Interim FAR Rule Published Expanding Compensation Caps to All Employees

The National Defense Authorization Act for FY 2012 amended the standards for determining the individuals affected by the senior executive compensation benchmark amount. Specifically, section 803 expanded the applicability of the existing executive compensation cap so that it would apply to all employees of a contractor instead of just the five most highly compensated employees in management positions at each home office and each segment of the contractor. This NDAA provision applies to only DoD, NASA, and Coast Guard contracts and applies to compensation paid after January 2012. That cap for 2011 is $763 thousand. The cap for 2012 has not been announced but is rumored to be in the $900 thousand range.

There is a slight problem in implementing Section 803 - the retroactive nature of the legislation. Earlier this week, the FAR councils published an interim rule addressing contracts awarded after the the effective date of the law, which was December 31, 2011. It is also working on a case to address retroactive implementation. Back in 1998, Congress passed a similar law which imposed a cap on allowable senior executives that applied to contracts already in existence as of the date of enactment. General Dynamic took that one to court and won; the court ruled that the provision beached contracts awarded before the statutory date of enactment (General Dynamics Corp. v. U.S., 47 Fed.Cl 514 (2000).

To avoid a repeat of 1998, the new interim rule applies only to contracts awarded after December 31, 2011. The FAR councils are working on a companion rule that will address contracts awarded prior to December 31, 2011 (FAR Case 2012-025).

The interim rule's wording gets a bit convoluted because while FAR applies to all Government contracts, the statute only applies to DoD, NASA, and Coast Guard contracts. So FAR 31.205-6(p) was written to distinguish between the source of the award and the year in which the contract was awarded. You can read the interim rule here.

This is going to complicate estimating and billing practices at some contractors as well as the preparation of the annual incurred cost clims. Some contractors will need to develop two sets of direct and indirect rates, one for DoD, NASA, and Coast Guard contracts and the other for contracts with all other Government agencies.