Wednesday, April 27, 2016

Using Blended Labor Rates to Implement New Compensation Caps - Part 4

Before we conclude this series on blending labor rates, here's a link to most of the published guidance on the matter. It includes the initial authorization from the Undersecretary of Defense for Acquisition, Technology, and Logistics dated October 24, 2014, the DCMA (Defense Contract Management Agency implementing guidance on the use of blended rates dated January 29, 2016 (this is the guidance we've been discussing in this series) and DCAA's (Defense Contract Audit Agency) own implementing guidance on blended compensation caps dated February 19, 2016. The latter simply authorizes auditors to support DCMA's efforts in negotiating advance agreements with contractors.

The decision to implement blended labor rates is solely that of the contractor. Contractors are not compelled by law or regulation to go forward with such a plan. The Government has offered up the blending option as a means of facilitating implementation of the significantly lowered compensation caps applicable to contracts awarded after June 24, 2014. Once a contractor chooses to use a blended compensation cap methodology however, the contracting officer must execute an advance agreement (FAR 31.109). The advance agreement is only the beginning of contractor responsibilities. The advance agreement will set forth the agreed to process and frequency for providing auditable data necessary to support the calculation and application of the blended compensation cap for forward pricing, interim billing, and final rates, as well as the expiration date for the ending of the blended compensation cap estimating method. Some contractors might find the requirements onerous.

The use of blended compensation caps can continue as long as contractors are incurring costs on pre-June 24, 2014 contracts. In extreme cases, this could be a decade. However, each year, the number of pre-June 24, 2014 contracts will diminish and eventually, so small that it makes continued operations under advance agreements not cost-effective. Advance agreements are written in such a way as to allow either party to exit whenever they want. Item 12 of the advance agreement template provided as part of the aforementioned DCMA guidance reads: "The parties retain the right to unilaterally and immediately cancel this agreement upon written notification to the other party. However, it is understood that each party will give the other party at least 30 calendar days' written notice, unless urgent and compelling reasons exist, prior to cancelling the agreement."

As we stated in the introduction to this series, the blended compensation cap methodology is not for everyone. For contractors having no employees that exceed the new compensation cap, there is clearly no applicability. Contractors that can implement the old and new caps within their existing system without significantly re-engineering their ERP systems should probably do so. This may not be too difficult if the highly paid employees (e.g. scientists and engineers) charge direct. Contractors where the impact is minimal may decide that the additional work required to develop, maintain, and support blended rates is not worth the added cost.

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