Blog

Controlling Relocation Costs: Establishing Protocols and Setting Realistic Expectations

September 1, 2010 by MSI

In today's economic environment, corporate relocation budgets are being scrutinized more closely than ever. Human resource leaders, talent management professionals and recruiters are walking a fine line working to secure qualified candidates while aiming to reduce their overall relocation-related expenses and remain within budget.  

Of course, controlling relocation costs is a challenge, because relocation is not black and white. It’s very difficult to estimate full relocation/assignment costs in advance because there are so many ‘moving pieces’: where the employee is moving to and from, family size, travel costs for final move and house hunting, currency fluctuations and allowance calculations, what a home may actually sell for, what the actual loan amount of a new home will end up being, the actual weight of a household goods shipment and the final tax assistance/equalization costs.

And, making it even more difficult from a forecasting perspective is the fact that, more often than not, there are exception requests, which, when approved, drive up the costs. Managers or departmental leaders may play a role in an increase in the final relocation costs because, working to appease their employee, they approve exception requests without fully understanding the financial impact. While it’s easiest to have an internal corporate policy of, “Just Say No,” we all know that it’s not possible in employee relocation, because there are always exceptions.

With so many moving parts and focused on having happy and satisfied employees and meeting the department’s financial goals, there are a few recommendations we have to establish protocol and set realistic expectations within your team.

1. Require that a customized pre-move estimate be established for each relocation. This will help you build an accurate forecast based on the specific employee or candidate and not just the estimated costs according to the employee’s policy tier. As a reminder, ensure that the estimated costs are based on the full policy benefits and not what the employee or candidate states they may need at that time.
2. Once the formal pre-move estimate process is implemented, schedule monthly or quarterly accrual reporting to track actual costs versus the estimated budgets. It is important to note that relocation accruals should be viewed as an overall process. Many finance teams want to know which specific expenses are going to be processed in the upcoming month or quarter, however, because of the numerous variables, it can be a dangerous practice to guess what expenses you anticipate will come through because a house could sell tomorrow and a lower anticipated payout could increase substantially.  
3. Closely track exception requests and associated costs. When a relocation exceeds the original budget, exception approvals will most often provide the rationale and support the business decision. It is a best practice to have one designated approver for all exception requests to ensure consistency.
4. Finally, if you find that you’re in a position where the relocation expenses can absolutely not exceed the budget and an overall cap applies, we recommend deducting estimated tax assistance. Depending upon your company's gross-up methodology, we recommend that the approximate tax assistance dollars be backed out of the cap amount, and that it’s done prior to advising the employee of their budget or cap. The estimated tax assistance should be based on the premise that the full amount of the budget will be used for taxable expenses. This should keep you within, or even under, budget while allowing the employee to focus on an accurate cap amount for their relocation expenses.