Has the Government Learned Its Lesson? Your Feedback is requested.
Perhaps the most subjective cost allowability determination process utilized by the Defense Contract Audit Agency (DCAA) is that associated with determining reasonableness of Government contractor employee compensation, more specifically the wages and benefits of senior managers and executives. Government contractors more likely to endure examination and challenging of such compensation are those with cost reimbursable contracts which invoke the audit of annual incurred cost proposals (ICP) via contract payment clauses. The audit review is a highly subjective process with the purpose of determining if annual compensation exceeds a hypothetical “reasonableness” benchmark, using ambiguous criteria contained in FAR 31.205-6(b)(2), i.e., measured to wage surveys reflecting compensation for same job position within companies of same size, same industry, same geographic area, and engaged in same type of non-government work as performed under government contracts.
In determining if annual compensation is reasonable, and therefore allowable, DCAA uses its own choice of national wage surveys, and goes through a series of highly judgmental, subjective and conservative determinations to benchmark both contractor manager and executive job positions and compensation levels to its selected survey information. DCAA employs a dedicated team of salary evaluation specialists to evaluate the compensation reasonableness, and no government contractor, large or small, is exempt from having its executive compensation reviewed during an ICP evaluation.
The benchmarking of job positions to wage survey data, selective determination of wage survey “quartiles” to which individual contractor employee salaries are measured for “reasonableness”, and statistical applications, however, have been under fire by the Armed Services Board of Contract Appeals (ASBCA), most recently in two cases (Metron, Inc., June 2012, and J.F. Taylor, Inc., January 2012) where the courts found that the DCAA evaluation process was flawed.
While these court decisions should have raised concerns within the ranks of the DCAA compensation audit team, resulting in a pull-back to more closely determine if its audit procedures and “reasonableness” criteria required refinement before continuing to even review management compensation, our experience with clients shows that DCAA has shown no interest in re-examining its compensation evaluation strategy or its statistical methodology so as to support a clear cut case for questioning compensation.
Question for government contractors reading this blog message who have been exposed to DCAA executive compensation audits: has DCAA (and Government ACOs/legal team members) learned their lesson?
We would appreciate your experiences and comments on this topic, more specifically how DCAA has approached evaluating your company’s compensation during recent ICP audits.
Darryl Walker is a Emeritus Advisor for Government Compliance with Redstone Government Consulting, Inc., and formerly served as an Owner and Technical Director for the Beason & Nalley Government contract consulting group for over ten years. He provides content for our Government Insights Newsletter, provides training courses to government contractor and business community leaders, and consults with government contractors regarding a vast range of issues including cost proposals and presentations, internal controls, proposal preparation, compliance with the FAR and Cost Accounting Standards, litigation support, specialized claims, defective pricing issues, liaison with procurement and DCAA audit officials, and accounting and management systems compliance. Prior to joining Redstone Government Consulting, Darryl worked with the Defense Contract Audit Agency (DCAA) for almost 34 years in a variety of technical and management capacities. During his tenure with DCAA, Darryl provided audit services to a wide range of government agencies, including the Department of Defense, NASA, Department of Energy, Department of Interior, General Services Administration, and Department of Justice. During his experience with DCAA, Darryl audited over 3,000 government contractors throughout the Southeastern United States, Europe, and the Middle East. Education Darryl is a graduate of Texas Wesleyan College with a major in accounting and minor in economics.