1. Changing Compensation Caps – You Need a Scorecard to Keep Track of the Players
Dave Lundsten, Partner
John Ford, Senior Consultant

2. Changing Compensation Caps – You Need a Scorecard to Keep Track of the Players Speakers
Dave Lundsten Partner Cherry Bekaert LLP John Ford Senior Consultant Cherry Bekaert LLP

3. Applicability of the FAR to State Awards
Any contract or subcontract funded in whole or in part with Federal-aid highway funds, shall be performed and audited in compliance with cost principles contained in the Federal Acquisition Regulation Part 31. (23 U.S.C. §112)
Compensation for each employee or classification of employee must be reasonable for the work performed in accordance with the Federal cost principles. (23 CFR §172.11(b)(2))

4. Compensation Defined
“Compensation for personal services” means all remuneration paid currently or accrued, in whatever form and whether paid immediately or deferred, for services rendered by employees to the contractor. (FAR )
The allowability of compensation costs is addressed generally in FAR
In addition, compensation costs must meet the reasonableness test of FAR

5. General Allowability Rules for Compensation 31.205-6(a)
Compensation for personal services must be for work performed by the employee in the current year.
The total compensation for individual employees or job classes of employees must be reasonable for the work performed; however, specific restrictions on individual compensation elements apply when prescribed.
The compensation must be based upon and conform to the terms and conditions of the contractor’s established compensation plan or practice followed consistently.

6. General Allowability Rules for Compensation
If major revisions of existing compensation plans or new plans are introduced, the contractor should provide the cognizant ACO an opportunity to review the allowability of the changes.
Costs that are unallowable under other paragraphs of Part 31 are not allowable under even if they otherwise qualify as allowable compensation for personal services.

7. General Allowability Rules for Compensation
For certain individuals, including:
Owners of closely held corporations, members of limited liability companies, partners, sole proprietors, or members of their immediate families; and
Persons who are contractually committed to acquire a substantial financial interest in the contractor’s enterprise.
Compensation must—
Be reasonable for the personal services rendered; and
Not be a distribution of profits (which is not an allowable contract cost).
For owners of closely held companies, compensation in excess of the costs that are deductible as compensation under the Internal Revenue Code (26 U.S.C.) and regulations under it is unallowable.

8. Reasonableness (FAR 31.205-6)
Compensation for each employee or job class of employees must be reasonable for the work performed. Compensation is reasonable if the aggregate of each measurable and allowable element sums to a reasonable total.
Other factors that may be relevant include, but are not limited to, conformity with compensation practices of other firms—
(i) Of the same size;
(ii) In the same industry;
(iii) In the same geographic area; and
(iv) Engaged in similar non-government work under comparable circumstances.

9. Reasonableness (FAR 31.201-3)
A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business.
What is reasonable depends upon a variety of considerations and circumstances, including --
Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor’s business or the contract performance;
Generally accepted sound business practices, arm’s-length bargaining, and Federal and State laws and regulations;
The contractor’s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and
Any significant deviations from the contractor’s established practices.

10. Compensation Caps FAR 31.205-6(p)
Compensation subject to the caps is the sum of wages, salary, bonuses, deferred compensation and employer contributions to defined contribution pension plans.
The allowability of all other forms of compensation is to be determined using the criteria from other provisions of Part 31.
The compensation caps are allowability rules, not reasonableness rules. Thus, compensation under the cap is not automatically reasonable and allowable.

11. Compensation Caps FAR 31.205-6(p)
Prior to June 24, 2014: the compensation of a “senior executive” in excess of the benchmark compensation amount determined applicable for the contractor fiscal year by the Administrator, Office of Federal Procurement Policy (OFPP) are unallowable.
“Senior executive” means the five most highly compensated employees in management positions at each home office and each segment of the contractor, whether or not the home office or segment reports directly to the contractor's headquarters.

12. Compensation Caps FAR 31.205-6(p)
The most recent OFPP benchmark amounts are:
2014 =$1,144,888 (set in March 2016)
2013 = $980,796 (set in March 2016)
2012 = $952,308
2011 = $763,029
2010 = $693,951
These caps apply to awards made before June 24, 2014

13. Compensation Caps FAR 31.205-6(p)
A new employee compensation cap was mandated by the Bipartisan Budget Act of 2013 (BBA) – applicable to awards made on or after June 24, 2014, and subawards/contracts made under them: compensation of all employees in excess of the benchmark compensation amount determined applicable for the contractor fiscal year by OFPP are unallowable.
The initial cap is set at $487,000.
This cap is to be adjusted annually to reflect the change in the Employment Cost Index for all workers, as calculated by the Bureau of Labor Statistics.

14. Compensation Caps FAR 31.205-6(p)
An agency head may establish one or more narrowly targeted exceptions for scientists, engineers, or other specialists upon a determination that such exceptions are needed to ensure that the executive agency has continued access to needed skills and capabilities.

