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Posted by on Dec 10, 2014

Federal Acquisition Report: DoD Approves Use of a Blended Rate for Calculating Executive Compensation

With increasing public scrutiny of both high executive compensation and the performance of Federal contractors, Congress included in the Bipartisan Budget Act of 2013 a provision to lower the amount of executive compensation for which Federal contractors may be reimbursed.

The December issue of the Management Concepts Press Federal Acquisition Report explains how the DoD’s decision to allow contractors to use a blended rate will ease the transition to the lower cap.  Here’s an excerpt:

The Department of Defense (DoD) will allow contractors to use a blended rate to calculate executive compensation as the department transitions to a new reimbursement limit, according to a memorandum issued by Defense Procurement and Acquisition Policy Director Shay Assad. The use of blended rates is intended as a “practical and cost efficient solution” to ease the transition to a lower executive compensation cap, the memo provides.

Section 702 of the Bipartisan Budget Act of 2013 (P.L. 113-67) lowered the executive compensation cap—the maximum amount of contractor-paid executive compensation that the federal government will reimburse on cost-based contracts. The cap was reduced from $952,308 to an initial limit of $487,000 per year. The figure will be adjusted annually to reflect the change in the Employment Cost Index calculated by the Bureau of Labor and Statistics.

The new executive compensation cap was implemented in the Federal Acquisition Regulation through an interim amendment that applied the $487,000 cap to all contracts awarded, and cost incurred, on or after June 24, 2014.

In light of the challenges that will surely arise among contractors that hold contracts awarded both before and after June 24, the memorandum allows affected contractors to use a blended rate approach to calculate executive compensation. Each contractor would propose their own rate based on a calculation of the volume of contracts awarded before June 24 and on or after that date.

The directive emphasizes that contractors are not required to use the blended rate approach; those that choose otherwise may calculate executive compensation on each contract based on the applicable rate, or adopt the lower rate for all contracts regardless of award date.

Those who do wish to use the blended rate method will use an initial rate for interim billing that is based on the estimated cost breakdown; then, when establishing final overhead rates, a final rate will be calculated using the actual proportion of contract costs for the current year for contracts issued before and on or after June 24.

The memo specifies that contractors who employ the blended rate method must submit an auditable calculation of the blended rate. “An audit will ensure that only the total allowable compensation is billed to the government for the fiscal year based on the different authorized caps,” the memo reads.

Contractors must also execute an advance agreement under FAR 31.109 in order to use the blended rate method. The agreement will document the process to be used, the auditable data submission requirements, and an expiration date for the use of the blended rate.

The October 24 memorandum notes that the Defense Contract Management Agency (DCMA) will issue implementation guidance on the use of blended rates, in coordination with the Defense Contract Audit Agency (DCAA).

Note that the blended rate approach has only been approved for Department of Defense contractors and subcontractors. Contractors that hold contracts with other federal agencies must continue to apply the compensation caps applicable to each contract and subcontract, unless an agency specifies otherwise.

Excerpted with permission from the Federal Acquisition Report.  © 2014 Management Concepts Inc. All rights reserved.

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