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Allowable FAR Compensation Limits are Being Dramatically Lowered

January 7, 2014 / Ed Jameson / Blog Posts
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Allowable FAR Compensation Limits are Being Dramatically Lowered; Will Apply to All Employees’ Compensation – by tim, CPA

Government contractors should be aware that the recently passed Bipartisan Budget Act of 2013 and the National Defense Authorization Act for FY2014 lowers the allowable executive compensation pay on government contracts to $487K from $952K (recently promulgated by OFFP) AND, most importantly, includes all employees and subcontract employees, not just executives (with a few rare non-executive exceptions).  Technically, the Defense Authorization Act allows up to $625K, but it was superseded by the Budget Act and its lower $487K limitation.

The compensation cap applies to all civilian and defense (i.e., Department of Defense, NASA and Coast Guard) contractor employees; the Budget Act extends the rules to subcontractor employees as well. Both acts are applicable on costs incurred under any cost-type contract awarded on or after 180 days after the December 26th enactment (i.e., June 24, 2014). However, parts of FAR 31.205-6, “Compensation for Personal Services,” need to be modified first before the change can take effect, which can take time due to the sometimes lengthy regulatory review process. Nonetheless, it is expected that the specific section addressing allowable compensation levels (FAR 31.205-6(p)) will be quickly modified within the next few weeks.

There are rare circumstances where Government contractors can request higher allowable compensation levels.  To ensure continued access to needed skills and capabilities, the Acts provide provisions for the head of an executive agency to establish exemptions to the cap for scientists, engineers, individuals in the mathematics, medical and cyber security fields as well as other fields requiring unique areas of expertise.

Even though the rules do not take effect until mid-2014, we suggest that Government contractors review their pay structures and address these new limitations for direct and indirect costs in any government contract proposal anticipated to be awarded on or after June 24, 2014.

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Ed Jameson, CPA, Managing Partner

I’ve been in practice for over 40 years helping our small business clients procure, manage, and survive audits on more than $6 billion in federal government contract and grant funding. We’ve been featured presenters and panel moderators at Tech Connect’s National SBIR/STTR conferences since 2010, and I’ve presented at the DOD’s Mentor Protégé Summit and present regularly for several state and local organizations.