Travel costs are frequently a target of incurred cost audits.

Auditors often report finding lodging costs that exceed federal per diem rates. To avoid that, your company should establish internal guidelines to ensure it can support estimated employee lodging costs, maximize cost recovery and avoid penalties for submitting expenses that are not allowed.

Keep in mind that historical travel cost information may be used to estimate direct and indirect travel costs in budgets and forward pricing proposals.

The criteria for allowable travel costs are contained in the Federal Acquisition Regulation (FAR) 31.205-46. The government may reimburse lodging, meals and incidental expenses based on an established per diem, actual expenses or a combination. The key to remember is that whatever method is used, the amounts must be reasonable.

Total daily expenses are compared to the maximum set per diem rate. Any expenses that exceed that rate are disallowed.

Although there are exceptions, amounts for lodging that exceed the maximums outlined in FAR 31.205-46(a)(2) generally are not allowed. These excess expenses must be identified and segregated in your firm’s accounting records.

Travel expense and documentation rules for federal employees traveling within the 48 contiguous states are defined in the Federal Travel Regulation (FTR). The Department of Defense has similar policies for travel to Alaska, Hawaii and outlying areas. The Department of State outlines policies for travel to other areas. Those policies refer to the FAR when it comes to maximum per diem rates, the definitions of lodging, meals and incidental expenses, and special or unusual situations.

The FTR rules state that the per diem allowance includes expenses (except lodging taxes in the U.S.) for:

  • Overnight sleeping facilities;
  • Baths;
  • Personal use of the room during daytime;
  • Telephone access fees; and
  • Service charges for fans, air conditioners, heaters and fires furnished in the room when they are not included in the room rate.

Ideally, your business uses cost-reporting software that can look up the maximum rates, find excess expenses and assign the costs to a segregated account containing expenses that are not allowed. If employees use this type of software, they must be trained to separate lodging charges from taxes, meals or miscellaneous charges that may appear on their receipts. Those expenses must be entered on separate lines and in distinct categories. They are not subject to the per diem lodging caps, although they may be subject to other criteria.

A cost-effective alternative may be to use statistical sampling to determine a factor that can be applied to remove excessive lodging costs. When costs are accumulated in a separate expense account, this technique can make it easier to determine the sampling universe and the appropriate sample size. If your company uses statistical sampling, it is recommended that it obtain an advance agreement for the sampling with its contracting agency. However, this is not required.

FAR 31.205-46(a)(2) notes two exceptions to these excess lodging caps:

  1. Lodging procured at a prearranged place where a meeting, conference or training session is held.
  2. Lodging rates that have temporarily escalated because of a room shortage created by such special circumstances as sporting events or natural disasters.

These exceptions must be approved at a level high enough in your company to prevent abuses and they must be supported by documents listing the location, dates and circumstances.

As with any travel costs, lodging must be supported with documents that show at a minimum:

  • Date and place of the expenses;
  • Purpose of the trip;
  • Name of person traveling, along with the individual’s title or relationship to the contractor; and
  • Receipts when expenditures are the lesser of $75 or your firm’s maximum expenditure that requires a receipt.

Keeping lodging receipts for amounts lower than $75 is not required, but it is recommended in case auditors question costs if there is insufficient evidence that the costs were incurred.


  • Establish a written travel policy and procedure for documenting lodging expenses.
  • At a minimum, ensure you address the criteria for allowable lodging expenses outlined in FAR 31.205-46, Travel Costs.
  • Address segregation of non-lodging costs for separate disposition.
  • Identify and segregate in accounting records all lodging costs that are not allowed.
  • Retain lodging receipts to demonstrate lodging expenses were actually incurred.

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