Compensation - Part 8 - Backpay

Backpay is a retroactive adjustment of prior years' salaries or wages. Backpay should not be confused with deferred compensation. While backpay is generally unallowable, deferred compensation is usually allowable if a deferred compensation plan is set up correctly.

This provision changed significantly in 2003. Prior to that, backpay included settlements for violations of Federal labor laws and the Civil Rights Act of 1984 (e.g. improper discharge or discrimination). Under the 2003 revision, backpay is defined as additional compensation for work performed.

According to FAR 31.205-6.(h), backpay is unallowable except for a few situations.

1. Payments to employees resulting from underpaid work actually performed are allowable, if required by a negotiated settlement order, or court decree. Contractor intending to claim backpay under this provision will most likely need legal assistance.
2. Payments to union employees for the difference in their past and current wage rates for working without a contract or labor agreement during labor management negotiation are allowable.
3. Payments to nonunion employees based upon results of union agreement negotiation are allowable only if
• A formal agreement or understanding exists between management and the employees concerning these payments, or
• An established policy or practice exists and is followed by the contractor so so consistently as to imply, in effect, an agreement to make such payments.

This rule effectively takes away situations where if a survey shows an employee is underpaid in a particular year, the contractor could make that underpayment up in a future year.

The allocation of backpay costs can be tricky. Usually settlements occur several years after the period to which backpay is allocable. If you have a backpay situation, we advise that you pursue an advance agreement (see FAR 31.109) with the contracting officer. Otherwise, you are risking time-consuming arguments with the auditors.

Next: Section (i) - Compensation based on changes in the prices of corporate securities

Compensation - Part 7 - Severance Pay

Severance pay is a payment, in addition to regular salaries and wages, by contractors to workers whose employment is being involuntarily terminated. Severance pay is only allowable under Government contracts to the extent that it is required by

• Law
• Employer-employee agreement
• Established policy that constitutes, in effect, an implied agreement on the contractor's part; or
• Circumstances of the particular employment.

These are pretty broad categories and we do not recall when a contractor's intention to pay or actual payment of severance pay was successfully challenged by the Government for failing to meet one of these four conditions.

Back in the 1970s and perhaps the early 1980s, as service contracts changed hands, winning contractors would hire the employees of the incumbent contractor and those employees would continue to do the same work that they had been performing. Sometimes, hiring incumbent employees was a requirement of the solicitation and other times, it was convenient and made business sense. However, upon losing the contract, incumbent contractors were paying their employees a severance pay and seeking reimbursement for those costs from the Government. That precipitated a new rule where payments made in the event of employment with a replacement contractor where continuity of employment with credit for prior length of services is preserved under substantially equal conditions of employment or continued employment by the contractor at another facility, subsidiary, affiliate, or parent company of the contractor are not severance pay and are unallowable.

There are two kinds of severance pay addressed in this cost principle; normal severance pay and abnormal severance pay.

Actual normal turn over severance payments shall be allocated to all work performed in the contractor's plant. However, if the contractor uses the accrual method to account for normal turnover severance payments, that method will be acceptable if the amount of the accrual is

• reasonable in light of payments actually made for normal severances over a representative past period, and
• allocated to all work performed in the contractor's plant.

Abnormal or mass severance pay is of such a conjectural nature that accruals for this purpose are not allowable. However, the Government recognizes its obligation to participate, to the extent of its fair share, in any specific payment. Thus, the Government will consider allowability on a case-by-case basis.

Specific requirements for foreign national employees. The costs of severance payments to foreign nationals employed under a service contract performed outside the US are unallowable to the extent that such payments exceed amounts typically paid to employees providing similar services in the same industry in the US. Further, all such costs of severance payments that are otherwise allowable are unallowable if the termination of employment of the foreign national is the result of the closing of, or the curtailment of activities at a US facility in that country at the request of the government of that country. This does not apply if the closing of a facility or curtailment of activities is made pursuant to a status-of-forces or other country-to-country agreement entered into with he government of that country before November 29, 1989. Applicable statutes permit the head of the agency to waive these cost allowability limitations under certain circumstances.

Next: Section (h) - Backpay

Mandatory Disclosure Requirements - A Reminder

In November 2008, FAR was amended to require mandatory disclosure requirements involving fraud and overpayments on contractors (and subcontractors). These disclosure requirements apply to contracts greater than $5 million and a performance period greater than 120 days. This disclosure requirement applies to most types of contracts including commercial items and contracts awarded and/or performed overseas.

FAR 52.203-13 requires timely disclosure of violations against criminal and civil laws. Criminal laws include fraud, conflict of interest, bribery, or gratuity violations. Civil laws include the False Claims Act. There must be credible evidence of a violation and the violation must have been committed by any contractor principal, employee, agent, or subcontractor.

Disclosures must be made in writing to the appropriate Inspector General (e.g. the DoD Inspector General for DoD Contracts) and the contracting officer. The reporting period extends from contract award to three-years after final payment. Many contractors do not realize that the reporting period extends beyond the contract period of performance.

