In this uber competitive labor market, it is more crucial than ever to be creative with compensation and benefits. Compensation programs and retention strategies have expanded beyond base compensation and bonus to include all methods in which employees are rewarded and incentivized. As a Federal Government Contractor, it is especially important to understand the FAR requirements which may impact compensation decisions and to document all processes and procedures related to your compensation program.
FAR 31.205-6 Compensation for Personal Services
DCAA scrutinizes allocability and allowability of compensation for personal services in both pricing and incurred cost. One of the many requirements for compensation to be considered allowable is that it “must be based upon and conform to the terms and conditions of the contractor’s established compensation plan or practice followed so consistently as to imply, in effect, an agreement to make the payment.” In addition, this cost principles requirement specifies that each component of compensation not covered by labor-management agreements must be “reasonable” and not in excess of the compensation cap. When determining reasonableness, the goal is to demonstrate similarities of your practices and compensation with companies
“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.”
Compensation Plans and DCAA Audits
Having a well-documented and implemented compensation plan is likely to be a “god-send” in the following DCAA audits:
Accounting System Compliance with DFARS 252.242-7006
System criteria (12) requires processes to ensure “[e]xclusion from costs charged to Government contracts of amounts which are not allowable in terms of Federal Acquisition Regulation (FAR) part 31, Contract Cost Principles and Procedures.” As discussed above unreasonable compensation is unallowable per FAR 31.205-6. DCAA auditors have come to expect an adequate accounting system to include a compensation plan and support that at least annually the contractor is documenting the fulfilment of the plan. In other words, a compensation system is a necessary part of an adequate accounting system that is in compliance with DFARS 252.242-7006.
Incurred Cost Audit
DCAA auditors are instructed to consider compensation of both executives and non-executives throughout an incurred cost audit. DCAA even has a headquarter team specializing in the review of compensation. Under the preliminary steps (i.e., risk assessment) of this audit, the auditor is instructed to “[g]ain an understanding of the contractor’s process in setting the compensation package (executive and nonexecutive) and ensuring that the aggregate of each element of the total compensation package complies with the allowability and reasonableness requirements of FAR 31.205-6.” To gain an understanding of this process, the auditor will request the contractor to provide “a detailed walkthrough of the compensation system.”
Forward Pricing Proposal Audits
Throughout this audit program the DCAA auditor is also instructed to gain an understanding of the contractor’s process in developing the compensation program (executive and non-executive) and ensure that the aggregate of each element of the total compensation package complies with the allowability and reasonableness requirements of FAR 31.205-6. The DCAA Compensation Team may be involved in this process and again, details and documentation related to your compensation program will be requested.
FAR 52.222-46 Evaluation of Compensation for Professional Employees
It is the Government’s express desire for employees to be compensated “fairly and properly.” This particular FAR clause directs Contractors to submit a “Total Compensation Plan” (TCP) when responding to “solicitations for negotiated contracts when the contract amount is expected to exceed $750,000 and services are to be provided which will require meaningful numbers of professional employees.” The Government evaluates this TCP to determine the Contractor’s understanding of the contract requirements and their ability to retain the incumbent workforce, effectively recruit, and maintain a qualified workforce. The TCP must include details about the Contractor’s pay, benefits, and rewards along with an explanation and proof as to how the Contractor develops rates and ensures that they are competitive and reasonable. A TCP with total compensation that is determined to be too low may lead the Government to believe that a Contractor does not understand the technical requirements or that they will not be able to provide uninterrupted service. A TCP with total compensation that is too high will be considered unreasonable.
52.222-25 Affirmative Action Compliance
Among the many other requirements of EO 11246, covered contractors are required to perform compensation analysis. Contractors may not discriminate in rates of pay or other compensation components and, as a part of their Affirmative Action Program, must assess these compensation programs in order to ensure that disparities based on sex, race, or ethnicity do not exist. This is not a new requirement, but it has certainly gained renewed attention recently. DIR 2022-01, issued by President Biden, was revised on August 18, 2022, with a new name, - “Advancing Pay Equity Through Compensation Analysis” (previously issued as “Pay Equity Audits”), -and attempts to clarify the OFCCP’s (Office of Federal Contract Compliance Programs) expectations around compliant compensation programs and documentation. There is much to digest in regard to DIR 2022-01 but a key takeaway is that, if audited by OFCCP, Contractors will be required to provide proof that they have complied with this requirement.
Be Prepared
These requirements can be quite tedious and cumbersome, especially if unprepared. While each of these requirements is unique, they should be considered in tandem in order to create a well-structured and meaningful compensation plan. Each step of the plan and the decision made, should be documented and justified. If done appropriately, you will be compliant while also being proactive in addressing typical day-to-day challenges, such as: recruiting and retention, succession planning, career paths and proposal preparedness. Once developed, your compensation program should be reviewed and modified regularly in order to keep up with changes internal and external to the organization and to ensure that processes are compliant and accurately reflected. Our team of experienced consultants are available to support you on this journey!
Sheri joined Redstone Government Consulting, Inc. in December 2012 as a Human Resources Consultant. She provides HR consulting services to our customers on a wide range of issues, from specific projects to an ongoing outsourced solution of the human resources function. Sheri has two decades of experience in providing a comprehensive assessment of all areas of HR, including establishing and implementing policies and practices, contract transition efforts/onboarding, and investigations. Sheri’s experience covers a broad spectrum of compensation planning and analysis for total compensation projects, reasonableness assessments including executive compensation, compensation philosophy development, total reward strategies, benefits analysis, market pay and pay equity evaluations. She regularly supports clients with the analysis and mapping of labor categories and the preparation and analysis of wage calculations and supports clients in pricing disputes with DCAA. Sheri has a wealth of experience in navigating the many compliance challenges associated with Service Contract Act and Davis Bacon Act. She has been a valuable resource to our clients in all these areas. She stays abreast of the various requirements of the Department of Labor and, of great importance to government contractors, the Office of Federal Contract Compliance Programs, as well as other federal and state regulations impacting human resources. Professional Experience Prior to joining Redstone Government Consulting, Inc., Sheri served in various roles in the Human Resources arena. While employed by a mid-size government contractor she assisted with database development, recruiting, affirmative action planning and contract proposals. Sheri later became an Employment Specialist with one of the largest employers in Huntsville, where she assisted and led managers in the interpretation and documentation of the progressive disciplinary process, conducted employee investigations and allegations of discrimination, sexual harassment, wrongful discharge and employee disputes, conducted unemployment hearings and conducted new employee orientation. Sheri developed and presented management training, administered facility compensation plan, monitored staffing budgets and wrote job descriptions and handbook revisions.