Income Tax reimbursement on Extended TDY

When you say "contractor," do you mean (1) a business concern who has a contract, or (2) an employee of such a concern?

Neurotic said:

The contractor proposed to increase the profit within the fully burdened rate in the T&M Clin in order to recoup this tax differential associated with the travel expenses.

What would be the consideration for the rate increase?

Was the location of the work, whether extended TDY or otherwise, known at the time of the negotiation of the sole source contract?

*Edit: If so, on what basis would the contractor be entitled to a price adjustment?

On 2/2/2024 at 12:10 PM, Neurotic said:

I'm looking to see whether anyone has come across a similar situation and how they incorporated this type of cost into a contract.

If the travel requirements were known at the time the sole source contract was negotiated, the contractor could have increased salaries or wages of travelers to cover the taxes on travel costs in order to attract and retain labor.

*Edit: That is a risk the contractor assumed.

This seems like a personal problem for the employees that is to be resolved between the employee and contractor.  Why is the government getting involved?

On 2/3/2024 at 4:04 PM, Retreadfed said:

This seems like a personal problem for the employees that is to be resolved between the employee and contractor.  Why is the government getting involved?

Yes it is likely a matter between the employees and employer.

If the scope of the project anticipated or required long term TDY, the employer should have been aware of the taxation and planned for it, if they thought there would be a problem with retention or dissatisfaction by the workforce.

It appears that the original poster hasn’t been back since posting Friday at noon*. So, without further details, readers are left to ask for further clarifications and to speculate. Several questions by us were asked on Friday and on Saturday afternoon.  

*Edit: Still evident at 0915 CST on Monday morning.

**Edit. Add:

Upon rereading the initial post, it’s not clear to me now (Sunday morning) whether initial contract negotiations are ongoing or the contract has been negotiated and awarded.

If still under negotiation, the contractor could adjust the proposed wages or salaries to attract or retain employees that would be TDY. If awarded, I see no contractual basis for an adjustment (assuming that the location and length of assignments should have been known or otherwise anticipated.

On 2/2/2024 at 12:10 PM, Neurotic said:

I'm looking to see whether anyone has come across a similar situation and how they incorporated this type of cost into a contract. Tying anything (cost or Profit) to an indefinite quantity (hours) contract is likely not the best option business-wise. Any suggestions are welcomed as well. For what is worth, the Gov reimburses its own employees for this additional income tax. Thanks

Apparently, upon some research of the tax code references, if the Contractor would directly pay vendors for long term lodging, the employee would still be taxed. If so, my suggestion would still be for the contractor to determine what wages or salaries would be necessary to attract and retain long term TDY employees.

Example: 

Many years ago (circa 1981),  my Corps of Engineers District Office negotiated a FFP construction contract for a new recreation area on the then under construction Tennessee-Tombigbee Waterway in Alabama with an 8(a) firm from the St Louis area.

The firm proposed using its own, home based construction trade labor at much higher than the prevailing local, rural Alabama wage rates, which I remember considered daily lodging and per diem expenses for its permanent trade labor. The agency agreed with that approach.

I was then working in a Tenn-Tom Resident Construction Office that administered the contract.  We reviewed the weekly payrolls to verify that all those employees were indeed TDY from the St. Louis area. To my amazement, they were!

————————————————-  

As an aside, that St Louis based contractor is still in business to date and was recently hired for a major, several mile long, forced main sewer line replacement project in Mobile Alabama for the Mobile Area Water and Sewer System (MAWSS).

My read of the OP is that the contract has not yet been awarded and the parties are negotiating price. If I'm correct, then I believe the contractor has a valid reason for trying to obtain a higher profit that the government initially established in the pre-negotiation objective. The tax costs are unallowable and the contract is going to pay them on behalf of its employees (similar to a relocation tax gross-up). The unallowable costs will come out of expected profit. Seems reasonable to me.

Alternate approach: the contractor rotates staff to avoid paying taxes, which will require a larger staff from which to draw on. Further, the transitions between employees may cause inefficiencies. Suboptimal. So: pay the higher profit rate.

I don’t see a problem with paying higher wages to attract and retain employees, assuming that the extended TDY is the predominant scope of the T&M efforts.

here_2_help said:

I believe the contractor has a valid reason for trying to obtain a higher profit that the government initially established in the pre-negotiation objective

Or maybe said another way...contractors risk increases therefore a higher profit is proposed as reasonable?!?

C Culham said:

Or maybe said another way...contractors risk increases therefore a higher profit is proposed as reasonable?!?

After thinking about it, that may be less expensive than increasing the labor costs to cover taxes on the travel reimbursement.

On 2/2/2024 at 3:33 PM, ji20874 said:

When you say "contractor," do you mean (1) a business concern who has a contract, or (2) an employee of such a concern?

On 2/2/2024 at 4:42 PM, Don Mansfield said:

What would be the consideration for the rate increase?

