Monday, July 1, 2013

Proposed FAR Rule Wants to Retroactively Cap Compensation Caps

Last Friday we discussed the interim FAR provision that limits compensation that can be recovered under Government contracts. This compensation cap has been applied to top executives for a number of years but beginning in 2012, it applies to all employees. That cap is set pretty high, currently $763 thousand (set to increase for 2012) and so most Government contractors will not be impacted. However, Congress is right now, considering lowering that cap to $400 thousand (the President's salary) or $230 thousand (the Vice President's salary). Either of those caps will impact many more contractors than the one currently in place.

There's a companion rule published in the form of a Proposed Rule (not to be confused with an Interim Rule) that would extend this provision to contracts that were in existence at the time the 2012 NDAA was signed into law, December 31, 2011.this Section 803 of the 2012 NDAA retroactively.  This proposed rule and the interim rule we reported on last Friday arise from the same NDAA provision. However, the FAR councils bifurcated the provision because of what happened last time Congress passed legislation that applied retroactively to existing contracts.

On 18 November 1997, the National Defense Authorization Act for Fiscal Year 1998 (NDAA or Act), Pub. L. No. 105-85, 111 Stat. 1629 (1997), was enacted. Section 808 of the Act, 111 Stat. at 1836, effective 90 days after the date of enactment, imposed a fixed cap on allowable executive compensation costs, making unallowable all such costs that exceeded a benchmark compensation amount to be determined annually by the Administrator for Federal Procurement Policy. It is undisputed and we find that the Section 808 cap covered cost reimbursable or fixed-price incentive contracts in excess of $500,000, and applied to all executive compensation costs incurred after 1 January 1998, whether the contracts were awarded on, before or after the date of enactment of the Act. 
In essence, the contractors argument is based on the allowable cost and payment provisions that provides that costs will be determined based on the FAR cost principles in effect as of the date of contract award.

After the Government attempted to apply that provision, a number of contractors appealed. The courts and boards ruled that imposing that provision retroactively was tantamount to a breach of contract. In order to avoid a costly repeat, the FAR Councils have made this part of the Legislation a "proposed rule" and have asked for public comment. Frankly, we don't see how anyone is going to come up with a solution that satisfies both the intent of the legislation and complies with Government contracting principles. If you do want to weigh in on the issue, public comments are due by August 26th.

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