PBMares Accounting Blog

Identifying Unallowable Costs – Executive Compensation

Posted by Neena Shukla, CPA, CFE, CGMA, FCPA on Aug 15, 2017 2:29:15 PM

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A large number of small companies and even some considered large have historically not concerned themselves with the allowability of their executive’s compensation.  With annual allowability limits approaching and even exceeding $1,000,000 it was not something that presented an issue in the past.  Executive compensation would never reach that high.  Time to take another look.

The new limit on allowability of annual executive compensation applicable to contracts awarded on and after June 24, 2014 is $487,000 and is applicable to all employees, not just the top five highest paid employees in executive positions.  Employee annual compensation exceeding $487,000 is now a very real potential.

Compensation is defined as the total amount of wages, salaries, bonuses, deferred compensation, employer contributions to defined contribution pension plans for the fiscal year, whether paid, earned or otherwise accruing, as recorded in the contractor’s cost accounting records for the fiscal year.

Historical executive compensation allowability limits are as follows:

2012 – For contracts entered into prior to December 31, 2012:

  • All US Government contracts
  • Top five most highly compensated employees
  • $952,308

2013 – For contracts entered into prior to December 31, 2013:

  • DoD, NASA and Coast Guard contracts
    • All contractor employees
  • All other US Government contracts
    • Top five most highly compensated employees
  • $980,796

2014 – For contracts entered into prior June 24, 2014:

  • DoD, NASA and Coast Guard contracts
    • All contractor employees
  • All other US Government contracts
    • Top five most highly compensated employees
  • $1,144,888

2014 – For contracts entered into on and after June 24, 2014:

  • All US Government contracts
  • All contractor employees
  • $487,000

Supplemental applicability ground rules are:

  1. Covered contracts are those contracts subject to FAR Subpart 31.2 (FAR 31.205-6(p).
  2. ID/IQ contract task orders issued on or after June 24, 1014 are subject to the limit at the time of ID/IQ award and not at the time of the task order award.
  3. Modifications to contracts made on or after June 24, 2014 are subject to the limit at the time of the contract award and not at the time of the contract modification.
  4. Options exercised on or after June 24, 2014 are bound by the limit applicable at the time of base contract award and not the date of option exercise.
  5. Delivery orders issued on or after June 24, 2016 applicable to a Blanket Purchase Agreement awarded prior to June 24, 2014 are bound by the limit applicable at the time of the delivery order since BPA’s are not contracts.
  6. Exemptions may be granted for scientists, engineers and other specialists to ensure continued access to needed skills and capabilities.

Note:  Information included above is taken from the DCMA letter dated January 29, 2016 providing guidance on the use of blended rates to implement multiple compensation caps (DCMA 16-022) and the Federal Register, Vol. 81, No. 50, Tuesday, March 15, 2016/Notices, Page 13833.

The implementation of the latest compensation cap effective for contracts issued on or after June 24, 2014 has created the need for either multiple sets of indirect rates for contracts before and after June 24th or the use of a blended compensation limit.  Weighting for the blended compensation limit should be based on data that is reproducible and easily auditable.  Direct labor is verifiable, accumulated for the periods involved and identifiable by contract and type of contract.

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A contractor using a blended compensation limit is to obtain a written advanced agreement with the cognizant contracting officer as defined at FAR 31.109.  The DCAA, at the request of the CO is to review the blended rate computation and participate in pre-negotiation discussions and/or subsequent negotiations.  This step is important.

Contracts to be included in the weighted executive compensation cap calculation should be subject to FAR 31.2

  • All contract types
  • Foreign Military Sales (FMS) contracts

Contracts not subject to FAR 31.2 are excluded from the weighted executive compensation cap calculation

  • Commercial contracts
  • Contracts for non-US Government customers
  • Direct sales contracts to other governments

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The executive compensation allowability cap for 2016 as calculated above is $945,469.  The calculation of the weighted or blended compensation CAP is generally to be done:

  1. At the beginning of each fiscal year to develop forward pricing rates and proposed interim billing rates based on forecasted data.
  2. Throughout the year to reflect the impact of unanticipated contract awards
  3. At the end of each fiscal year to establish final overhead rates as a part of the incurred cost proposal utilizing actual data.

Topics: Government Contracts

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Neena Shukla, CPA, CFE, CGMA, FCPA

Neena is an assurance partner and government contracting niche leader at PBMares, LLP, in Fairfax. She is also the leader of the firm’s technical and emerging issues group.

For more information, please contact the author at nshukla@pbmares.com or visit: www.pbmares.com.

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