Last December, 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 (click here for more details). Compensation, in this case, includes basic salary/wages, bonuses/incentive compensation, deferred compensation, and employer contributions to ESOPs and defined benefit pension plans This is different than the FAR definition of "compensation" (click here for more details).
This new limitation is causing implementation issues. Any contract awarded prior to June 24, 2014 is subject to the significantly higher compensation limit provision found in FAR 31.205-6(p) For calendar year 2012, that cap is $952 thousand. The 2013 rate has not yet been published. Only contracts awarded after that date, are subject to the lower compensation cap. This means that for a time, contractors will be working on contracts subject to differing compensation ceilings.
DoD has recognized this implementation issue and has authorized the use of blended rates during this transition period. In a October 24, 2014 letter, the DoD wrote,
Many contractors will have contracts subject to both the current and earlier compensation limit provisions in (FAR), causing the potential for undue complexity and related costs to implement multiple rates to accommodate these revisions. After careful review and consideration of the law and regulations, contractors' use of a "blended rate" approach is deemed as a practical and cost efficient solution to implement these requirements.
The letter goes on to provide guidance on how to calculate a blended rate:
Blended rates will be calculated by each individual contractor as a weighted average composite cap amount specific to their contract volume prior to June 24, 2014, and on or after June 24, 2014.
...for the purpose of establishing final overhead rates, contractors will calculate blended rates reflecting actual proportion of contract costs for the current year for contracts prior to and after June 24, 2014. The contractors' final overhead submission for the completed fiscal year must include auditable substantiation of the calculation of the actual blended rates. An audit will ensure that only the total allowable compensation is billed to the Government for the fiscal year based on the different authorized caps. The objective is to simplify compliance while continuing to protect the interests of the Government.
Contractors who chose to use blended rates, will need to execute advance agreements with their contracting officers. The advance agreement will outline the agreed-to-process, auditable data submission and expiration for the application of the blended rate. DCMA (Defense Contract Management Agency) will be issuing implementation guidance at some unspecified date.
Contractors who are impacted by the lower compensation cap in 2014 should be thinking about how to develop blended rates now and begin to engage their contracting officers. Don't wait for DCMA guidance because that might not happen quickly. Get outside help, if necessary.
This new policy is from DoD and applies only to DoD contracts. We have not yet heard how other Agencies will implement the $487 thousand annual compensation cost limit. However, contractors could certainly make a good case for applying the DoD methodology to non-DoD contracts.