Compensation for Personal Services - Part 1

The compensation cost principle, FAR 31.205-6, is by far the longest and most often revised of all the cost principles found in the acquisition regulations. It is easily the most technical for its highly detailed coverage of pension costs, employee stock options, and compensation based on changes in the prices of corporate securities. It takes a lot of time and effort to truly understand all of it. Some people in the Government make a career in specializing in this one cost principle.

The first thing to understand when discussing compensation is the definition of the term "compensation" in the context of the discussion. There are multiple definitions. The general definition is found in FAR 31.001 which states that compensation for personal services means all remuneration paid currently or accrued, in whatever form and whether paid immediately or deferred, for services rendered by employees to a Government contractor. It is generally believed that the term "remuneration" includes fringe benefits but some contractors do not agree. The overarching allowability for remuneration is that it be reasonable for the services performed. Meanwhile, if you're discussing the statutory limitation applied to executive compensation, the definition of compensation means the total amount of wages, salary, bonuses, deferred compensation and employer contribution to defined contribution pension plans ... whether paid, earned, or otherwise accruing, as recorded in the contractor's cost accounting records for the fiscal year." (see FAR 31.205-6(p). This definition is different from the former definition and includes far fewer elements that the broader definition at FAR 31.001.

Beginning today, we will begin unpacking the compensation cost principle and explain its basic and essential requirements focusing primarily on its application to smaller contractors. To begin with, we provide you this listing of the various sections included in the cost principle. In all, there are 16 sections within the cost principle. The first three are sections covering general information and the remaining 13 are specific to particular components of the "compensation package". Here are the 16 sections.

     (a) General
     (b) Reasonableness
     (c) [Reserved]
     (d) Form of payment
     (e) Income tax differential pay
     (f) Bonuses and incentive compensation
     (g) Severance pay
     (h) Backpay
     (i) Compensation based on changes in the prices of corporate securities
     (j) Pension costs
     (k) Deferred compensation other than pensions
     (l) Compensation incidental to business acquisitions
     (m) Fringe benefits
     (n) Employee rebate and purchase discount plans
     (o) Postretirement benefits other than pensions
     (p) Limitation on allowability of compensation for certain contractor personnel
     (q) Employee stock ownership plans (ESOPs)

Next: Section (a), general principles.