Craig Stetson, Director, Capital Edge Consulting
The Bipartisan Budget Act of 2013, dated April 7, 2014 implemented a compensation limit of $487,000 applicable to new contracts awarded by all federal agencies on or after June 24, 2014 and subject to Federal Acquisition Regulation (FAR) Subpart 31.2. The $487,000 limit is applicable to all contractor employees – a significant expansion from what was the top five positions within each contractor business segment or home office. As the limit is now applied based on the date of contract award, versus by fiscal year as it historically has been, the accounting treatment for cost allowability purposes has become more complicated. Under recently issued government guidance, contractors may utilize multiple compensation limits each year starting in 2014 depending on the date of contract award and corresponding period of performance.
Defense Procurement and Acquisition Policy (DPAP), the Defense Contract Management Agency (DCMA) and the Defense Contract Audit Agency (DCAA) all have issued recent internal guidance permitting contractors to address these multiple compensation limits using a “blended rate” approach. Under this approach, multiple compensation limits may be applied during the fiscal year and are weighted based on the cost of specific contracts in relation to the total cost of all contracts (see example below). This blended approach is not required, rather an option to consider.
For cost allowability purposes and determining what individual compensation elements are included in the limitation, compensation is defined at FAR 31.205(p) to include only wages, salary, bonuses, deferred compensation and employer contributions to defined contribution pension plans. This definition is important as other common elements of compensation frequently included in an overall definition, e.g., auto allowances, tuition reimbursements, life insurance premiums, etc., are not included for purposes of calculating the limit.
Pursuant to the government issued guidance, contractors are permitted to use a blended compensation limit if they consider this approach to be beneficial. If a contractor proposes to use a blended limit, the contractor is required to obtain an advance agreement with the Administrative Contracting Officer. The advance agreement should outline the agreed-to process, auditable data submission and applicable period associated with the blended rates. Additionally, the DCAA will perform an audit to determine that allowable compensation limits are used across applicable fiscal years.
Additionally, the 11 page DCMA guidance issued January 29th, 2016 specifically addresses how compensation limits apply to task orders, modifications and options. This is important as there is a significant difference between the current limit of $487,000 and recent years past. Addressed in the DCMA guidance are four specific situations and how the limits are applied to each.
- Task orders issued after June 24, 2014 applicable to IDIQ contracts awarded prior to June 24, 2014 are bound by the limit in effect at time of the IDIQ award (not the task order).
- Modifications made after June 24, 2014 applicable to contracts awarded prior to June 24, 2014 are bound by the limit in effect at time of the contract award (not the modification).
- Options exercised after June 24, 2014 applicable to contracts awarded prior to June 24, 2014 are bound by the limit in effect at time of the contract award (not the option exercise).
- Delivery orders issued after June 24, 2014 applicable to Blanket Purchase Agreements (BPAs) awarded prior to June 24, 2014 are bound by the limit in effect at time of the delivery order as BPAs are not contracts.
This specific guidance is favorable to contractors as this definition will maximize allowable cost reimbursement due to application of the limits in effect prior to June 24, 2014. The much more conservative approach would be to simply use the current limit, i.e., $487,000, on all contracts active in 2014 and beyond. However, considering the significant difference in the current and historical limit amounts, it may be worth the time to do the additional calculations and accounting mechanics to claim the costs that contractors are entitled to under the government guidance.
Separately, the Office of Federal Procurement Policy published March 15, 2016 compensation limits applicable to 2013 and January 1, 2014 through June 23, 2014 of $980,796 and $1,144,888, respectively. Additional compensation limits effective since 2010 are noted here for information – $952,308 – 2012, $763,029 – 2011 and $693,951 – 2010.
A hypothetical example applying the recent government issued guidance is presented below. In this example, the blended compensation limit for 2014 is $946,676 and applicable to all covered contracts during that year.
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