Allowable Compensation Costs

Here's a quick primer on applying the compensation caps found in FAR 31.205-6(p).

For contracts awarded after June 24, 2014, the cap is straight-forward. Compensation for all employees is limited to $487,000 annually. This ceiling on compensation comes from the Bipartisan Budget Act (BBA) of 2013 and has been incorporated into FAR 31.205-6(p)(3) as an interim rule. This compensation level is subject to annual adjustment based on the Employment Cost index for all workers. For the latest cap amounts, refer to OMB's Contractor Employee Compensation Cap per BBA webpage. We call this the "new cap". So far, the new cap has not increased from its initial setting at $487,000. The BBA and the corresponding regulations allows agency chiefs to create narrowly-targeted exemptions for scientists, engineers and other specialists where the cap might not be high enough to acquire needed skills. Note, these are specialty skills and it is unlikely that the Government would entertain waiver requests for company executives.

For contracts awarded prior to June 24, 2014, application of the compensation cap becomes more complicated. The statutory cap itself is found in OMB's Contractor Compensation Cap per Statutory Formula webpage. We call this one the "old cap". In 2004, the cap was $432,851 and it increased steadily (and rapidly) to $952,308 in 2012. The application of the cap is where things get tricky.

If you hold a DoD, Coast Guard, or NASA contract awarded after December 31, 2011 and before June 24, 2014, the cap applies to all employees.

If you hold a DoD, Coast Guard, or NASA contract awarded after January 1, 1998, the cap applies to senior executives.

If you hold a contract awarded by an executive agency other than DoD, Coast Guard, or NASA between January 1, 1998 and June 24, 2014, the cap applies to senior executives only.

To further complicate matters, the definition of "senior executive" changes. Prior to January 2, 1999, senior executive meant the CEO and the four most highly compensated employees in management position. After January 1, 1999, the definition changed to mean the five most highly compensated employees in management positions at each home office and each segment of the contractor.

The compensation amounts listed under the old cap ends with calendar year 2012 and the new cap begins on June 24, 2014. This raises the question of what cap applies to costs incurred in 2013 and in 2014 prior to June 24, 2014. It is DoD's position that the 2012 cap of $952,308 applies to costs incurred in all subsequent years (e.g. 2013, 2014, 2015, etc) for contracts awarded prior to June 24, 2014.