Jun 29, 2012

Brian M. Bender

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More Government Movements Towards Lowering Contractor Compensation

As we have discussed in this blog previously (Obama Tries to Cap Contractor Salaries…Again and Government Reluctantly Raises Contractor Executive Compensation Ceiling) compensation of contractor employees is a hot topic in the government contracting arena lately. Back in January the White House proposed a limit on all contractor employees of $200,000; and when the Office of Federal Procurement Policy (OFPP) raised the annual limit on the top five executives to $763,029 it was noted that the increase was done reluctantly and solely based on a requirement in an existing statute.

Most recently, the Senate Armed Services Committee recommended in the fiscal 2013 National Defense Authorization Act (NDAA) (S.3254 Section 842) the “maximum amount of allowable costs of compensation of contractor employees” should be $230,700. As with the salary amount proposed by the White House, the limit proposed in the NDAA applies to all contractor employees. The proposed $230,700 of compensation is equal to the amount established by the Office of Management and Budget (OMB) for the Vice President’s annual salary. It is important to note this limit is proposed by committee and still has to be voted on by the full Senate as part of the approval of the NDAA, as well as the House of Representatives (which has yet to set any benchmark), before it could go to the President.

With the recent moves by many in Congress, and the White House, to limit the allowable portion of contractor salary it will only be a matter of time until contractors can expect the reasonable amount of compensation to be decreased. With such a drastic decrease in allowable compensation we feel it would be prudent for contractors to plan for a decrease of some sort. This will cause contractors to either decrease the amount they pay their employees and/or absorb the difference in their indirect rates. A decrease in pay would most certainly cause issues attracting and retaining top performers, especially for small businesses who can’t afford pay above the allowable limit. Absorbing the difference as an unallowable cost would also cause financial hardships for small contractors. It appears there will be hardships in this area, but how much so is yet to be determined. There are a number of proposals in the marketplace which vary in the amount of benchmark cited and we will keep you apprised of developments on this issue as they occur.

Please contact Brian Bender at 301.222.8273 or bmbender@aronsonllc.com for questions or assistance with your executive compensation and federal government compliance issues.