15. When Is a Contract/ Option Extension/ Supplemental Agreement/ Task/Delivery Order Awarded (or “Entered Into”)?
The date a contract is entered into is the date by which both the government and the contractors have signed the contract.
The date an option extension is entered into is the date that the “original” contract is entered into. Options are not considered separate contracts, they are a modification of the original contract.

16. When Is a Contract/ Option Extension/ Supplemental Agreement/ Task/Delivery Order Awarded (or “Entered Into”)? (continued)
For cap purposes, a Task or Delivery Order under an indefinite quantity contract vehicle is not a new contract, and the date they are entered into is the date of the “original” indefinite quantity contract.
A Supplemental Agreement (SA) is likewise not a new contract, but a part of the “original” or basic contract. This is not true if the work in the SA is unrelated to the work in the basic contract.

17. Impact of Differing Caps Applying During the Same Period
Awards made prior to June 24, 2014 can be performed simultaneously with awards made on or after June 24, 2014.
Different caps can be in effect for the same accounting period.
A contractor may find it difficult to establish a single indirect cost rate when two caps apply to the same period.
Options
Establish a single rate using the BBA cap.
Establish two rates using the different caps
Establish a blended rate as authorized by DoD (See, DCAA MRD 16-PSP-005(R), February 19, 2016 available at

18. When and How Does the Cap Affect Compensation Allowability
When and How Does the Cap Affect Compensation Allowability? Three Examples

19. Example 1
Employee X is employed by Contractor A and works all of 2015 on a contract awarded by DoT after June 24, In 2015, X received compensation subject to the BBA cap of $500K. Therefore, $13K of this compensation is unallowable
A also provides X with a life insurance policy as part of his compensation and in 2015 paid $10K in premiums on that policy. This $10K must be added to his otherwise capped compensation of $487K to give a total of $497K in compensation that must be examined for reasonableness.
Thus Employee X may have allowable compensation that exceeds $487K.

20. Example 2
Employee Y also works for contractor A in the same job classification as X. However, in 2015, Y only worked on a contract awarded by DoT in May Y’s compensation as defined in the BBA is $550K. However, Y is not subject to the BBA compensation cap.
In addition to the $550L in BBA compensation, Y also has a company provided life insurance policy for which the premiums were $10K in Y’s total compensation of $560K must be reviewed for reasonableness.

21. Example 3
Employee Z works for Contractor A. In 2015, she only worked on a contract awarded in December Z’s total compensation for 2015 was $350K. However, $5K of this came from a company provided car that Z could use for personal business. This $5K is an unallowable cost.
Therefore, Z’s allowable compensation of $345K must be examined for reasonableness even though it is below the BBA cap. 21

22. Summary Information Post June 23, 2014 Contracts
Pre June 24, 2014 Contracts
Post June 23, 2014 Contracts
Effective date of new OFPP Compensation Caps
Jan. 1, 2013 and Jan. 1, 2014 respectively
N/A
OFPP and BAA Cap amounts:
2013
2014
$980,796
$1,144,888
$487,000
Ability to re-open 2013 & 2014 completed audits
Cannot re-open closed audits unless the government wishes to do so
Applies to which employees:
5 highest paid individuals in management positions, in each segment
All employees
Definition of compensation – for purposes of the compensation cap
Wages, salary, bonuses, deferred compensation, employer contributions to defined contribution plans, entered in the Company’s cost accounting records, whether paid, earned or otherwise accruing.
Same

23. Summary Information Post June 23, 2014 Contracts
Pre June 24, 2014 Contracts
Post June 23, 2014 Contracts
Definition of compensation for purposes of determining reasonable compensation below the cap
FAR Part 31
What if you work for multiple agencies, or what if the government wishes to re-open 2013 & 2014 rates, or those rates have not been agreed upon?
DCAA/DCMA permits use of a blended rate – ask your CO to approve this approach
Submit two rates, one for DoD/NASA/Coast Guard and one for Civilian Agencies (DOT)
N/A

24. Topics for Discussion
How many of you have submitted or seen audits that show two rates, before and after the BBA cap date?
How significant has the difference in these two rates been:
< 1%
1% - 3%
3% - 5%
> 5%

25. Topics for Discussion
How many of you have submitted or seen audits of companies with > $25 million in Direct Labor where the difference was greater than: 3%? 2%? 1%? How many of you have submitted or seen audits of companies with between $2 million and $5 million where the difference was greater than: 5%? 4%? 2% or less?

26. Topics for Discussion
For the DOT auditors in the group, what have been the most significant problems in dealing with the two sets of caps?

27. Topics for Discussion
How many of you have submitted or seen audited reports that just use the BBA $487,000 cap, even though there are contracts that could use the higher cap?
How many of you have submitted or seen audits of companies with between $2 million and $5 submitted or seen audits where a blended rate was used?

28. Topics for Discussion
How many of you wish that Congress would have let the OFPP implement the new cap so it would have gone into effect on January 1 rather than June 24?