Update on the 2014 Compensation Cap Law

Section 702 of the Bipartisan budget Act of 2013 (BBA) established a cap of $487,000 per year on the amount the Federal Government will reimburse contractors employee compensation on contracts with defense and civilian agencies. By law, this amount must be adjusted annually to reflect the change in the Employment Cost Index for all workers, as calculated by the Department of Labor, Bureau of Labor Statistics (BLS). This cap applies to all contracts awarded after June 24, 2014 but so far, OMB (Office of Management and Budget) has not increased the cap so contractors should be proposing and seeking reimbursement for no more than the current $487,000 cap. Perhaps the change in the Employment Cost Index has not been sufficient to move the cap.

Section 702 of the BBA also required OMB and DoD to report to Congress on alternative benchmarks and industry standards to the benchmarks established by the BBA. OMB and DoD performed a study and solicited industry comments on several alternatives including:

• creation of multiple caps
• use of "say-on-pay" principle (i.e. compensation voted on by stockholders)
• use of alternative inflators to adjust the cap, and
• creation of an alternative definition of compensation to address the scope of the cap.

Ultimately, OMB and DoD concluded that none of the four alternatives would be more effective than the benchmark established by Section 702 which, they believed, was a substantial improvement over the statutory formula it replaced.

Finally, Section 702 allows agency heads to establish one or more narrowly targeted exceptions for scientists, engineers, or other specialists upon a determination that such exceptions are needed to ensure that the executive agency has continued access to needed skills and capabilities. It also requires OMB to report annually on use of the exception authority, including the total number of contractor employees, the taxpayer-funded compensation amounts, and the duties and services performed.

For fiscal years 2014 and 2015, OMB reported that no exceptions were granted. Information for fiscal year 2016 is not yet available. No company has been brave enough to request an exemption yet.

It appears that the $487,000 cap, adjusted for changes in the Employment Cost Index, will be the benchmark for the foreseeable future.