Thursday, February 21, 2019

Compensation for Professional Employees

The Service Contract Act of 1965 was enacted to ensure that Government contractors compensate their blue blue-collar workers and some white-collar service workers fairly. However, the SCA does not cover bona fide executives, administrative, or professional employees.

Professional employees are those having a recognized status based upon acquiring professional knowledge through prolonged study. Examples include accountancy, actuarial computation, architecture, dentistry, engineering, law, medicine, nursing, pharmacy, and the sciences. To be a professional employee, a person must not only be a professional but must be involved essentially in discharging professional duties.

It is the Government's policy that all professional employees be compensated fairly and properly. To this end, contracting officers will sometimes include in solicitations a requirement for offerors to submit for evaluation a total compensation plan setting forth proposed salaries and fringe benefits for professional employees working on the contract. This solicitation clause is found at FAR 52.222-46, Evaluation of Compensation for Professional Employees. This is a required clause when the contract is expected to exceed $700 thousand and the service to be provided will require meaningful numbers of professional employees.

If this clause is included in a solicitation, offerors must submit for evaluation a total compensation plan setting forth proposed salaries and fringe benefits for professional employees who will be working on the contract. Supporting information will include data such as recognized national and regional compensation surveys and studies of professional, public, and private organizations, used in establishing the total compensation structure. Plans indicating unrealistically low professional employee compensation may be assessed adversely as one of the factors considered in making an award.

The Government has a right to be concerned about unrealistically low wages. Re-competition of service contracts may in some cases result in lowering the compensation paid to professional employees and lower wages can be detrimental to obtaining the quality of professional services needed for adequate contract performance. Therefore it is in the Government's best interest that professional employees be properly and fairly compensated.

So what does the Government look for when evaluating compensation plans? The Government will evaluate plans to assure that they reflect a sound management approach and understanding of contract requirements including an assessment of offerors' ability to provide uninterrupted high-quality work. It will be evaluated in terms of its impact on recruiting and retention, its realism, and its consistency. Other factors that the Government might consider when evaluating a compensation plan include:

  • The capability of the compensation structure to obtain and retain suitably qualified personnel to meet mission objectives.
  • Salary rates or ranges that take into account differences in skills, complexity of various disciplines, and professional job difficulty.
  • Where proposed compensation levels are lower than those of predecessor contractors, evaluating on the basis of maintaining program continuity, uninterrupted high-quality work and availability of replacements.

Unrealistic compensation plans will probably be viewed as evidence of failure to comprehend the complexity of contract requirements and failure to submit a plan at all, will cause the rejection of a proposal.

The Government estimates that about 10,000 (or so) compensation plans are submitted for evaluation each year.

Wednesday, February 20, 2019

Violations of Davis-Bacon Results in Three-Year Suspension for One Contractor

The Labor Department's Wage and Hour Division (WHD) who routinely conducts 'audits' of contractor compliance with various labor laws including the DBRA (Davis-Bacon and Related Acts) recently found four contractors working on a construction project in violation of the DBRA. Each of the four contractors were found to have shorted employees and all have agreed to pay those employees affected by the violations.

One of the contractors agreed to pay $69 thousand to 19 employees for failing to pay finishers, painters, and carpenters prevailing wage rates required by the DBRA. The contractor also failed to pay the required fringe benefits. This wasn't the first time this particular contractor ran afoul of the WHD investigators. Back in 2017, WHD investigators found other violations of DBRA and  had to pay back $99 thousand to 95 employees. Because of the repeat and willful nature of the violations, the contractor and its owner have been declared ineligible to bid on federal DBRA contracts for a period of three years. We didn't know that WHD had such authority but evidently someone other than a contracting officer can make such decisions.

The other three contractors caught up in this investigation each agreed to pay back wages and fringe benefits as well. In total, these payments reached a quarter of a million dollars.

Government contractors receive detailed agreements that include prevailing wage and fringe benefits rates, required to be paid by all contractors working on a federally funded project. Prime contractors must assure that their subcontractors adhere to these rules as well. Many times, violations are the result of contractors (and subcontractors) down-grading the skill classification of their employees and paying them lesser amounts.

The WHD press release on this case can be found here.

Tuesday, February 19, 2019

Relocation Tax Gross-Ups

Relocation costs are those incident to a permanent change of assigned work location of an existing employee or upon recruitment of a new employee. FAR 31.205-35 lists the type of relocation costs that are allowable under Government contracts and the limitations on some of the costs. One restriction that is sometimes forgotten is that the relocation must be for a period of twelve months or more. If shorter than 12 months, the costs are unallowable and if not excluded from billings or incurred cost proposals, are subject to penalties.

One of the items specifically allowable under the relocation provisions are payments for increased employee income taxes incident to allowable reimbursed relocation costs (see FAR 31.205-35(a)(10). Relocation reimbursements are taxable to the employee and the intent of the provision is to make the employee whole so that he/she won't owe additional income tax as a result of the relocation. These payments for increased taxes are commonly referred to as "gross-up" although you won't find that term in the FAR.

