Friday, July 26, 2013

"Compensation" in the House Passed 2014 Defense Authorization Act

The House passed the 2014 National Defense Authorization Act earlier this month. Now its on to the Senate for consideration. This is a good time to take a look at what they've done with employee compensation recoverable by contractors under Government contracts.

First, it should be noted that the new coverage applies to all contractors, not just Defense contractors. Right now, there are different limits set on Defense, NASA, and Coast Guard contracts than for civilian agency contractors. That's confusing because contractors, with both Defense and non-Defense contracts must account for those difference when estimating and billing.

Secondly, there is a new definition for "senior executive". Currently it includes the five most highly compensated employees within each contractor component (e.g. division, subsidiary). Under the House version, it will apply to the five most highly compensated employees contractor-wide. Those five individuals will continue to be subject to the compensation cap methodologies that have been in place for some time. For fiscal year 2011, that cap is $763 thousand. The cap for 2012 has not yet been announced but is expected to top $900 thousand.

New to the compensation discussion is a cap on all contractor employees (except for the top five executives). The House NDAA would cap compensation for everybody at the $763 level and adjust that cap each year based on the U.S. Bureau of Labor Statistics Employment Cost Index for total compensation for private industry workers. The DoD or executive agency would be able to establish exceptions to those caps for positions in the science, technology, engineering, mathematics, medical and manufacturing fields upon a determination that such exceptions are needed to ensure that they have continued access to needed skills and capabilities.

The effective date for this proposed legislation would be 180 days after enactment. It seems to us that this provision, if enacted, is unlikely to impact a significant number of contractors. There doesn't seem to be that many contract employees whose compensation comes anywhere near that limit.

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