The Bipartisan Budget Act of 2013 (BBA) has changed the game for executive compensation limitations yet again. Before 2012, US Government contracts subject to the FAR Part 31 Cost Principles were subject to the applicable fiscal year (FY) Compensation Cap established by the OMB (Office of Management and Budget) on the five most highly compensated employees in management positions. This changed again for contracts awarded from January 1, 2012 through June 23, 2014 to apply to all contractor employees performing DoD, NASA, and Coast Guard contracts, but apply only to the top five executives for remaining agencies. Every year the Office of Management and Budget publishes a memorandum to the Heads of Executive Departments and Agencies announcing the “benchmark compensation amount” for certain executives and contractor employees. During contractor’s fiscal years 2013 and 2014 the executive compensation dollar limitation was $980,796 and $1,144,888, respectively. Now, the BBA limits how much a contractor could charge the federal government for an employee’s compensation to $487,000 to all contractor employees for new contracts subject to FAR 31.2 awarded on or after June 24, 2014. This provision limitation change within a fiscal year has caused a contractor to be subject to multiple employee compensation caps (FAR 31.205-6(p)) within the same fiscal year.
Now that we have a mess, what to do? Director, Defense Pricing (DDP) and the Defense Contract Management Agency (DCMA) issued guidance allowing contractors to address these multiple limits (caps) using a “blended rate” approach. Contractors’ use of a “blended rate” approach according to the memo, is deemed as a practical and cost efficient solution to implement these requirements.
“Blended rates will be calculated by each individual contractor as a weighted average composite cap amount specific to their contract volume prior to June 24, 2014, and on or after June 24, 2014. Contractors may elect, but are not required, to use the blended rate approach. Depending upon their circumstances, contractors may elect another compliant method (e.g. using the new $487,000 cap for all contracts regardless of award date).”
It’s all about the base. Base year of a contract determines which compensation cap is applicable. The blended compensation cap is calculated as a weighted average of costs incurred based on the volume of contracts awarded before and on or after June 24, 2014. Incurred Cost Proposals, Final Overhead Rates, Interim Billing, and Forward Pricing Rates will be impacted by the calculation of blended compensation caps. Administrative Contracting Officers (ACO) must execute an advanced agreement as provided for in FAR 31.109 (Advanced agreements), when contractors choose to implement the blended compensation cap. DCMA will request DCAA’s evaluation of the contractor’s forward pricing and incurred cost proposals to ensure use of the blended compensation cap does not result in the Government pricing or paying compensation costs in excess of the total allowable compensation amounts. This will be a non-audit service provided by DCAA on the proposed advance agreement to determine compensation costs does not exceed the allowable cap. Non-audit services will not include any testing of transactions, this will be performed during audit of forward pricing and incurred costs audits.
DCAA has updated its OAG – Guide for determining Adequacy of Contractor Incurred Cost Proposals (ICP) version 3.1 dated June 2016 to reflect the change of executive compensation. The instructions before assessing an incurred cost proposal for adequacy requires the DCAA auditor to determine if the contractor is using a blending of compensation caps approach and if so to notify the Administrative Contracting Officer (ACO) to determine if an advanced agreement has been executed or working to execute. It is important to note that the advanced agreement does not determine if the incurred cost proposal is adequate or inadequate in accordance with FAR 52.216-7(d); however, based upon its latest ICP Adequacy Checklist, DCAA may return a proposal and require the contractor to resubmit only after executing an advanced agreement with the ACO. We say “may” return the ICP because a corollary DCAA MRD (Memorandum for Regional Directors) states that the auditor will not return a contractor’s adequate ICP solely because there is not yet an advance agreement. By some appearances, the author of the ICP Adequacy Checklist failed to read the MRD; hence, we are left with inconsistent DCAA policies in application to blended compensation caps/rates and accepting or rejecting ICPs which will ultimately require an advance agreement. And the last inconsistency (or odd terminology attributed to DDP/DCMA) is the reference to an advance agreement albeit several years after the fact (after the compensation costs were incurred) leaving us to conclude that one should not over-think any of this; it is what it is.