Selected Costs Series, Part 4-1 (FAR 31.205-6)

Compensation for Personal Services

payrollAfter some relatively light discussions around FAR unallowable costs, the FAR turns to Compensation for Personal Services (FAR 31.205-6).  This section goes on, seemingly forever and is the bane of many contractor’s existence.

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

  • (a)    General
  • (b)   Reasonableness
  • (c)    [Reserved]
  • (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 1 – (a) through (c)

(a) General

General is easy.  I am going to generally qualify the allowability for this cost as allowable, but with restrictions.  Compensation for work performed in the current year is allowable.  The caveat is the compensation plan needs to be documented (isn’t that always the case?).  Also, just because the compensation plan is written, doesn’t mean it is allowable.

Also, owners of closely held corporations, LLC, partners, sole proprietors, owner’s family construction_imagemembers, and contract employees whose contract is based on financial interest in the company are all subject to “special consideration.”  A reasonableness test is performed on these individuals based on the IRS Code for compensation they receive that is NOT a distribution of profit (which is unallowable).

(b) Reasonableness

I know I spoke about reasonableness in a prior cost principles post, but here we are again at a crossroads.  Labor management agreements are generally in as “reasonable,” but other compensation amounts are subject to size, industry, geography, and comparable circumstances tests.  One thing I know for sure is as a general rule, DCAA would not allow the support for compensation to come from or other similar online resource unless it was specifically prepared for the contractor being audited.

(c) [Reserved]

This section used to contain the Labor-management contract wording that got moved to section (b).

Next time, we will pick up with Form of Payment.

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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