Lower contractor compensation caps now law

The new federal budget signed into law by President Barack Obama on Dec. 26 includes a provision that caps federal reimbursement for contractor compensation at $487,000 annually. The caps apply to both civilian and military contractors, and replace a formula that benchmarked the maximum reimbursable compensation to top private-sector salaries.  

A similar provision capping contractor compensation at $625,000 was included in the defenseauthorization bill, which the president also signed Dec. 26. But because the budget was signed after the defense measure, its lower figure takes precedence. 

The measure does not cap salaries and compensation paid by contractors to their employees. But it does limit how much firms can bill the government for salaries and benefits paid to employees working on federal contracts. The new caps will be applied to contracts that are awarded 180 days after the law went into effect. An official at the Office of Management and Budget told FCW that the Office of Federal Procurement Policy will work with other members of the Federal Acquisition Regulatory Council to draft new rules for public comment. These rules are expected to include how the caps will be administered and how exceptions, which are included in the statute, should be handled.  

One worry in industry is that the government will seek to apply the rules on a contract-by-contract basis, said Alan Chvotkin, senior vice president of the Professional Services Council, which represents government contractors. Currently, contractors treat compensation as an indirect cost for accounting purposes, because not every employee is mapped on a one-to-one basis to a single contract. Executives and managers, for example, could divide their time among multiple contracts. Tracking compensation to individual contracts would “significantly increase the compliance costs and burden,” Chvotkin said.  

The caps permit exceptions for highly specialized posts, which could include top medical researchers, scientists, cybersecurity workers, software developers, and others with highly marketable skills. It’s not clear how often such exceptions would need to be employed – the Defense Department has authority to circumvent its contractor caps but apparently has never done so. Chvotkin said he would prefer to see any such exceptions handled on an agency-by-agency basis, rather than having a single overarching rule that applies to all government contractors.