New FAR Interim Rule - Limitation on Allowability of Compensation

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.

(p) Limitation on allowability of compensation. (1) Senior executive compensation limit for contracts awarded before June 24, 2014. (i) Applicability. This paragraph (p)(1) applies to the following:

(A) To all executive agencies, other than DoD, NASA, and the Coast Guard, for contracts awarded before June 24, 2014;

(B) To DoD, NASA, and the Coast Guard for contracts awarded before December 31, 2011;

(ii) Costs incurred after January 1, 1998. Costs incurred after January 1, 1998 for the compensation of a senior executive in excess of the benchmark compensation amount determined applicable for the contractor fiscal year by the Administrator, Office of Federal Procurement Policy (OFPP), under 41 U.S.C 1127 as in effect prior to June 24, 2014, are unallowable (10 U.S.C. 2324(e)(1)(P) and 41 U.S.C 4304(a)(16), as in effect prior to June 24, 2014). This limitation is the sole statutory limitation on allowable senior executive compensation costs incurred after January 1, 1998, under contracts awarded before June 24, 2014, and applies whether or not the affected contracts were previously subject to a statutory limitation on such costs. (Note that pursuant to section 804 of Pub. L. 105-261, the definition of “senior executive” in paragraph (p)(4) has been changed for compensation costs incurred after January 1, 1999.)

(2) All employee compensation limit for contracts awarded before June 24, 2014. (i)Applicability. This paragraph (p)(2) applies to DOD, NASA, and the Coast Guard for contracts awarded on or after December 31, 2011 and before June 24, 2014;

(ii) Costs incurred after January 1, 2012. Costs incurred after January 1, 2012, for the compensation of any contractor employee in excess of the benchmark compensation amount, determined applicable for the contractor fiscal year by the Administrator, Office of Federal Procurement Policy (OFPP) under 41 U.S.C 1127 are unallowable (10 U.S.C. 2324(e)(1)(P)).

(3) All employee compensation limit for contracts awarded on or after June 24, 2014. (i)Applicability. This paragraph (p)(3) applies to all executive agency contracts awarded on or after June 24, 2014, and any subcontracts thereunder;

(ii) Costs incurred on or after June 24, 2014. Costs incurred on or after June 24, 2014, for the compensation of all employees in excess of the benchmark compensation amount determined applicable for the contractor fiscal year by the Administrator of the Office of Federal Procurement Policy are unallowable. See http://www.whitehouse.gov/omb/procurement/cecp.

(iii) Exceptions. An agency head 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. In making such a determination, the agency shall consider, at a minimum, for each contractor employee in a narrowly targeted excepted position—

(A) The amount of taxpayer funded compensation to be received by each employee; and

(B) The duties and services performed by each employee.