New per diem rates based on independent data

Hotel & Motel Management, Dec 13, 2004 by Bruce Adams

NATIONAL REPORT -- Be careful what you ask for because you might get your wish. That axiom applies to hoteliers and hotel and travel association board members who thought it was time to fix the way federal per diem rates are established nationwide.

But something unexpected occurred during that much-anticipated fix, causing a last-minute appeal by the hotel industry of the new rates that it had lobbied so hard to get.

Per diem rates, established periodically for 420 U.S. markets, are the amounts that federal and government travelers will be reimbursed for a hotel room when they travel. If they exceed the fixed per diem rate, they have to pay the difference out of their own pockets.

The government travel market is a $20-billion annual business, according to Duncan Farrell, general manager of the Society of Government Travel Professionals, which is the national forum for that market. But not all of that spend goes to hotels.

"The per-diem-influenced business represents about 60 million roomnights per year in all government categories, including the cost-reimbursable contractors, which is the largest segment of the government travel spend," Farrell said.

Part of the government contract for cost-reimbursable contractors is based on their ability to stay at a hotel with the per diem rates. These companies are reimbursed for their travel by the government, so their companies' per diem policies often are affected by what the government is paying.

There are more than 230,000 cost-reimbursable contractor organizations and most are influenced or abide by the federal per diem rates. A few of the larger companies in the federal contractor category that buy many hotel roomnights are Boeing, General Dynamics and Lockheed Martin.

Before changes implemented for fiscal year 2005 effective Oct. 1, per diem rates were established by surveying hotels in markets about what they charge for a night's stay. Hoteliers were skeptical about the accuracy and fairness of the surveys, and decided it was time for a change.

The Governmentwide Per Diem Advisory Board, which consists of hoteliers, travel agents, government agencies and associations, including the American Hotel & Lodging Assn., recommended that the General Services Administration set its rates based on actual rates in a market instead of a random survey, according to Kevin Maher, AH&LA v.p. for governmental affairs.

"If they gather this data, they can show what is actually happening with rates in a market and they don't need to do the surveys," Maher said. "The GSA took the Smith Travel Research chain designations, dropped the luxury and economy segments, gathered information on the middle four groups [from STR data] and based the per diem on that."

They took the average daily rate from the previous 12 months and reduced it by 5 percent to come up with the new per diem, according to Scott Lamb, national director of government sales for Prime Hospitality Corp. He's also chair of the supplier council for SGTP and the only lodging employee on the board of directors of SGTP.

Unfortunately for many big-market hoteliers, the rates were based on a post-9/11 period when discounting was rampant. In addition, the survey examined all seven days of the week rather than midweek when business travel is the strongest and rates tend to be higher.

"Part of the problem was that the data [were] post-9/11 data and the industry was skewed inordinately low, and they didn't adjust for that," Lamb said. "They got a lot of feedback after the per diems went out. The GSA reacted fairly quickly and made adjustments. You always will have some people who are unhappy with the per diems from the hotel community. But this end product is going to be better for everybody."

He said the initial results were very unfair to some markets, such as Orlando, which initially was reduced from a $95 per diem rate in fiscal years 2003 and 2004 to $61 for fiscal year 2005. But changes were made quickly and the 2005 fiscal year per diem for Orlando was reset at $98.

"I am happy with the outcome," Lamb said. "Overall, it is fair. As a taxpayer, I want to see lower per diems and as a hotelier, I want to see higher per diems. Overall, we want government travelers to perform their mission at the best cost to taxpayers. We don't want money wasted, but we want to be fair to hoteliers and to those who travel on the per diem."

Based on the work done this year, the per diems will be easier to update and more predictable than when they were done by random surveys, Lamb said.

"Previously, they did a major survey every three years and a minor survey the two years in between," he said. "Now they can build a logarithm and calculate it. I think they will review it every year."

Any change to get away from calculating per diem rates by surveys is good, according to Ronda Combs, c.e.o. of the Tennessee Hotel & Lodging Assn.

"With the random surveys, you never know who would get them or fill them out or throw them away," Combs said. "Using STR data, they are getting good firm data to base the per diems on. It is definitely more fair than it was. Overall, members in the Nashville area have been very pleased."