Contractor Claimed Deferred Compensation Disallowed by ASBCA

Earlier this month, the ASBCA handed down a ruling that may impact a lot of small businesses - businesses whose owner forgoes some compensation in order to keep a project going financially.

The case relates to a company called Accurate Automation Corporation (AAC) and only involves a minuscule $54 thousand. But it may have far-reaching consequences.

The appeal involves AAC's performance on two SBIR (Small Business Innovative Research) contracts back in 2007. Both were CPFF (cost-plus-fixed-fee) contracts. When DCAA (Defense Contract Audit Agency) audited costs for 2007, they identified claimed labor cost for hours worked but not paid.

DCAA questioned the costs on the basis that the costs were never paid. AAC asserted that the costs were deferred compensation paid to the employee in a later year by issuance of AAC stock. The president of AAC (and principle shareholder) claimed that he had made a decision not to pay himself so that the company could pay suppliers and other employees by electing to take the wages as deferred compensation at a later date.

The contracting officer agreed with DCAA and rendered a final decision demanding payment of $54 thousand.

There was no dispute that the president worked those hours he was not paid. The dispute is over whether the president was ever paid for the work. AAC argued that costs are allowable because there was a deferred compensation agreement in place in 2007 and the debt under that agreement was liquidated in 2008 bu the issuance of stock. This, AAC argued, satisfies the requirements under FAR 52.216-7 (allowable cost and payment) and FAR 31.205-6 (allowable compensation costs).

The Board did not find AAC's arguments persuasive. It ruled that AAC failed to meet its burden of proof that such a plan was in place before or during 2007 or that the issuance of stock evidences liquidation of AAC's debt to the owner. There was never a written plan and the stock certificate was undated and does not indicate on the face why it was issued. Furthermore, there were no entries in the accounting records of a deferred compensation liability.

The Board ruled that the government had been prejediced by AAC billing and being reimbursed for costs it did not incur. AAC's appeal was denied.

There are a lot of small companies out there that are in similar circumstances - forgoing compensation owed to the owner in order to cover other, more pressing needs. If there is no "true" liability for those deferred costs, then they may be treated as unallowable.

Click here to read the entire Board decision.