On December 10, 2009, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (FAR Councils) issued two final rules governing the allowability of travel costs and post retirement benefits. First, the FAR Councils revised the travel cost principle at FAR 31.205-46 to "ensure a consistent application of the limitation on allowable contractor airfare costs." See 74 Fed. Reg. 65,612 (December 10, 2009). Second, the FAR Councils amended FAR 31.205-6(o) regarding the calculation of post-retirement benefit (PRB) to resolve the inconsistency between FAR criteria governing the calculation of PRB costs for reimbursement by the Government and Internal Revenue Code (IRC) criteria governing calculation of the amount of contribution to retiree benefit trusts accounts considered tax-deductible. See 74 Fed. Reg. 65,608 (December 10, 2009). Both of these final rules go into effect on January 11, 2010.
FAR 31.205-46, Travel Cost Principles
Currently, FAR 31.205-46(b) limits allowable airfare costs to "the lowest customary standard, coach, or equivalent airfare offered during normal business hours." Because this standard had been inconsistently interpreted as allowing either the lowest coach fare available to the contractor, or the lowest coach airfare available to the general public, the FAR Councils amended the cost principle to eliminate this ambiguity. Under the revised principle, the standard for determining the allowability of airfare is the "lowest priced airfare available to the contractor." Further, the final FAR provision omits reference to "standard, coach, or equivalent" airline services. The Councils explained that contractors are often able to obtain lower prices than the general public through negotiation with travel providers, and noted that the variety of airfares available and the ability of contractors to negotiate lower fares render imperfect the assumption that coach class fares represent the lowest available price to all contractors.
FAR 31.205-6, Postretirement Benefit Cost Accounting
The FAR Councils also amended FAR 31.205-6(o) to alleviate discrepancies between accounting mechanisms applicable to PRB costs under the FAR and to related retirement trust account contributions under the IRC. Contractors that elect to use the accrual method to determine PRB costs must abide by measurement criteria set by Financial Accounting Standard (FAS) 106. By contrast, tax-deductible contributions to retirement trusts are determined according to IRC §§ 419 and 419A, which use different criteria. Because costs calculated under FAS 106 often exceed the tax-deductible amounts calculated under the IRC, contractors choosing to accrue PRB costs must choose whether to fund the entire FAS 106 amount and obtain reimbursement regardless of tax implications, or fund only the tax-deductible amount and not receive full reimbursement.
The final rule provides contractors the option of measuring accrued PRB costs using criteria based on IRC §§ 419 and 419A, rather than FAS 106. By establishing consistency across accounting systems, the rule allows contractors to fund the entire tax-deductible amount without having a portion disallowed by virtue of violating the FAR's measurement criteria.
The final rule carries two significant implications for contractors considering changing their PRB cost accounting methodology. First, the final rule requires contractors to consult with the Government regarding transition from one accounting method to another. Under FAR 31.205-6(o)(iii)(G) as revised, contractors must present an analysis of their transition plan to ensure the Government has an opportunity to review and approve implementation of the change in accounting method. To that end, the final rule includes several provisions to ensure that prior funded accrued costs are fully recognized, and to prevent duplicate recovery of costs. Second, for contracts covered by the Cost Accounting Standards (CAS), the election of the IRC accounting method would be a unilateral change in cost accounting practice such that the Government would not pay increased costs, unless the Contracting Officer determined the change to be desirable.
The Councils note that the Government will not pay higher PRB costs as a result of this amendment, as the difference between the lower IRC amount and the full FAS amount remains an unallowable cost. The amendment simply allows contractors to switch to the IRC 419 accrual basis methodology, and potentially avoid any current or future disallowances.