & Confidential 6

7. The Lowest Cost Airfare Revision Proprietary & Confidential 7

8. Revision to FAR 31.205-46(b) and (c)Limiting Airfare to the Lowest Airfare Available to the Contractor Purpose is to limit recovery based on agreements the contractor has negotiated with the airlines or with travel agencies. Revision results in increased cost of compliance and documentation and a nice grey area for DCAA to questions costs based on interpretation of the regulation. Proprietary & Confidential 8

9. Lowest Airfare Cont.DCAA Audit Policy 10-PAC-010(R) Auditors should question costs claimed in excess of the lowest airfare available. The contractors policies & procedures should provide for advance planning of travel to assure lowest price airfare is documented and utilized as the baseline for allowable airfare. The contractor must consider in its documentation, negotiation with airlines, travel agents, credit card companies, etc. Proprietary & Confidential 9

10. Lowest Airfare Cont.DCAA Audit Policy 10-PAC-010(R) Substantiating documentation must be maintained if you are taking one of the exceptions in FAR 31.205-46(b) Substantiating documentation should take the form of quotations from competing airlines or travel service providers. Instances where only one flight is available may be substantiated by only one quote. Multiple instances of single quotes should be questioned by the auditor to determine if policies and procedures result in possible unreasonable airfare costs. Proprietary & Confidential 10

11. Lowest Airfare Cont. The amended rule clearly requires the use of non-refundable airline tickets The GOOD News: “Auditors should not question costs in excess of nonrefundable tickets, the contractor’s data must show increased costs result in comparison to refundable tickets” The BAD News: The contractor’s data MUST show, so documentation has to include proof that refundable tickets were ultimately less expensive than nonrefundable tickets (a documented history of additional costs from change fees relating to a certain customer or contract.) Proprietary & Confidential 11

12. Lowest Airfare – Ambiguities The revised principle provides no guidance on how availability is to be determined. There is no guidance on what DCAA deems “adequate documentation” Proprietary & Confidential 12

13. Possible DCAA Audit Procedures Individual trips should be reviewed to determine if: The contractor is complying with its travel policies and procedures The trip is for an allowable purpose, and The incurred travel costs are documented in accordance with FAR 31.205-46. (later) The contractor’s accounting procedures have adequate controls for segregating unallowable travel costs. Proprietary & Confidential 13

14. Audit Guidance Coverage of this area should include a determination that the contractor’s travel authorization procedures provide for documented justification and approval of the necessity, duration, and number of travelers for each trip. Proprietary & Confidential 14

15. Audit Guidance, Cont. The contractor’s procedures should provide for advance planning of travel to assure that: Wherever feasible and economically practical, required visits to locations in the same geographical area are combined into a single trip. Lowest cost airfare regulations are adhered to Coordination between organizational elements is effected to minimize the # of trips to the same location. Proprietary & Confidential 15

16. Travel Rewards – The government giveth and … They actually just giveth! Sec 1116 of the National Defense Authorization Act replaced the Federal Acquisition Streamlining Act of 1994 as the authority for travel rewards. Government travelers, including military personnel and federal employees, are now allowed to keep their points and use them for personal travel. Some rules apply such as Can’t charge the fee for enrollment in any airline programs Can’t charge fees incurred when points are redeemed Can’t select an airline based solely on the prospect of earning miles, etc. etc. Proprietary & Confidential 16

17. Ideas for Compliance Policies and Procedures Disclaimer: Sample Policies and Procedures can not be guaranteed by Watkins Meegan as “adequate” in the eyes of DCAA depending on your auditors mood that particular day. Proprietary & Confidential 17

18. Other Items to Note Make sure you establish similar practices and policies for indirect travel. Don’t forget to read your contract, frequently contract language provides for more detailed information on that contract’s expectation of travel reimbursement. Look for: Mileage limits Any references to policies and procedures Special allowances off per diem Generally gratuities to staff inside the lodging facility are unallowable as they are considered included in per diem. System requirements Proprietary & Confidential 18

