Wednesday, July 29, 2015

DCAA Compensation Reviews - Qualitative Factors Affecting Compensation

This is the third part in our series of articles that examine the methodologies used by the Government to assess compensation reasonableness in the post JF Taylor/Metron era. There were two ASBCA (Armed Services Board of Contract Appeals) cases from 2012; JF Taylor (ASBCA Nos. 56105, 56322) and Metron (ASBCA Nos. 56624, 56751, 56752) that were (mostly) decided in favor of the appellants (i.e. the contractors). In deciding for the appellants, the ASBCA criticized the methodologies employed by DCAA in deriving its estimates of "reasonableness". You can refer to the following past articles for a recap of those decisions.

In Part 1 of this series, we explained how DCAA continues to utilize the "fatally flawed" methodologies of the past to audit compensation costs. DCAA rationalizes that their methodologies were not repudiated - they just didn't have the right "expert" on the case to rebut the contractor's experts. In Part 2, we noted some cases where the contracting officers, rather than trying to defend the DCAA position on compensation, disregarded the audits and took matters into their own hands by performing their own analysis of compensation reasonableness.

In this Part 3, we want to point out that there are both quantitative factors and qualitative factors that affect compensation levels (sometimes these are referred to as objective and subjective factors). DCAA's methodologies in assessing compensation relies heavily on quantitative factors (e.g. salary surveys). Qualitative (or subjective) factors that affect compensation levels require someone to exercise judgment as to how those factors affect compensation levels. DCAA is not prone to giving consideration to such factors. In fact, DCAA is more likely to argue against any qualitative factors than try to give recognition to them.

According to DCAA, "... there are two types of information to look at: quantitative and qualitative." The quantitative factors are easy for DCAA to determine - take the 50th percentile from two or more surveys of companies with comparable sales, job descriptions, and industry, average the results, add 10 percent and you have your reasonable compensation benchmark. The qualitative factors on the other hand are difficult to quantify and we don't recall a case where DCAA bumped the quantitative assessment of reasonableness for qualitative factors. That's not saying they haven't because, of course, we are not privy to all of their audits. But we have seen quite a few.

Examples of qualitative factors (the ASBCA calls them "discriminators that may explain variations in compensation) would include security clearances, customer satisfaction, company growth trajectories, performing multiple functions, awards and recognition, to name a few.

In one case, rather than trying to quantify the qualitative factors, DCAA simply advised the contracting officer to use her own judgment as to how those factors entered into the reasonableness equation.

It seems unlikely that DCAA is ever going to address qualitative factors affecting compensation reasonableness. Contractors that expect qualitative considerations should be prepared to address those factors with their contracting officers.

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