FAR 31.205-35—Relocation costs.
Plain-English Summary
FAR 31.205-35 addresses when employee relocation costs are allowable as contract costs and when they are not. It covers permanent change-of-duty relocations for existing employees and recruitment relocations for new employees, including travel for the employee and immediate family, transportation of household goods, home-finding trips, temporary lodging, real estate closing costs, continuing ownership costs on a vacated home, other ordinary relocation expenses, home purchase costs at the new location, mortgage interest differential payments, rental differential payments, lease cancellation costs, tax gross-ups, and spouse employment assistance. It also sets important limits, such as the 14 percent cap on certain home-sale-related costs, the 5 percent cap on home-acquisition costs, the 3-year limit for mortgage and rental differential calculations, and the $5,000 cap for miscellaneous lump-sum relocation costs. The section also identifies costs that are unallowable, including home-sale losses, many home-purchase costs, continuing mortgage principal, and lender-arrangement costs. In practice, this rule is meant to let contractors reimburse reasonable, employer-benefiting relocation expenses while preventing the Government from paying for personal investment losses, excessive housing costs, or inconsistent relocation practices.
Key Rules
Relocation must be permanent
Allowable relocation costs apply only when the employee’s assigned work location changes permanently for 12 months or more, or when a new employee is recruited and relocated. Temporary assignments do not fit this rule.
Only specified costs are potentially allowable
The section lists the categories that may be reimbursed, including travel, household goods transport, home-finding trips, temporary lodging, closing costs, certain ownership costs on the old residence, ordinary relocation expenses, home purchase costs, mortgage and rental differentials, lease cancellation, tax gross-ups, and spouse employment assistance.
Home-sale and home-ownership costs are capped
Certain costs tied to selling the old home and carrying the vacant former residence are allowable only up to a combined 14 percent of the sales price. This prevents open-ended reimbursement of residence-related expenses.
New-home acquisition costs are limited
Costs incident to buying a home at the new location are allowable only for employees who were homeowners before relocation, and only up to 5 percent of the purchase price. Many common purchase-related costs are specifically unallowable under paragraph (c).
Mortgage and rental differentials have special formulas
Mortgage interest differential payments are limited to the interest-rate difference times the old mortgage balance times 3 years, with prorating required if the employee leaves or transfers again early. Rental differential payments are similarly limited and must be based on comparable housing and a 3-year measure.
Employer benefit and policy consistency are required
Even if a cost is listed, it is allowable only if the move benefits the employer, the reimbursement follows an established and consistently applied policy or practice designed to encourage prompt and economical relocation, and the cost is not otherwise unallowable under Subpart 31.2.
Actual expense is the default rule
Reimbursement generally may not exceed the employee’s actual expenses, except that miscellaneous costs may be paid as a lump sum up to $5,000 and certain relocation elements may be paid on a lump-sum basis if supported by data. If a lump sum is used, later adjustments to actual costs are unallowable.
Specific costs are expressly unallowable
The rule bars reimbursement for loss on sale of a home, many costs of acquiring a home in the new location, continuing mortgage principal payments on the old home, and costs of furnishing equity or nonequity loans or arranging below-market mortgage financing.
Responsibilities
Contracting Officer
Determine whether claimed relocation costs are allowable under FAR 31.205-35 and whether they are also allocable, reasonable, and not otherwise unallowable. Review the contractor’s relocation policy, ensure claimed amounts stay within the applicable caps and formulas, and verify that any lump-sum treatment is supported and consistent with the regulation.
Contractor
Maintain an established relocation policy or practice that is consistently followed and designed to motivate prompt, economical relocation. Document the business purpose of the move, support actual expenses or lump-sum build-ups, apply the 14 percent, 5 percent, and 3-year limits correctly, and exclude expressly unallowable costs from claims and indirect cost proposals.
Employee
Provide accurate documentation of relocation expenses, home sale or purchase information, lease terms, and any supporting data needed for lump-sum calculations. The employee must also avoid claiming personal costs that are not reimbursable under the contractor’s policy or the FAR.
Agency or Audit Staff
Evaluate whether the contractor’s relocation practices are consistent, whether claimed costs are properly classified, and whether unallowable costs have been excluded from billing, provisional rates, or incurred cost submissions. Scrutinize gross-ups, home-related costs, and any lump-sum arrangements for compliance.
Practical Implications
This section is often a source of questioned costs because relocation packages can mix allowable business expenses with personal housing and tax costs. Contractors should separate each element carefully and keep strong support for every amount claimed.
The 14 percent and 5 percent caps are easy to misapply, especially when multiple home-related costs are bundled together. Contractors should track which costs count toward each cap and which costs are excluded entirely.
Lump-sum relocation payments are allowed in limited situations, but they must be built from supportable data and cannot later be trued up to actual costs. If the company uses lump sums, its policy should clearly explain how the amount is determined.
Home-sale losses, mortgage principal, and many purchase-related costs are unallowable even if they are part of a real relocation package. These items should be screened out before billing the Government or charging indirect rates.
Consistency matters. A contractor that reimburses relocation costs only sometimes, or without a written and consistently followed policy, risks having otherwise allowable costs disallowed because the move was not handled under an established practice.
