SUBJECT: Most Current Executive Compensation Cap for Contracts Awarded on or After June 24, 2014
Section 702 of the Bipartisan Budget Act of 2013 (PL 113-67) reduced the contractor and subcontractor allowable compensation cap from $952,308 to $487,000 for contracts awarded on or after June 24, 2014, representing a 49 percent reduction. Calculated by the Bureau of Labor Statistics the cap will be adjusted annually to reflect the change in the Employment Cost Index for all workers. As always, contractors can pay whatever amounts they deem appropriate, but the government will only reimburse (up to) the capped amount.
Previously, the National Defense Authorization Act for Fiscal Year 2012 (PL 112-81) applied the ceiling on reimbursable pay to all Department of Defense (“DoD”), Coast Guard, and National Aeronautics and Space Administration (“NASA”) contract employees, rather than just the five highest paid executives. During 2012, the cap was $763,029; in 2013, the cap changed to $952,308. This rule applies to DoD, NASA, and Coast Guard contract employees on contracts awarded on or after December 31, 2011, and before June 24, 2014. For contracts issued by other agencies subject to Federal Acquisition Regulation (FAR) 31.2, the cap applies only to the five most highly paid executives. These rules apply to all cost-based contracts awarded and costs incurred before June 24, 2014.
The current cap is effective June 24, 2014, and applies to all contractor and subcontractor employees on contracts awarded on or after June 24, 2014. With only narrowly targeted exceptions for scientists, engineers, or other specialists to ensure access to needed skills and capabilities, FAR 31.205-6(p)(3) has been amended to reflect the change. The relevant ceiling on allowable compensation depends upon when the contract was issued and its effective date, because it is the FAR Part 31 cost principles language in effect on the effective date that establishes the applicable ceiling.
Based on the risk assessment, the reasonableness of executive compensation should also be evaluated in accordance with FAR 31.205-6(b)(2).