At 8:35 yesterday morning, a change to the FAR was published in the Federal Register that changed how the compensation cap is implemented.
The FY2012 National Defense Authorization Act (NDAA) extended what used be the “Executive” Compensation Cap to ALL CONTACTOR EMPLOYEES, but ONLY on contracts with DOD, NASA and the Coast Guard. The cap remains at $763,029 as set by OMB in April last year.
The change modified the Compensation cost principle in FAR Part 31 to extend the cap to all employees whose cost is allocable (direct or indirect) to DOD, NASA or Coast Guard contracts. It also changed the Allowable Cost and Payment clause at FAR 52.216-7 so that the Supplemental Schedule B (Exec Comp) now refers to the limitation on allowability of compensation for “certain contractor personnel” rather than the “five most highly compensated executives.”
The change was published with no notice of proposed rulemaking and no comment period. It is not only effective immediately, THIS CHANGE IS RETROACTIVE TO JANUARY 1, 2012. This is because Congress mandated the FAR change within 180 days of the effective date of the law (12/31/11) and that deadline expired almost a year ago.
Effectively, this means:
- If the total compensation of any employee beyond the top five exceeds the current cap, that employee should be included in Supplemental Schedule B whether or not it causes the total number of employees reported to exceed five.
- If the total compensation of any employee beyond the top five exceeds the current cap, the excess compensation will need to be excluded from the rate calculation for DOD, NASA and Coast Guard contracts. Failure to do so could expose the contractor to penalty.
- The net result for any contractors meeting condition 1 AND having a mix of DOD and Civilian Agency contracts will be that they will have to calculate and apply two different sets of rates (with and without the additional exclusions).