On September 30, 2016, the FAR Council finalized its Interim Rule which capped the allowable compensation for all contractor employees at the benchmark set by Congress in Section 702 of the Bipartisan Budget Act of 2013. The Interim Rule has been in effect since June 24, 2014. Under the Interim Rule and now the Final Rule, the cap on compensation remains at $487,000. Note that compensation includes the total amount of wages, salary, bonuses, deferred compensation, and employer contributions to defined contribution pension plans.
From a practical standpoint, contractors will still be able to compensate their officers, senior executives and employees at any level they choose. However, the rule (found at FAR 31.205-6 titled "Compensation for Personal Services) prohibits contractors from seeking reimbursement for compensation costs incurred in excess of $487,000 with respect to contracts awarded on or after June 24, 2014.
Are There Any Exceptions?
Yes, the rule contains an exception which essentially allows "[a]n agency head to establish one or more narrowly targeted exceptions for scientists, engineers, or other specialists upon a determination that such exceptions are needed to ensure that the executive agency has continued access to needed skills and capabilities." Many of our clients, especially those that do work in the IT space, have contracts that require individuals that are highly skilled and/or have significant technical expertise to fill positions. Recruiting such individuals often requires contractors to offer very high compensation levels, sometimes higher than the compensation received by the company's senior management members. This exception, while it requires an additional administrative process, may ultimately prove to be beneficial for those contractors that have a need to hire scientists, engineers or other specialists.
What Adjustments Do Contractors Need To Make In Order to Comply?
For contractors that have contracts awarded before and after June 24, 2014, you will be subject to different compensation limits (the June 24, 2014 Interim Rule lowered the cap from $952,308 to $487,000). In various memos issued by the DCAA, DCMA and DoD, contractors subject to multiple caps are encouraged to use blended caps.
"Blended rates will be calculated by each individual contractor as a weighted average composite amount specific to their contract volume prior to June 24, 2014 and on or after June 24, 2014. Contractors may elect, but are not required, to use the blended rate approach. Depending on their circumstances, contractors may elect another compliant method (e.g., using the new $487,000 cap for all contracts regardless of award date)."
Again, as stated above, contractors are able to compensate their employees at whatever levels they choose; however, amounts in excess of the applicable caps are considered unallowable costs and contractors will be unable to seek reimbursement of those costs from the Federal government.