Contractors Need to Reflect the New Compensation Caps in Forward Pricing

Last December 26th, the President signed into law the Bipartisan Budget Act (BBA). Among its provisions is a $487 thousand limitation on compensation for all employees on all Government contracts awarded after June 24, 2014. Now, some of you might be confused. We sure were. On the same date, the President signed the 2014 NDAA (National Defense Authorization Act) which capped compensation at $625 thousand. So what gives?

Well, the President first signed the 2014 NDAA and then the BBA which means that the BBA limitation takes precedence. So there you have it. Compensation is capped at $487 thousand, which will undoubtedly impact a lot of Government contractors. Incidentally, contractors can still pay whatever they want, they just cannot claim anything in excess of $487 on Government contracts.

Like previous incarnations of the compensation cap, the BBA provides for higher caps in limited situations:

The head of an executive agency may establish one or more narrowly targeted exceptions for scientists, engineers, or other specialists upon a determination that such exceptions are needed to ensure that the executive agency has continued access to needed skills and capabilities.

Additionally, the law provides for an annual escalation based on the Employment Cost Index for "all workers as calculated by the Bureau of Labor Statistics."

DCAA (Defense Contract Audit Agency) and DCMA (Defense Contract Management Agency) are already on record advising their auditors and cost/pricing analysts to ensure that contractors are adhering to the reduced caps in their proposals for contracts to be awarded after June 24th and in forward pricing indirect rate proposals. Contractors who don't impact their proposals for the lowered cap are in danger of submitting defective pricing.

The FAR (Federal Acquisition Regulations) Councils have not issued final rules but they are working to implement this statutory change. According to DoD however, the absence of a final rule does not let contractors off the hook as the basis for the limit is statutory, not regulatory.