The Gross-Up calculation is not as obvious as one might expect. Suppose for example that relocation reimbursement is $50 thousand and the employee is in the 25 percent tax bracket. The additional taxes would be $12,000 ($50,000 times 25%). But wait a minute. The $12,000 is also taxable so you need to add tax on that amount - $12,000 times 25% = $4,000. But that's not enough. The $4,000 is also taxable so you need to add tax on that amount. And on and on.

There is a common two-step method of calculating tax gross-up. Step one is to calculate the tax gross-up factor. Step two is to apply the factor to reimbursed relocation costs. Here's an example:

1. Tax gross-up factor = employee marginal tax rate divided by 1 minus the marginal tax rate. Assuming a marginal income tax rate of 25 percent per the above example, the tax gross-up factor is 0.25/(1.0-0.25) or 0.3333.

2 Tax gross-up amount = reimbursed relocation costs times tax gross up factor. Assuming reimbursed relocation costs total $50,000, the tax gross-up amount is $16,997 ($50,000 times 0.3333).

One final note. Marginal tax rates are going to vary from employee to employee based on other non-employee features like spousal income, investments, and retirement distributions. The marginal tax rate used for gross-up calculations should be based solely on the employee's compensation from the contractor employer. In most cases, under current tax law, this will be 24 percent.

Monday, February 18, 2019

Undefinitized Contract Actions? Government May Lower Profit Percentages

Undefinitized Contract Actions (UCAs) are those contract actions for which the contract terms, specifications, or price are not agreed upon before contract performance begins (see DFARS 217.7401). UCAs are used when the negotiation of a definitive contract action is not possible in sufficient time to meet the Government's requirements and the Government's interest demands that the contractor be given a binding commitment so that contract performance can begin immediately.

Normally, UCAs must be definitized withing 180 days (six months) but there are provisions for a 90 day extension, if warranted. UCAs however cannot be definitized until the contractor submits a "qualifying proposal".

A "qualifying proposal" means a proposal containing (i) sufficient data for the DoD to do complete and meaningful analyses and audits of the data in the proposal and (ii) any other data the contracting officer has determined DoD needs to review in connection with the contract (definition at DFARS 217.7401(c)). . So, for example, if a contractor's proposal passes the proposal adequacy checklist found at DFARS 252-215-7009, we would presume it to be a "qualifying proposal".

Contractors need to submit their qualifying proposals as soon as possible. Waiting runs the risk of reduced profits. Why? Because the longer you wait, the less uncertainty there is in final cost of the contract. Costs are more likely to be based on actual costs because they've already been incurred rather than estimates of future costs.

Under the proposed regulations, the contracting officer shall assess the extent to which costs have been incurred prior to definitization of the contract action. When costs have been incurred prior to definitization, contracting officers are instructed to generally regard the contract type risk to be in the low end of the designated range. If a substantial portion of the costs have been incurred prior to definitization, the contracting officer may assign a value as low as zero percent, regardless of contract type. Zero percent profit seems pretty extreme and probably is. We've never seen a negotiated profit rate that low, regardless of circumstances.

But suppose that the reason for not definitizing a contract in a timely manner is the Government's fault. It happens. Is it fair to penalize a contractor under those circumstances? No, and the proposed regulations provide for that.
However, if a contractor submits a qualifying proposal to definitize an undefinitized contract action and the contracting officer for such action definitizes the contract after the end of the 180-day period beginning on the date on which the contractor submitted the qualifying proposal, the profit allowed on the contract shall accurately reflect the cost risk on the contractor as such risk existed on the date the contractor submitted the qualifying proposal. 
For this reason, as we stated above, it is important for contractors to submit "qualifying proposals" as soon as possible. Failure to do so jeopardizes the profit potential of the contract.

Friday, February 15, 2019

New Rule Requires Anti-Terrorism Training for Some Contractors

The proposed DFARS (DoD FAR Supplement) rule requiring mandatory anti-terrorism training for Government contractors and subcontractors that we wrote about last September (see Mandatory Antiterrorism Training for Government Contractors), has been finalized.

This new rule applies to contractors and subcontractors who require routine physical access to a Federally-controlled facility or military installation. Routine access is considered more than intermittent access, such as when a contractor employee is required to obtain a CAC card (common access card).

Training must be completed with 30 days from whenever a contractor is awarded a contract with the requisite clause (DFARS 252.204-7004, Antiterrorism Awareness Training for Contractors) and annually thereafter. Training must be completed either through DoD-sponsored and certified computer or web-based distance learning instruction or under the instruction of a qualified Level 1 anti-terrorism awareness instructor. Its our guess that most contractors will go the on-line learning route for its convenience. And anyway, where would one go to find a 'qualified' Level 1 instructor?

Contractors are required to flow-down this training requirement to its subcontractors where the subcontractor personnel requires routine access to a military installation (which by definition includes almost any defense-related facility).

Level 1 training is the most basic of training regimens. Level 1 antiterrorism training includes:

  • surveillance detection fundamentals
  • government facility security fundamentals
  • insider threat
  • active shooter fundamentals
  • residential security
  • air travel
  • ground travel
  • hotel security
  • hostage survival

Check your contract to see if it includes the DFARS 252.204-7004 antiterrorism clause. If it does, your contracting officer should be able to provide resources to meet the training requirements.