19. Record Retention www.dcaa.mil / publications / information for contractors FAR Subpart 4.7 – 3 years after final payment Nothing in this section shall be construed to preclude a contractor from duplicating or storing original records in electronic form unless they contain significant information not shown on the record copy. Original records need not be maintained or produced in an audit if the contractor or subcontractor provides photographic or electronic images of the original records AND meets the following requirements: Proprietary & Confidential 19

20. Record Retention Cont. The contractor or subcontractor has established procedures to ensure that the imaging process preserves accurate images of the original records, including signatures and other written or graphic images, and that the imaging process is reliable and secure. The contractor or subcontractor maintains an effective indexing system to permit timely access. The contractor or subcontractor retains original records for a minimum of one year after imaging to permit periodic validation of the imaging system. Proprietary & Confidential 20

21. FAR 31.205-46 Expense Substantiation Costs shall be allowable only to the extent that the following is documented: Date and place of expense Name of person and their title and relationship to the contractor Costs in excess of lowest cost airfare Proprietary & Confidential 21

22. Expense Substantiation Cont. Crossover between IRS and FAR recordkeeping requirements, as such: Incomplete records – You can prove an ELEMENT of expense for incomplete records with: Your own written statement containing specific information related to that element AND Other supporting evidence that is sufficient to establish the element. Proprietary & Confidential 22

23. Where do unallowable travel costs go? If Direct, then they go to an unallowable task on a direct contract NOT in your rates. If Indirect, then they go to unallowable costs and will fall in your rates depending on how you treat unallowables. If personal and for an owner, then distributions if Scorp / LLC etc. Side note: personal mileage of company owned auto’s needs to be comp’d out on the W2 as income and moved to unallowable. Proprietary & Confidential 23

24. Fuzzy Lines: Relocation and Travel 31.205-35 Relocation Costs of travel of the employee and members of the employee’s immediate family are allowable (cross reference here to 31.205-46) However, reimbursement may be on a lump sum basis, <$5k, when adequately supported by data on the individual elements (transportation, lodging, meals.) Proprietary & Confidential 24

25. How can I burden this burden? Generally not with OH but usually with G&A. Travel costs are in the base of G&A so it makes sense that it would receive its proportionate share of an allocation. We can definitely make a case that G&A is expended on these efforts (compliance alone.) No hard and fast rule. Some burden with a reduced G&A and we’ve seen some not burden at all. Proprietary & Confidential 25

26. What are the risks? Generally most of these amounts you would think would be immaterial. A possible system deficiency? Proprietary & Confidential 26

27. Prime Contractors Always pass 31.205-46 down to your sub. How much you monitor depends. Likelihood of audit Comfort level of the subs to comply: also considering the new push for prime contractors to monitor subs compliance The amount of travel / materiality of the sub You will always need your subs / consultants to at least provide you with the documentation required to be submitted with your invoice. Proprietary & Confidential 27

28. Deltek Time and Expense Can help you retain receipts Route multiple levels of approval Monitor and cap expenses against per diem (move them automatically to unallowable) Audit trail is retained at all times Proprietary & Confidential 28

29. Receipt Storage Receipts are stored in PDF format by expense report Can be viewed directly from expense report Since receipts are stored outside the database, make sure you are backing them up! Proprietary & Confidential 29

30. Extensive Workflow Expense can be set up to route approvals for Over Ceiling Unallowable Multiple levels within your organization Options are limitless! Proprietary & Confidential 30

31. Per Diem Per diem rates are imported directly into Expense and attached to the expense report Overages will be automatically put to unallowable unless overage is approved CONUS and OCONUS rates can be combined or separate per expense report Proprietary & Confidential 31

32. Audit Trail Your Audit Trail will always remain intact regardless of the person changing the expense report Different roles can have different rights for changes Able to define when in the workflow changes can be made Proprietary & Confidential 32