It’s a busy time of year for us and many of our clients, but I wanted to take this opportunity to remind all of our readers of a few upcoming things to keep in mind. For most of our clients, January was a whirlwind of closing 2016 and getting all W-2s and 1099s completed. February will be spent ramping up for financial statement audits and the corporate tax deadline, but for government contractors there’s also a few extra things to do this time of year.
Since early January, we have been assisting clients with review and preparation of their provisional billing rates (PBRs), as well as corporate budgeting for fiscal year 2017. If you do have cost-type or T&M contracts and still have not filed your provisional rates, let us know if we can help. DCAA has already begun issuing notices (let’s call them reminders) to contractors who have not turned in their provisional indirect rates, reminding them of their responsibility to do so. Hopefully, you caught Mike Steen’s webinar in January on the topic of provisional rates, covering the regulatory authority and responsibilities for contractors in this area. Mike also discussed the difference between provisional indirect rates and forward pricing rates used for proposals, which brings me to our next topic: PROVISIONAL RATES.
If you haven’t already set up your corporate indirect rate budget, but you have submitted your provisional rates, you probably have a good starting point. For our clients, we like to establish somewhat conservative provisional rates to minimize the possibility of an over- or underbilling at year end, but also to use the corporate indirect rate budget internally, in order to shoot for best-and worstcase scenarios based on known proposal pursuits and existing company backlog. The purpose of this process is to drive home to management the levers that can drastically change the way the company needs to incur cost during 2017. It’s a great way to give a concise impression to executives and program management of the things that should happen to incur expenses the way they desire in the budget. Whether planning for a new accounting system, fixed asset investment, or just striving for great bonuses for those involved in the company’s success, understanding what it takes to get to that point without materially impacting indirect rates is extremely important
Speaking of bonuses, I’m sure everyone will recall the fun we’ve had the past few years with the blended compensation rate caps. Back in mid-2014 the compensation ceiling was reset to $487K, and this reset created a line in the sand, splitting 2014 into two halves, each subject to a different compensation cap. For companies with employee compensation exceeding that mark, there was a need to develop a method for treatment of contracts awarded before and after the cap. The law (BBA, PL 113-67, Sec. 702) that established the executive compensation limitation also provides for an annual escalation based on the employment cost index (ECI) for all workers, as calculated by the Bureau of Labor Statistics. The law unfortunately does not clarify which “all workers” classification, but for the sake of brevity (and the fact that there is not that much variance) we’ve run the numbers from June of 2014 to December 2016. The cap should have increased to around $496K in June 2015 and around $507K in June 2016. The last reported numbers in 2016 just released on 31-Jan 2017 for Q4 2016 would have put the cap around $516K.
Bear in mind that the cap, which should have increased annually, remains at a previously published amount (i.e. $487,000) until it is increased by OMB (Office of Management and Budget) in the Federal Register.
Why is all of this important? First of all, more money is always a good thing; for those of us who prepare many incurred cost submissions, if we do see these escalations this spring, it will make the calculation of the applicable compensation ceiling by contract much more difficult for the 2016 incurred cost submissions, and will likely necessitate the resubmission of previously filed incurred cost submissions for 2015. This is just one more thing to look forward to when working with the federal government.