Monday, September 10, 2018

Contractor Compensation Ceilings - USAID Contractors

Employee compensation is the single largest element of cost for many Government contractors.  The US Government is, not surprisingly, quite interested as well.  The compensation wars that are being fought in the court rooms under recent JFT and Metron cases represent just a few of those, which are capitulated by contractors during the course of audits, or settled in pre-court dispute procedures. 
Most of the disputes are about what used to be called “executive compensation” and the FAR used to prescribe limits (at FAR 31.205-6) on how much compensation government contractors could claim as being allowable for their top 5 most highly paid executives at each business segment. The rationale for those allowability limits being, of course, that the government didn’t want taxpayers to fund exorbitant executive salaries, which, arguably, provided the least amount of actual direct or indirect benefit to Government contracts….
But as it turned out, the executives were only the preliminary victims of the “fat cat purge”, which was taken to a new egalitarian level in 2014 when an overall cap was made applicable to all contractor employees.  Now the “executive compensation cap” is simply called “contractor compensation cap.” The rationale for applying the limits to all contractor employees is less clear, even though some wonder if the timing of class wars may have been a factor… To the extent there is a rationale, it appears to be no more than “thou shalt not get wealthy by contracting with the Federal government.”
These caps apply to compensation charged directly or indirectly under US Government contracts.
Alas, I’m digressing….  
If you are a contractor for USAID, complying with the FAR contractor compensation caps are just the beginning of your journey into the compensation rabbit hole …
Enter USAID Contractor Salary Threshold (USAID CST), which equals OPM’s Basic Rates of Pay for Members of the Senior Executive Service. The “USAID CST” is the amount established for Agencies without a Certified SES Performance Appraisal System on annual basis.
This one, promulgated through USAID Automated Directive System Chapter 302 and AIDAR 752.7007“Personnel Compensation”, establishes a non-statutory policy cap for all contractor employee salaries charged directly to USAID cost reimbursable contracts.  The rationale for this one was not very clear at all, given that it put a decisive deterrent for any highly technical, highly innovative and, hence, highly compensated labor from ever wanting to contribute to foreign aid development objectives.  It is also a poorly written policy, which (ADS 302.3.6.9) assumes firmly that no contractor executives will ever work on any USAID contracts directly.  The cap applies to direct salariesonly, not overall compensation, so presumably incentive compensation and other compensation elements are then capped at regular FAR 31.205-6 limitations.  However, the policy does not address those situations where such executives do work directly under a contract. This makes any salary paid to such executive in excess of USAID CST unallowable during the period when such executive is charged directly to the contract.  More on this below.
Of course, compensation cap aficionados are quick to tell you that contractors are free to pay employees as much as they want, the rules in FARs and AIDARs are simply limiting the amounts which the US Government will agree to reimburse. If you pay more, you take the rest out of your profits, which is to say – tough noogies(term of art in Government contracting).
Personally, I think legislating and regulating compensation limits flies in the face of free market principles—principles upon which this country was founded. (At least that’s what they told me in my history class).
FAR 31.205-6 The Final Frontier
So, if you are a USAID Contractor the first threshold that you have to worry about is FAR 31.205-6, which governs “compensation for personnel services” and is the longest and most detailed of the FAR cost principles (it also holds the record for most revisions (over 32) in the last 15 years).

FAR 31.205-6 defines the term total compensation as “all remuneration paid currently or accrued in whatever form and whether paid immediately or deferred, for services rendered by employees to the contractor.” Compensation includes payment made or to be made in the future in the form of cash, corporate securities such as stocks, bonds and other instruments or other assets, products or services.

