Is $487K Too Little to Pay Federal Contractors?

The federal government has finalized a plan to expand compensation reimbursement caps to a large swath of its contracted employees, drawing the ire of its private industry partners.

Congress approved the expansion in the 2012 National Defense Authorization Act, applying the ceiling on reimbursable pay to all Defense Department, General Services Administration and NASA contract employees, rather than just the five highest paid executives. The law applied to all contracts signed on or after Dec. 31, 2011.

The contracting community took particular issue with the rule’s requirement that the reimbursement cap’s implementation take place retroactively to the end of 2011. Instead, the Professional Services Council said, the cap should only apply to contracts signed after June 26, 2013, when the Federal Acquisition Regulatory Council initially issued the interim rule to implement the change.

“As a result of the interim and final rules, covered contractors will have to unscramble their accounting to make this change in allowable compensation rates that were validly incurred during the 18 months it took the FAR Council to act,” said Alan Chvotkin, PSC executive vice president. “That is simply unacceptable.”

The FAR Council said in the final rule, however, it was only following the letter of the law.

The 2012 NDAA “explicitly states that the expanded reach of the compensation cap ‘shall apply with respect to costs of compensation incurred after Jan. 1, 2012, under contracts entered into before, on, or after the date of the enactment of this Act’ (which was Dec. 31, 2011),” the rule stated. “Therefore…the specified effective date for this rule is Jan. 1, 2012.”

A separate proposed rule would apply the salary reimbursement cap to contracts awarded before Dec. 31, 2011, but for which costs were incurred in 2012 and beyond.

The budget deal reached at the end of 2013 set the maximum contractor reimbursement salary at $487,000. The government has not yet issued a rule to implement that cap, though it is scheduled to take effect June 24 and will apply to all federal government contractors. At the time of the original Defense, GSA and NASA guidance, the cap was $763,029, meaning contractors must retroactively ensure no employee in a post-2011 contract was compensated by government funds at more than that figure.

Adding to the confusion, Chvotkin said, is that in 2013 the maximum reimbursable salary jumped to $952,308. Though he suspected very few employees were charging the government more than either of those figures, Chvotkin said determining how and how much to pay back in overcharges could create “quite a bit of administrative work.”

PSC said it opposes both the expansion of the maximum reimbursable salary provision and the “arbitrary caps” put in place by the budget deal.  As the maximum reimbursable rate shrinks to $487,000, “or gosh forbid lower,” Chvotkin said, some companies -- especially smaller ones -- cannot afford to pay their employees more than what they receive from the government.

A commenter on the interim rule said the expansion will “reduce contractors' ability to attract and retain experienced and talented individuals and will jeopardize contractors' ability to support government mission critical requirements.” The FAR Council noted, however, just 0.4 percent of contractors would be affected by a cap set at the president’s salary of $400,000 -- almost half of the maximum in place at the time of the rule. It added -- citing the Government Accountability Office -- even if the cap were set at the vice president’s salary of $237,000, businesses would only be “minimally affected.”  

Going forward, Chvotkin said PSC will help agencies take advantage of a provision allowing them to exempt contracted employees in fields such as science, engineering and math from the reimbursable cap.