Wednesday, April 12, 2017

Contractors Cannot Anticipatorily Adjust Statutory Compensation Caps

Section 702 of the Bipartisan Budget Act (BBA) of 2013 significantly reduced the cap on compensation charged to Government contracts. The old statutory formula applicable to contracts awarded prior to June 24, 2014 now sits at $1,144,888. The new cap applicable to contracts awarded after that date is $487,000 and applies to all contractor employees on contracts awarded by all executive agencies.

The BBA also required that the compensation cap be adjusted annually to reflect the change in the Employment Cost Index for all workers, as calculated by the Bureau of Labor Statistics. That has not been done - yet.

The BBA also required the Office of Management and Budget to figure out whether any alternative benchmarks and industry standards for compensation would provide a more appropriate measure of allowable compensation. The OMB solicited feedback on alternative measures and after reviewing the feedback, decided not to recommend any changes to the BBA process.

In the meantime, the $487,000 cap still applies though by this time, it should have been adjusted a couple of times. We don't know why the holdup. But we do know that contractors should not be escalating the $487,000 benchmark on their own - even though the employment cost index has increased by two plus percentage points per year. The way that the cap works is that increases must first be published in the Federal Register before the Government is obligated to pay the higher amounts. As of today, there have been no Federal Register publishing of revised caps. Under the old methodology for example, the ceiling applicable to compensation costs incurred after January 1, 2014 was not established (i.e. posted in the Federal Register) until more than two years later, March 15, 2016.

Contractors that are most likely to feel the pinch are those trying to price out fixed priced contracts. The Government is not going to allow anything higher than the $487,000. Contractors operating under cost reimbursable contracts will also need to price out their labor under the current cap but should get some relief if the ceiling is adjusted before they submit their annual incurred cost submissions.

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