FAR 31.205-6(a)(1) sets forth five general criteria that must be met if costs of personal compensation are to be allowable. First, with limited exceptions such as severance pay, deferred compensation, pensions or other post-retirement benefits, the compensation is for work performed in the current year and may not be a retroactive payment for work in prior years. Second, the compensation in total must be reasonable for work performed as well as individual components where “reasonableness” is defined in FAR 31.201-3. Essentially it is what is normal for a comparable business. “Reasonableness” criteria usually translates into results of compensation surveys used by auditors. Third, the compensation must have been paid in accordance with an “established compensation plan or practices followed so consistently as to imply, in effect, an agreement to make the payment.” Fourth, there is no presumption of allowability where the contractor has made a major revision to its compensation plan or practice without notifying the Cognizant Agency (the opposite is also true where there is a presumption of allowability where the contractor has notified the Cognizant Agency and provided an opportunity to review the change). Fifth, costs considered unallowable under other cost principles are not considered allowable simply by being called compensation (e.g. cost of country clubs, “entertainment”, cars etc).
Once you go through the above, the total compensation(direct or indirect) is then capped as follows (you can find the link here):
Summary of the cap to be applied to each calendar year is below. If your fiscal year is other than a calendar year, you will need to “blend” the caps appropriately:
CY 2015: $487,000
CY 2016: $500,000
CY 2017: $512,000
CY 2018: $525,000
If you want to know some of the historical caps (because you have contracts awarded before June, 2014) then follow this link.
USAID Salary Threshold – Where are all the executives gone?
As mentioned above, USAID ADS 302.3.6.9 sets a maximum rate on salaries under contracts where USAID establishes the price or the fixed labor rate for services after considering what the actual staff salaries would be (so Cost Reimbursable and T&M Contracts). This is called USAID Contractor Salary Threshold or USAID CST.  Please note the word “salary”, which is not the same as "total compensation".

The USAID CST is equivalent to the maximum rate at Federal agencies without a certified Senior Executive Service (SES) performance appraisal system. While the amount of the CST is derived from the SES system, there is no other connection between the USAID contractor salary policy and the SES system. 

Before the Contracting Officer (CO) may authorize payment for any contractor salary that exceeds the USAID CST under a USAID direct contract, he or she must obtain approval in accordance with the procedures in 302.3.8.4., normally involving giving up the employee’s first born… 

ADS 302.3.6.9 (3) goes to explain that “The USAID CST does not normally apply to executive level salaries. While USAID technical assistance services contracts typically furnish senior-level professional services, the services rarely involve executive level direct labor. Therefore, costs associated with executive level salaries are typically allocated to a contract through the indirect cost pool, to which CST does not apply. Salaries for individuals providing personal or non-personal services to USAID contractors instead must be compensated at rates determined by the CO to be fair and reasonable in the competitive market, in accordance with applicable FARand AIDAR cost principles. Overall compensation to individuals providing these services are subject to the applicable cost principles in FAR 31.205-6 and FAR 31.205-33 as well as AIDAR subparts 731.2, 731.3, and 731.7. “

What happens if your “senior executive”, whose compensation is normally charged in full to indirect pools (up to the FAR 31.205-6 cap of course) is asked to go and provide some technical level expertise or produce a complex deliverable under a USAID contract.    Clearly, doing so would fall into “separate purpose” category (i.e. not something that he/she does every day as part of her role in the home office) and hence would meet the exception to Consistency in Allocating Costs Incurred for the Same Purpose of CAS 402.  

Normally, such assignment for direct work under a contract is approved by USAID’s CO as a Temporary Duty Assignment (TDY) or Short Term Technical Assistance (STTA).  Such approval, however, will likely be limited to USAID CST (unless a waiver… hahaha), regardless of how much such executive makes, even though ADS 302 makes it clear that those executives are not normally charged directly, i.e. they could be occasionally. 

Because costs which are unallowable directly are also unallowable indirectly, any excess compensation paid to such executive during the approved TDY must now be charged to an unallowable cost pool together with all the directly associated costs: i.e. fringe, portions of incentive compensation, deferred compensation etc.

So, wouldn’t you just charge such executive indirectly?  Well no, it is not consistent with CAS 402 and is not allocable to all contracts through indirects since it is benefiting only one.

The take away is: don’t let your executives engage in any technically stimulating work…. :-)

This gets weirder if you consider non-profits are not subject to USAID CST under assistance (grants and cooperative agreements), but are subject under USAID contracts… And then there are the local compensation caps…. Blah blah blah

If you are reading this still, you are most likely a) my husband so you have to or b)geek like me and I salute you.

Till next rabbit hole…


  1. Where can I find positions titles grades (FSN Grades) thank you

  2. Hi I have a question- for fixed Price Contracts under a USAID contract, are we obligated to ask from the offeror biodatas to demonstrate cost reasonableness for the staff they will directly bill to under the FPC? Should we also impose the USAID max if under the FPC they need to hire staff or consultants? Thanks!