This issue’s analyst is Alan Chvotkin, Executive Vice President and Counsel of the Professional Services Council. PSC is a national association of companies providing professional services and technology to the Federal government. PSC has been a partner with HRA-NCA on the compensation survey for over eight years. For the whole time, Alan has represented PSC on the Compensation Survey Committee.
Congratulations on your success so far in winning federal contracts. But moving into the world of cost-reimbursement contracts will affect your approach to compensation in three significant ways: (1) in the nature of the compensation costs that can be incurred on government contracts; (2) in the minimum salary and benefits that must be paid to employees for work under certain types of contracts; and (3) in the maximum amount of compensation costs that the government will allow. I’ll discuss each of these briefly below but this can only be a brief overview of each of these important but very complicated matters.
Under cost-reimbursement federal contracts, contractors must adhere to a detailed set of cost principles addressed in the federal acquisition regulation, agency supplements, and the contract. For public policy reasons, the federal government will not "allow" a contractor to be reimbursed for a wide range of otherwise normal business expenses. For example, interest payments on borrowings are "unallowable" on government cost-reimbursement contracts but are a legitimate business expense that may be deductible for income tax purposes. For another range of business expenses – including employee compensation – the costs incurred on these contracts must be "fair and reasonable." How is "fair and reasonable" determined?
The two methods the government uses in making that "fair and reasonable" determination is through government reviews of the company’s written and consistently applied company compensation plan and by referencing salary benchmarks, such as through compensation surveys, that show that the offered compensation is comparable to that offered for similar position by others. Thus, use reliable benchmark surveys – such as the HRA-NCA Compensation Survey and its government contractor slice – as part of your compensation plan documentation of comparability.
Many federal contracts impose minimum wage requirements. For example, both the Service Contract Act (for certain types of federal services work) and the Davis-Bacon Act (for most types of federal construction) require contractors to pay the minimum salary and benefits established through “wage determinations” issued by the Department of Labor for each of the specific job functions to be performed under the contract and for the location of the contract performance. These are very complex federal laws and implementing regulation to comply with and they carry significant risks and penalties for even technical non-compliance. But for our purposes here, if the wage determination sets a compensation level that is lower than either the federal minimum wage or any state or local government-established minimum wage where the work is being performed, then the contractor must pay that higher wage. In addition, on February 12, 2014, President Obama signed an executive order mandating that, no later than January 1, 2015, the minimum wage to be paid on all covered federal contracts will be $10.10 per hour. Many federal contracts are already requiring this $10.10 minimum wage and you can expect to see this minimum wage “floor” in more federal procurements leading up to the “all-in” after the new year.
Finally, Congress has established a new ceiling on the amount of “allowable cost” that a company can recover on its cost-reimbursement contracts for the “compensation” of any employee. The federal acquisition rule defines the term “compensation” broadly to include not only salary and benefits, but also short-term or long-term compensation, stock options or other forms of “compensation.” For new contracts entered into by any federal agency after June 24, 2014, that “allowable cost” amount is $487,000. The law and implementing rules permit an agency, on an employee-by-employee basis, to grant a waiver if the contractor’s employee is performing scientific, engineering, medical or other special functions and the agency determines that granting the waiver is in the best interest of the government. The Defense Department has had similar waiver authority for the last four years but appears to have never granted a waiver.
It is important to understand that the cap on allowable cost reimbursement does not mean that a company cannot pay an employee a higher salary; only the government’s reimbursement of that compensation is capped. But for many government contractors who do not have significant commercial or other sources of revenue other than from government contracts, this maximum reimbursement rate often equates to the employee maximum compensation rate.
Beyond these three major focus areas, several federal agencies have imposed agency-specific compensation limitations, either by rule or by contract. And there is plenty of evidence that the competitive federal market is driving down government contractor employees’ salaries and benefits. Since it is essential for companies to be able to attract and retain the workforce necessary to pursue and perform federal contracts, companies need to pay close attention to these compensation rules and the opportunities and challenges they present.
More information on the HRA-NCA survey and its government contractor “slice” can be found at http://surveys.akroninc.net/hranca/info/government_contractors_survey.html.
We hope this example of how to use the HRA-NCA Compensation Survey to answer a salary/compensation question helped you. If you have any questions for our ten person Compensation Committee, send them to email@example.com. Perhaps your question will be answered in our next Ask the Analyst column. Submitters whose questions are used for this column will receive an HRA-NCA gift.