Official Regulatory Text
(a) Relocation costs are costs incident to the permanent change of assigned work location (for a period of 12 months or more) of an existing employee or upon recruitment of a new employee. The following types of relocation costs are allowable as noted, subject to the limitations in paragraphs (b) and (f) of this subsection: (1) Costs of travel of the employee and members of the employee’s immediate family (see 31.205-46 ) and transportation of the household and personal effects to the new location. (2) Costs of finding a new home, such as advance trips by the employee or the spouse, or both, to locate living quarters, and temporary lodging during the transition period for the employee and members of the employee’s immediate family. (3) Closing costs incident to the disposition of the actual residence owned by the employee when notified of the transfer ( e.g., brokerage fees, legal fees, appraisal fees, points, and finance charges), except that these costs, when added to the costs described in paragraph (a)(4) of this subsection, shall not exceed 14 percent of the sales price of the property sold. (4) Continuing costs of ownership of the vacant former actual residence being sold, such as maintenance of building and grounds (exclusive of fixing up expenses), utilities, taxes, property insurance, and mortgage interest, after the settlement date or lease date of a new permanent residence, except that these costs, when added to the costs described in paragraph (a)(3) of this subsection, shall not exceed 14 percent of the sales price of the property sold. (5) Other necessary and reasonable expenses normally incident to relocation, such as disconnecting and connecting household appliances; automobile registration; driver’s license and use taxes; cutting and fitting rugs, draperies, and curtains; forfeited utility fees and deposits; and purchase of insurance against damage to or loss of personal property while in transit. (6) Costs incident to acquiring a home in the new work location, except that- (i) These costs are not allowable for existing employees or newly recruited employees who were not homeowners before the relocation; and (ii) The total costs shall not exceed 5 percent of the purchase price of the new home. (7) Mortgage interest differential payments, except that these costs are not allowable for existing or newly recruited employees who, before the relocation, were not homeowners and the total payments are limited to an amount determined as follows: (i) The difference between the mortgage interest rates of the old and new residences times the current balance of the old mortgage times 3 years. (ii) When mortgage differential payments are made on a lump-sum basis and the employee leaves or is transferred again in less than 3 years, the amount initially recognized shall be proportionately adjusted to reflect payments only for the actual time of the relocation. (8) Rental differential payments covering situations where relocated employees retain ownership of a vacated home in the old location and rent at the new location. The rented quarters at the new location must be comparable to those vacated, and the allowable differential payments may not exceed the actual rental costs for the new home, less the fair market rent for the vacated home times 3 years. (9) Costs of canceling an unexpired lease. (10) Payments for increased employee income or Federal Insurance Contributions Act (26 U.S.C.Chapter21) taxes incident to allowable reimbursed relocation costs. (11) Payments for spouse employment assistance. (b) The costs described in paragraph (a) of this subsection must also meet the following criteria to be considered allowable: (1) The move must be for the benefit of the employer. (2) Reimbursement must be in accordance with an established policy or practice that is consistently followed by the employer and is designed to motivate employees to relocate promptly and economically. (3) The costs must not be otherwise unallowable under subpart 31.2 . (4) Amounts to be reimbursed shall not exceed the employee’s actual expenses, except as provided for in paragraphs (b)(5) and (b)(6) of this subsection. (5) For miscellaneous costs of the type discussed in paragraph (a)(5) of this subsection, a lump-sum amount, not to exceed $5,000, may be allowed in lieu of actual costs. (6) (i) Reimbursement on a lump-sum basis may be allowed for any of the following relocation costs when adequately supported by data on the individual elements ( e.g ., transportation, lodging, and meals) comprising the build-up of the lump-sum amount to be paid based on the circumstances of the particular employee’s relocation: (A) Costs of finding a new home, as discussed in paragraph (a)(2) of this subsection. (B) Costs of travel to the new location, as discussed in paragraph (a)(1) of this subsection (but not costs for the transportation of household goods). (C) Costs of temporary lodging, as discussed in paragraph (a)(2) of this subsection. (ii) When reimbursement on a lump-sum basis is used, any adjustments to reflect actual costs are unallowable. (c) The following types of costs are unallowable: (1) Loss on the sale of a home. (2) Costs incident to acquiring a home in the new location as follows: (i) Real estate brokers’ fees and commissions. (ii) Costs of litigation. (iii) Real and personal property insurance against damage or loss of property. (iv) Mortgage life insurance. (v) Owner’s title policy insurance when such insurance was not previously carried by the employee on the old residence. (However, the cost of a mortgage title policy is allowable.) (vi) Property taxes and operating or maintenance costs. (3) Continuing mortgage principal payments on a residence being sold. (4) Costs incident to furnishing equity or nonequity loans to employees or making arrangements with lenders for employees to obtain lower-than-market rate mortgage loans. (d) If relocation costs for an employee have been allowed either as an allocable indirect or direct cost, and the employee resigns within 12 months for reasons within the employee’s control, the contractor shall refund or credit the relocation costs to the Government. (e) Subject to the requirements of paragraphs (a) through (d) of this section, the costs of family movements and of personnel movements of a special or mass nature are allowable. The cost, however, should be assigned on the basis of work (contracts) or time period benefited. (f) Relocation costs (both outgoing and return) of employees who are hired for performance on specific contracts or long-term field projects are allowable if- (1) The term of employment is 12 months or more; (2) The employment agreement specifically limits the duration of employment to the time spent on the contract or field project for which the employee is hired; (3) The employment agreement provides for return relocation to the employee’s permanent and principal home immediately prior to the outgoing relocation, or other location of equal or lesser cost; and (4) The relocation costs are determined under the rules of paragraphs (a) through (d) of this section. However, the costs to return employees, who are released from employment upon completion of field assignments pursuant to their employment agreements, are not subject to the refund or credit requirement of paragraph (d).