"Fatally Flawed" Compensation Audit

In a decision likely to affect the methodology by which the Government assesses the reasonableness of contractor compensation levels in the future, the ASBCA (Armed Services Board of Contract Appeals) issued a decision last week stating that the methodology used by DCAA (Defense Contract Audit Agency) to assess the reasonableness of compensation was "fatally flawed statistically and therefore unreasonable". The methodology that DCAA used in this case followed the guidance in its Contract Audit Manual (Chapter 5) and the same one used in thousands of compensation reviews over the years. If you have ever had employee compensation questioned by the Government, you will want to read this decision.

In the present case, the contractor challenged DCAA's methodology for determining reasonable executive compensation based on four discrete arguments. The first argument contended that the Government's methodology was fatally flawed as a matter of basic statistical analysis. The Board found that the contractor's first argument was sufficient to prove its case so it did not need to address the contractor's other arguments.

The Government didn't help itself in this case either. In its decision, the Board wrote:

The government made no effort at the hearing or in its brief, to respond to the statistical arguments made by appellant and thus we are left with unrebutted evidence that the methodology used by DCAA was fatally flawed statistically and therefore unreasonable. Moreover, the government effort to support its own methodology was supplanted by an expert witness of questionable judgment. Consequently, we conclude that there are statistical flaws in the government methodology for determining reasonable compensation and that the computations performed by (the contractor's expert) to overcome those flaws are reasonable.