Contractor meaning a large business enterprise. The rate (assume you meant profit) increase is to get compensated for the tax differential, basically circumvent cost principles to get reimbursed for the add cost.

On 2/2/2024 at 11:15 PM, joel hoffman said:

Was the location of the work, whether extended TDY or otherwise, known at the time of the negotiation of the sole source contract?

*Edit: If so, on what basis would the contractor be entitled to a price adjustment?

No, nor the vendor or the agency foresaw the extended TDY. The pandemic created the situation during contract performance. The original POP ended so the agency is negotiating a follow on contract (although first time through my desk). The conditions for extended TDY continue.

On 2/6/2024 at 2:28 AM, joel hoffman said:

After thinking about it, that may be less expensive than increasing the labor costs to cover taxes on the travel reimbursement.

Agree. If we account for it as a cost it will be burdened with indirects and even profit. Thanks

On 2/5/2024 at 12:06 PM, here_2_help said:

My read of the OP is that the contract has not yet been awarded and the parties are negotiating price. If I'm correct, then I believe the contractor has a valid reason for trying to obtain a higher profit that the government initially established in the pre-negotiation objective. The tax costs are unallowable and the contract is going to pay them on behalf of its employees (similar to a relocation tax gross-up). The unallowable costs will come out of expected profit. Seems reasonable to me.

Alternate approach: the contractor rotates staff to avoid paying taxes, which will require a larger staff from which to draw on. Further, the transitions between employees may cause inefficiencies. Suboptimal. So: pay the higher profit rate.

Good insight, will give some thought to the rotating option although additional personnel is unlikely. This is a highly specialized field. Thanks

Appreciate the responses. In a nutshell, the inclusion of these expenses in profit seem to be reasonable given the circumstances. I did not mention in the original post that my agency is not bound by any limitation in profit so it will just be a matter of getting to a reasonable/supported agreed upon profit rate/dollars.  Thanks again.

On 2/3/2024 at 5:14 PM, joel hoffman said:

Yes it is likely a matter between the employees and employer.

If the scope of the project anticipated or required long term TDY, the employer should have been aware of the taxation and planned for it, if they thought there would be a problem with retention or dissatisfaction by the workforce.

It appears that the original poster hasn’t been back since posting Friday at noon*. So, without further details, readers are left to ask for further clarifications and to speculate. Several questions by us were asked on Friday and on Saturday afternoon.  

*Edit: Still evident at 0915 CST on Monday morning.

**Edit. Add:

Upon rereading the initial post, it’s not clear to me now (Sunday morning) whether initial contract negotiations are ongoing or the contract has been negotiated and awarded.

If still under negotiation, the contractor could adjust the proposed wages or salaries to attract or retain employees that would be TDY. If awarded, I see no contractual basis for an adjustment (assuming that the location and length of assignments should have been known or otherwise anticipated.

Apologized for the delayed response. The government created the conditions (Pandemic) for extended TDY during performance.  Extended TDY was never considered prior to award (2019). We are negotiating a follow on contract and the extended TDY conditions remain.

The prior contract (where the need for extended TDY wasn't contemplated at time of contract formation) and the new contract being negotiated now are two entirely separate matters.  We must not conflate them.

We're talking about the new contract being negotiated, as best as I can tell.  The parties can protect their interests in the negotiation.  If they are unable to come to terms, they can end the negotiation and walk away from the contract.  I think OP is on the government side, and the agency's leverage in the negotiation will include whether the negotiation is sole source and how desperate the agency is for the new contract to be awarded.  I don't know if the agency has strong or weak leverage -- but this matters, and the answer to OP's question is not merely an academic re-hashing of academic principles.

Assuming that Neurotic is government employee:

Neurotic said:

No, nor the vendor or the agency foresaw the extended TDY. The pandemic created the situation during contract performance. The original POP ended so the agency is negotiating a follow on contract (although first time through my desk). The conditions for extended TDY continue.

I would consider the extended TDY to be a change of scope. If it was originally known at the time of negotiating the contract, the contractor could have increased the wage/salary rates “to attract or retain employees” who didn’t know they would be working on extended TDY. The contractor might be willing to simply accept an adjustment w/o all the markups…

Joel, because OP is talking about the negotiation for a new contract (and not about administration or the existing contract), your last comment about change of scope seems inapt.

ji20874 said:

Joel, because OP is talking about the negotiation for a new contract (and not about administration or the existing contract), your last comment about change of scope seems inapt.

My last post only addressed the initial contract, as if the contractor is seeking reimbursement…

The initial post didn’t differentiate, between the first contract and the follow on contract.

The initial responses questioned adjustments to the existing contract price.

On 2/7/2024 at 6:28 AM, Neurotic said:

No, nor the vendor or the agency foresaw the extended TDY. The pandemic created the situation during contract performance. The original POP ended so the agency is negotiating a follow on contract (although first time through my desk). The conditions for extended TDY continue.

