Executive Compensation Limit Reset

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Government contractors may feel like they are hanging on to a swinging rope in a tornado now that Congress has hit the reset button on executive compensation for the second time in less than a month.  On December 26, 2013, the President signed both the National Defense Authorization Act (NDAA) for fiscal year 2014 and the Bipartisan Budget Act of 2013 (BBA). Both established a new government-wide benchmark compensation levels for all contractor employees at $487,000, marking a nearly 50% decrease in these allowable costs.

It was less than a month ago on December 4, 2013, that OMB increased the current compensation cap from $763,029 to $952,308 for costs incurred on all contracts after January 1, 2012 for contractor employees performing DoD, NASA and Coast Guard contracts – but only to the five most highly paid executives for all other federal agencies.  The BBA overrides the earlier enacted provision.  This is basically a reset to compensation.   The new initial allowable compensation cost cap for all contractor and subcontractor employees on any government cost reimbursement contract is set at $487,000, to be adjusted annually based on the Bureau of Labor Statistics’ Employment Cost Index (ECI). 

This revised benchmark amount has not yet been reflected in changes to the cost principles. Since both the NDAA and BBA repeal the authority of OFPP to establish the benchmark compensation amount, there is no further authority for OFPP to act. However, we expect the FAR council to make the necessary administrative changes to the compensation cost principal:

  1. Removal of the requirement for OFPP to conduct a survey to determine the annual benchmark.
  2. Application of the newly established benchmark to ALL contractor employees and removal of the language stating the benchmark applies the five most highly compensated employees in management positions at each home office and each segment.

Contractors will have to wait to see how this will impact the DCAA executive compensation review process, which already left many contractors in negotiations over executive compensation levels.  The new benchmark will likely lead to changes in how DCAA conducts compensation reviews to determine if the surveys used and processes currently in place provide a valid approach.  The end result may be a simplified process with less ambiguous compensation determination, but lower levels for the contractors.

Please contact Nicole Mitchell at 301.222.8231 for questions or assistance related to executive compensation and federal government compliance issues.

About Nicole Mitchell

Nicole Mitchell joined Aronson LLC in 1998 and serves as a Partner in Aronson’s Government Contract Services Group. She received a Bachelor of Science in Accounting from Frostburg State University and a Masters in Business Administration from Mount Saint Mary’s College. Nicole specializes in accounting and financial issues impacting government contractors. She has a broad-based background in generally accepted accounting principles and cost principles related to government contractors including the Federal Acquisition Regulations (FAR) and Cost Accounting Standards (CAS). Nicole provides consulting and accounting services to government contractors in the areas of financial regulatory compliance, contract pricing, and complex cost accounting structures. She has in-depth knowledge of the key financial business systems and compliance risk unique to government contractors. Nicole has been a guest speaker on various financial and government contracting topics for such organizations as the AICPA, MACPA, Deltek Insight Conference, and the Howard County Chamber of Commerce. She co-authored a Thompson RIA reference manual for controllers “Doing Business with the Federal Government” and is a regular contributor to Aronson’s Fed Point blog.

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