The compensation cap is now an official regulation, albeit an interim regulation. The FAR Councils yesterday issued an interim rule amending the FAR to implement Section 702 of the Bipartisan Budget Act of 2013. This interim rule revises the allowable cost limit relative to the compensation of contractor and subcontractor employees. Also, the interim rule implements the possible exception to this allowable cost limit for scientists, engineers, or other specialists upon an agency determination that such exceptions are needed to ensure that the executive agency has continued access to needed skills and capabilities.
The new act limits both contractor and subcontractor employee compensation. It changes the application of the cap, the amount of the cap, and the formula for adjusting the cap. Currently, the cap is set at $487 thousand for contracts awarded after June 24, 2014. The cap will be adjusted annually to reflect changes in the Employment Cost Index for all workers, as calculated by the Bureau of Labor Statistics.
The interim rule also authorizes the head of executive agencies to 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. We have no idea how that is going to work. Obviously, a contractor is going to have to propose an exception but the authority to grant the exception does not rest with the contracting officer but with heads of Executive agencies (or more likely, a designee). It seems like this process could get bogged down real quick. How is a contractor supposed to justify an exception to the rule? Perhaps compensation surveys would play a role but we all know that different compensation surveys produce wildly different results for similar positions within geographical areas. Seriously, does anyone want to leave it up to DCAA (Defense Contract Audit Agency) to perform some of their famous compensation reviews (e.g. see "fatally flawed" here and "inappropriate surveys" here)?
Contracts and subcontracts awarded before June 24, 2014 (yesterday) are still subject to the old cap which currently sits at $952 thousand.
One last comment, the Government is quick to point out that this interim rule doesn't limit what contractors can pay their employees. It only limits the amount that can be recovered under Government contracts.
This may not be the end of the compensation cap wars. There are still those in Congress who believe that the cap should be set at the President's salary and other who believe the cap should be set at the Vice President's salary. However, cutting the cap nearly in half from $952 thousand to $487 thousand should take a lot of pressure off the need to do more.