Tax Law

Compensation for Government Contractors: What Is Reasonable?

[Editor's Note:  This narrative is derived from Accounting for Government Contracts: Federal Acquisition Regulation § 11.02[2][a] (Matthew Bender).] 

One of the most significant topics in the area of government contracts is executive compensation.  In early 2012, in J.F. Taylor, Inc. [ASBCA Nos 56105, 56322], the Armed Services Board of Contract Appeals (ASBCA) ruled on the Defense Contract Audit Agency's (DCAA's) approach to the evaluation of executive compensation, concluding "... that there are statistical flaws in the government methodology for determining reasonable compensation...."  The Board upheld but $42,000 of the $590,000 disallowed by the government.  The flaws in the DCAA approach were alleged at nine, but the Board did not accept one of these flaws, below.

(1)  The DCAA analysis ignored the actual dispersion of data in surveys and instead applied a 10% Range of Reasonableness (ROR) - a concept accepted in a prior Board decision.

(2) The DCAA analysis ignored differences in survey sizes.

(3) The DCAA did not initially consider financial performance, but would do so only if challenged by the contractor.

(4) The DCAA did not consider discriminators other than financial - a common issue with DCAA.

(5) The DCAA did not use the same industry classification for the contractor over a four-year period.

(6) The DCAA did not use the same titles for the same positions/same people each year.

(7) The DCAA did not use the same surveys each year.

(8) The DCAA mixed and matched medians and means from different surveys.

(9) The DCAA revenue apportionment scheme whereby each officer below the president is measured against a survey using "revenue responsibility of the person" rather than total company revenue.

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The acting head of the Office of Federal Procurement Policy (OFPP) urged Congress to repeal the existing formula on determining allowable contractor executive compensation.  The intent is to bring "the cap down to a level on par with what the government pays its own executives - approximately $200,000." 

According to this official, just as the government must be prudent in paying its employees, it must also not overpay contractors.


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