Do YOU “Make too Much” as a Government Contractor?

Congress is poised to reduce how much the government pays defense contractors as reimbursement for the salaries they give their employees.  The government has a cap on how much it will pay for salaries of each defense contractor’s top five executives — all other contractor employees are fully reimbursed for their pay regardless of how much it is. Executive compensation is generally part of the overhead rates charged by a contractor.

It looks like Congress may broaden that definition for reimbursement caps to cover ALL personnel employed by defense contractors.  The defense authorization bill has been bulked-up with this little nugget.

The reimbursement cap now is set at $693,951 for the top five executives. That figure is based on a review of the median amount of compensation — wages, salary, bonuses and deferred compensation — paid to the senior executives of publicly owned U.S. corporations that exceed $50 million in annual sales.

As usual, there was disagreement within Congress over whether that cap should be lowered or not.  The House sought to keep it where it is while the Senate wanted to lower it to $400,000 (the president’s salary), and apply it to all defense contractors.

I am of the opinion that since it is taxpayers’ money, we should not have to “pay” an executive whom we cannot get rid of from running a government contractor more than we pay “the most powerful man in the country.”  Congress doesn’t agree so much.  The committee that reconciles differences between the two bills settled on the House version, which would extend the current cap to all employees on defense contracts. The Defense Department also would be authorized to create an exemption for scientists and engineers if officials determine an exemption is necessary to attract skilled workers in those areas. The House and Senate still have to approve the conference committee report.

Sen. Barbara Boxer, D-Calif., who amended the Senate bill, said she will continue to work on reining in “exorbitant taxpayer-funded salaries for contractors.”  “It is outrageous that under this bill, defense contractors can continue to charge taxpayers $700,000 a year for their salaries,” she said.

The fundamental issue isn’t that the government is not going to allow contractors to be reimbursed above this amount, only that they will only reimburse up to that amount as “allowable costs” based on reasonableness.  So, I am not sure why the amount can’t be reduced or eliminated based on the type of contract being performed instead of by the contractors as a whole.

A short juxtaposition if you will:
Contractor 1 – new kid on the block offering services of some sort to the government.  The contractor has 5 employees that each touch the cap.  The only other employee is an administrative assistant.
Contractor 2 – 20 years in contracting, multi-billion dollar contractor with lot of history of great performance.  5000 employees, 50 of which touch that threshold.
Problem:  How much more deserving are the 50 in the larger contractor than the smaller one?  Likely, and arguably, they have more responsibility and more risk than the upstart.  Case-by-case analysis would be a much better view on this – IMHO.

Supporters of the measure to extend the reimbursement cap to all defense contractor employees say it will save the government millions of dollars in overhead and contract labor costs.  No official cost estimates have been released.

The Office of Management and Budget, which currently determines the compensation cap, could also decide to apply a defense contractor compensation cap to all agencies in the interest of continuity.

If the measure takes effect, federal auditors would have to expand their efforts to ensure compensation caps are being applied to all contract employees.  Ultimately, the cap is not a savings issue but a policy issue regarding how tax dollars are spent on private employees’ compensation.


About Marty Herbert

With 13 years of government contract administration, analysis, finance, and audit experience, I have established a firm baseline in ethics and a specialization in government contracts that has prepared me to become a subject matter expert in my field. I am currently working on enhancing government contracts management and compliance through workflow tools and product offerings - attempting to make the process proactive as opposed to reactive.
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