Selected Costs Series, Part 4-2 (FAR 31.205-6)

Compensation for Personal Services

payrollThis section covers A LOT of topics, so it spans multiple posts for easy digestion; this is what’s left to discuss:

  • (d)   Form of Payment
  • (e)   Income Tax Differential Pay
  • (f)     Bonuses and Incentive Compensation
  • (g)    Severance Pay
  • (h)   Backpay
  • (i)      Compensation based on changes in the prices of corporate securities or corporate security ownership, such as stock options, stock appreciation rights, phantom stock plans, and junior stock conversions.
  • (j)     Pension Costs
  • (k)    Deferred compensation other than pensions.
  • (l)      Compensation incidental to business acquisitions.
  • (m) Fringe Benefits.
  • (n)   Employee rebate and purchase discount plans.
  • (o)   Postretirement benefits other than pensions (PRB).
  • (p)   Limitation on allowability of compensation for certain contractor personnel.
  • (q)   Employee Stock Ownership Plan (ESOP)

Part 2 – (d) through (g)

(d) Form of Payment

I have mentioned before that I teach part-time at a local community college.  In my Intro Accounting courses, we don’t cover much in terms of payroll except the basics. Normally, we show the journal entries with CASH being used as the method of payment.  I joke around about how it is easier to pay people in cash (under the table) instead of writing a check, but the FAR says the same thing.

Personal services compensation should be paid in cash or cash equivalent.  The only “rub” here is when the cash equivalents are in the form of corporate securities.  In this case, you have to use “fair market value on the first date the number of shares awarded is known.”  Once upon a time I wrote my Master’s Thesis on the use of stock options dates associated with the accounting treatment for them.  (The research is from 2005, but if you want a copy, let me know).

(e) Income Tax Differential Pay

Since I mentioned my class already in this post, I should also mention that I am NOT a big fan of income taxes.  Even though my degrees are in accounting, I really can’t stand the income tax or much of anything about it.  So, when the FAR mentions it – MEGO (my eyes glaze over).  Fortunately, it is a short 2 paragraphs that mention foreign assignment differentials as allowable compensation costs and domestic assignment differential allowances as unallowable (but see also 31.205-35).

(f) Bonuses and Incentive Compensation

Hooray!  Contractor employees can not only get reimbursed in the form of bonuses, but thebudget2 contractor can pass along the government’s share of those bonuses as allowable costs!  As long as the bonus plan is documented before the services are rendered and followed as per the basis of award, the cost of bonuses and incentive compensation is allowable.

(g) Severance Pay

Do you have your parachute?  “Involuntary termination” is a bad word in a struggling economy, but it is a reality that many have faced.  Fortunately for government contractors getting reimbursed for such costs is allowable as long as a few criteria are met.  The costs must either be:

  • Required by law;
  • Based on an employer-employee agreement;
  • Established by policy that, in effect, creates an agreement by the contractor to the employee; or
  • Circumstances of the particular employment.

This last one leaves the door open, doesn’t it!?

Then, there is the notion the contractor may experience “abnormal or mass severance pay” in which case the allowability is considered on a case-by-case basis.  I would chalk this one up to “see also Sequestration Costs.”

Last, but certainly not least, is severance to foreign nationals employed under a service contract performed outside the US.  Sorry, these costs are unallowable over “similar industry and services” standards outlined in section (6).


We will kick off next time with the breakdown of Backpay.

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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