The term "credible evidence" is undefined. but the FAR Councils have noted that the term indicates a higher standard than "reasonable grounds to believe". Implicit in this distinction is an allowance of time for a contractor to investigate matters to make a "credible evidence" determination. Failure to disclose credible evidence of criminal and civil violations (and significant overpayments) constitute grounds for suspension and debarment.

Sleeter Group Announces 2013 "Awesome Applications"

Each year since 2006, the Sleeter Group has culled through dozens of QuickBooks add-ons to select a few that rise above the others. They awarded these applications their "Awesome Add-on Award".  This year, the Sleeter Group changed its format to include non-specific QuickBooks products and renamed their promotion from "Awesome Add-ons" to "Awesome Applications. While some QuickBooks specific add-ons made the winner's circle, many of the applications are stand-alone, not requiring QuickBooks to function.

As consultants with many clients using QuickBooks, we are always interested in any improvements to the basic platform as well as improved or added functionality provided by third-party add-ons. With hundreds of add-ons available however, it is difficult to assess which ones are worthwhile and which should be avoided. Having reviews by an independent (and reputable) organization certainly helps in assessing a product's strengths  weaknesses, and value.

Click here to read about the winners of the 2013 Awesome Applications. Go here to read about previous winners.

Of the nine winners, the following three have the most potential for benefiting Government contractors and prospective contractors.

• BillQuick by BQE Software. This is a repeat winner. BillQuick is an integrated solution for time & expense tracking, billing and project management. Many Government contractors use this product.
• Cloud9 Real Time by Cloud9 Real Time. This application hosts all of your applications, data, and users in one central location, in the "cloud".
• Concur Small Business Edition by Concur. This is an office expense management and reporting application. Contractors who perform a lot of travel and have inefficiencies in collecting travel expense information might benefit from Concur SBE.

eFAACT, a QuickBooks solution for Government contractors was a finalist in this year's selection process. If you are looking for something to facilitate indirect rate development and billings under Government contracts, you might want to evaluate this product. Our impression? Powerful but expensive.

Preaward Accounting System Survey Checklist

FAR 16.301-3 states that a cost-reimbursement type contract may be used only when the contractor’s accounting system is adequate for determining costs applicable to the contract. Contracting officers must make this determination prior to the award of a contract. If the contracting officer has insufficient information to make this determination, it will request DCAA or another audit organization to perform a Preaward Survey of Prospective Contractor’s Accounting System (SF Form 1408).

DCAA has been instructing contracting officers to send out a preaward survey checklist to prospective contractors to complete prior to requesting a preaward survey of the accounting system. This checklist will help ensure that the contractors understand the requirements of the SF Form 1408 and to ensure that they are ready for DCAA to come in a perform an audit.

This checklist essentially mirrors the requirements of the SF Form 1408 however there are a few additional items that require contractor response. These are:

• Are you planning on bidding on cost type contracts?
• Are you ready for a DCAA audit?
• Have you read the requirements in the SF Form 1408?
• Have you read the "Information for Contractors" pamphlet?
• Please identify the DCAA office cognizant of your company.
• Please identify your company's point of contact.
• If an outside CPA/Consultant/Non DoD agency has reviewed your Accounting System, please provide a copy of the report.

This last bullet requires some clarification. The "review" that is referred to here is an attestation engagement performed in accordance with Generally Accepted Government Auditing Standards (GAGAS) a.k.a. a "Yellow Book" audit. It would not include the results of, say, an outside firm (like PNWC) performing a review to identify potential weaknesses in a contractor's accounting system and making recommendations, as appropriate, on improving the system to meet Government contracting requirements. Those are not "reviews"  conducted in accordance with GAGAS.

Companies looking to enter the Government contracting arena or existing contractors looking to bid on cost-reimbursable contracts, will find this checklist useful.

Update on Compensation Caps

The Senate version of the fiscal year 2013 Defense Authorization Act includes a provision that would cap compensation paid under DoD contracts at the Vice President's salary, $230,700. This represents a significant reduction from the current $763 thousand cap. The House version of the 2013 Defense Authorization Act does not include such a provision and so this difference will need to be resolved in "conference" at some point.

Last week, a consortium of ten public interest , government accountability, research, and labor groups issued a letter addressed to the Chairmen and Ranking Members of the Senate and House Armed Services Committees, urging them to adopt the Senate provision. Here's some of the points they make:

• It is fiscally irresponsible to allow private contractors to charge escalating and exorbitant rates to the government.
• Since 1998, the compensation cap has more than doubled, outpacing inflation by 53 percent.
• Private firms are free to pay their employees whatever they deem that they are worth, but the taxpayer should not have to pay exorbitant amounts.
• Capping salaries at $200 thousand would save the Government $5 billion per year.
• Contrary to what some contractors claim, compensation levels over $230 thousand are not required to find and retain a talented workforce.
• "Its grossly unfair to expect working people to pay for the inflated salaries for defense contractor employees.

Our concern here is one of practicality. Since this provision applies only to DoD contracts, Government contractors with a mix of DoD and other agency contracts (e.g. NASA, Dept of Energy, etc) will need a two-tiered direct and indirect rate structure, one for DoD contracts and one for everyone else. Well, the Government wants to create jobs and this will help.