On 2/7/2024 at 6:25 AM, Neurotic said:

Contractor meaning a large business enterprise. The rate (assume you meant profit) increase is to get compensated for the tax differential, basically circumvent cost principles to get reimbursed for the add cost.

On 2/2/2024 at 12:10 PM, Neurotic said:

The contractor is seeking reimbursement of the these taxes.

To repeat- my post this morning only refers to the initial contract, if the contractor is seeking reimbursement. Neither side anticipated that the employees would have to go on extended TDY when the contract price was negotiated and permanent relocation or replacement of existing personnel wasn’t practical.

I previously said that, if the initial contract anticipated or required extended TDY then there would be no grounds for an adjustment.

joel hoffman said:

The initial post didn’t differentiate, between the first and following contracts.  The initial responses discussed adjustments to the contract price.

My last post only addressed the initial contract, as if the contractor is seeking reimbursement…

Thanks for the responses. My agency does not have an issue with reimbursing the contractor. The government created the requirement/conditions for the cost to happen. My original question goes to the treatment of the cost since the cost principles make this cost unallowable. The contractor (and at this point we don't see any other way) wants to include the tax differential cost in the profit of the T&M CLIN. I was asking if anyone had dealt with this type of cost and how they accounted/paid the contractor for it.

Neurotic said:

Thanks for the responses. My agency does not have an issue with reimbursing the contractor. The government created the requirement/conditions for the cost to happen. My original question goes to the treatment of the cost since the cost principles make this cost unallowable. The contractor (and at this point we don't see any other way) wants to include the tax differential cost in the profit of the T&M CLIN. I was asking if anyone had dealt with this type of cost and how they accounted/paid the contractor for it.

Actually, the cost might well be allowable if the contractor proposed higher wages/salary for the follow on contract. But if the situation can be handled by simply adjusting profit, ok.

A percentage of travel reimbursement costs may not be huge. If travel is by commercial carriers,  hopefully the contractor will directly pay for tickets.

(Going deer hunting. Enjoy your day)

Neurotic said:

Thanks for the responses. My agency does not have an issue with reimbursing the contractor. The government created the requirement/conditions for the cost to happen. My original question goes to the treatment of the cost since the cost principles make this cost unallowable. The contractor (and at this point we don't see any other way) wants to include the tax differential cost in the profit of the T&M CLIN. I was asking if anyone had dealt with this type of cost and how they accounted/paid the contractor for it.

What would entitle the contractor to an adjustment in the fixed hourly rate in the initial contract?

If government changed the location and working conditions, it is a change.  If it affected the labor availability or willingness to travel without a raise to cover increased employees’ expenses, I could then consider that  the government change impacted the contractors cost due to the changed working conditions. If the contractor was just being a nice guy, then maybe no impact.

In my opinion, an after the fact profit adjustment couldn’t really be justified as “higher risk “, if the risk didn’t occur and it was contractor voluntarily reimbursing employees for taxes paid to be a “good guy”.

But if the parties agreed that the unburdened amount of the employees aditional requests for relief  would suffice as an impact settlement, that could work.

Mutual agreement of both parties?   After all is not a contract a living document and if something is not working that affects one party enough that both parties agree we need to do something different to make the project a success can not it be done?     

To be clear with regard to this particular thread I am not suggesting just putting a bunch of money into a contractors pocket I am taking about reasonable adjustment to the contract because it makes sense - good faith.   And of note good faith may suggest that the contractor should be as aware of reimbursement for taxes as the government is!  Anyone can read the FAR principles!

Neurotic said:

My original question goes to the treatment of the cost since the cost principles make this cost unallowable.

If we are talking about a T&M contract, why do you think the cost principles apply to what costs can be included in the hourly rate?

I think OP is talking about negotiating a new contract -- he or she has not inquired about changing or modifying an on-going contract.

ji20874 said:

I think OP is talking about negotiating a new contract -- he or she has not inquired about changing or modifying an on-going contract.

ji, my post above was only in response to Don’s last question. The contractor asked for an adjustment and they both agreed to it.

As for a new contract for the same conditions, the contractor can easily handle it in new proposed hourly rates in agreement with its labor force. He doesn’t have to identify any travel reimbursement taxes in the new rates. They would just be higher.

C Culham said:

Mutual agreement of both parties?   After all is not a contract a living document and if something is not working that affects one party enough that both parties agree we need to do something different to make the project a success can not it be done?     

To be clear with regard to this particular thread I am not suggesting just putting a bunch of money into a contractors pocket I am taking about reasonable adjustment to the contract because it makes sense - good faith.   And of note good faith may suggest that the contractor should be as aware of reimbursement for taxes as the government is!  Anyone can read the FAR principles!

Wouldn't there need to be consideration?

Don Mansfield said:

Wouldn't there need to be consideration?

Yes...but then we get into details.

On 2/7/2024 at 4:43 AM, Neurotic said:

The government created the conditions (Pandemic) for extended TDY during performance.

I don't understand this. What does the Government have to do with the pandemic?