In this 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 bonuses 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 costs. 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 godsend 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 fulfillment 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 headquarters team specializing in compensation reviews. 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 non-executive) 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. 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
As of January 21, 2025, Executive Order 14173 revoked Executive Order 11246, eliminating the federal requirement for contractors to maintain Affirmative Action Programs or perform compensation analyses specifically to identify and address disparities based on sex, race, or ethnicity under the OFCCP framework. The 90-day wind-down period for prior compliance ended on April 21, 2025, and OFCCP has ceased enforcement activities related to these former obligations. Contractors must continue to comply with general nondiscrimination laws (e.g., Title VII of the Civil Rights Act, the Equal Pay Act), and new contracts may include certifications affirming compliance with applicable federal anti-discrimination laws and affirming the avoidance of programs that violate them. Pay equity remains important under these broader laws, though no longer tied to mandatory OFCCP affirmative action processes.
Building a Sustainable and Compliant Compensation Framework
These requirements can be complex, especially when multiple expectations must be addressed at the same time. While each requirement is unique, they should be considered together to support a structured and meaningful compensation plan. Each step of the plan and the decisions made should be documented and justified so that organizations remain compliant while also addressing challenges such as recruiting and retention, succession planning, career paths, and proposal preparedness. Once developed, your compensation program should be reviewed and updated regularly to reflect changes within the organization and evolving federal requirements, ensuring that processes remain accurate and aligned. Redstone GCI supports organizations through compensation plan development, documentation reviews, accounting system alignment, audit preparation, and training that helps teams understand how compensation decisions affect pricing, billing, and allowability. By taking a proactive and structured approach, government contractors can strengthen internal processes while maintaining a compensation program that supports compliance requirements and long-term workforce stability.
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.