Compensation Caps Cross the $1 Million Threshold

The Office of Management and Budget (OMB) announced the compensation caps for certain executives and contractor employees for fiscal years 2013 and 2014. These caps apply to both defense and civilian agencies for their respective applicable periods for contracts awarded before June 24, 2014.

These benchmarks are:

     2013:  $ 980,796
     2014:  $ 1,144,888

Contractors that submitted incurred cost proposals for 2013 and 2014 with compensation capped at the 2012 amount of $952,308 may need to revise their submissions if the new caps result in a material difference in amounts charged to Government cost-reimbursable contracts.

These benchmark amounts apply to contracts awarded prior to June 24, 2014 and limit the reimbursement or allowability of compensation under Federal Government contracts at FAR 31.205-6(p). For covered contracts awarded after June 24, 2014, a new cap applies pursuant to the Bipartisan Budget Act of 2013. That cap is currently set at $487,000  but will be adjusted annually based on the change in the Employment Cost Index for all workers, as calculated by the Bureau of Labor Statistics.

Since enactment of the statutory formula in 1998, the "old" cap has increased by more than 300 percent and Congress became duly alarmed not only by the amount  but by the adverse perception of the public finding out that contractors were paying out huge salaries at taxpayer expense. A number of proposals were proffered as part of the fiscal year 2012 and 2013 National Defense Authorization Acts, some as low as $200 thousand. The final compromise at $487 thousand came about as part of the Bipartisan Budget Act of 2013.

Each of these statutory formula cap amounts limits reimbursement of compensation at the beginning of the contractor fiscal year that begins January 1st for the respect year (or pro-rated over that portion of the contractor fiscal year that includes January 1st for the respective years). So, for example, the statutory formula cap for fiscal year 2013 is applicable to compensation costs incurred on contracts during the period January 1, 2013 through December 31, 2013.

The 2014 compensation cap of $1.1 million applies to years after 2014 as well, until OMB revises it.

Contractors, of course, can compensate employees at any level they deem appropriate. These caps only limit the amount the Government will pay.

Next week, we will look at DCMA (Defense Contract Management Agency) guidance on blending the old and new compensation caps.