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05/01/2023
Pre-award compensation considerations: The best things in life aren’t free
Imagine you’ve received a shiny new request for proposal (RFP). You mark off all your requirements and you’re confident your proposal will go through. But then you notice there’s a clause related to compensation. What do you do next?
When it comes to compensation for government contracting purposes, what is considered compensation can vary. While salary is a large part of compensation, there are additional components that need to be considered for government contracting.
According to FAR 31.205-6, compensation means “the total amount of wages, salary, bonuses, deferred compensation, and employer contributions to defined contribution pension plans, for the fiscal year, whether paid, earned, or otherwise accruing, as recorded in the contractor’s cost accounting records for the fiscal year.” Examples of compensation include cash, corporate securities, other assets, products or services, income tax differential pay, bonuses and incentive compensation, severance pay, backpay, pension costs, employee rebates and purchase discount plans, and post-retirement benefits.
Now that you are thoroughly overwhelmed by the different types of compensation costs, let us guide you through determining the right amount of overall compensation during the federal contract pre-award process.
Navigating the bidding process of compensation costs can leave you feeling personally victimized by the extensive RFP requirements. However daunting the RFP requirements may be, they are the best place to start when determining compensation costs. The RFP may provide specific compensation requirements, escalation rates, and minimum labor or fringe rates.
RFP compensation requirements
Although this article is specifically looking at cost type contracts, it’s also important to note that specific compensation requirements may vary depending on the contract type.
The RFP may contain maximum salary requirements for direct and indirect employees. When bidding on the contract, one should also consider the Bipartisan Budget Act of 2013 contractor compensation cap.
|
Fiscal year for costs incurred |
BBA contractor compensation caps for contracts awarded on or after June 24, 2014 |
|
2023 |
$619,000 |
|
2022 |
$589,000 |
|
2021 |
$568,000 |
|
2020 |
$555,000 |
|
2019 |
$540,000 |
The data included in the compensation limits may include all compensation costs as defined by FAR 31.205-6. Just because the government says you’re allowed to be paid this much doesn’t mean you should be paid this much. Reasonableness must be assessed even if compensation is below the statutory cap.
The RFP may contain specific directions on the allowability of bonuses and other types of incentive compensation, whether direct or indirect. Since bonuses and incentive compensation can represent a significant amount of total compensation, it is important to have an incentive compensation plan outlined prior to awarding compensation. Otherwise, contractors risk the cost being unallowable because the costs are not part of an established plan or policy per FAR 31.205-6(f).
Job qualifications
The RFP may also contain specific job qualifications to meet the salary requirements. The government may request specific education requirements or years of experience to perform on the contract. And (spoiler alert!) in the event the contractor wins the contract, they may risk compensation costs being unallowable if employees do not meet job specific qualifications (more to come on this in our upcoming post-award article on compensation). Seize the opportunity to live out hoarding dreams and hold on to all those resumes in case labor qualifications come under review. Furthermore, while contractors are at it, they should establish controls for maintaining and monitoring LCAT qualifications at both the prime and subcontractor level.Escalation
Another area contractors should focus on, especially if it is a multi-year proposal, is year-over-year escalation. Contractors should use their professional judgment, relevant industry data, and overall experience to determine if a fixed rate or variable rate escalation is appropriate for the specific RFP. Contracting officers will require some type of documentation to support the chosen escalation rate; therefore, contractors should document accordingly. We know “subject matter expert judgment” is everyone’s favorite default line but do yourself a favor and maintain actual supporting documentation. Some other factors to consider related to escalation include:
- Contractors can use general inflation to support their escalation rate but should also make note to assess the rates for that pesky cost realism for cost reimbursable opportunities.
- Federal government-provided escalation rates from the Bureau of Labor and Statistics (BLS) are available to the public and can be used to formulate an escalation rate. Could the government BE MORE helpful in determining escalation? Keep in mind that these rates are retrospective in nature and develop a rationale on why using those rates as a basis of estimate apply to your particular situation.
- Contractors may need to quantify their cool points and assess the specialized nature of the industry and/or position. From there, they may adjust escalation rates accordingly.
- Contractors can also consider separate escalation rates for different labor categories. For example, the general inflation rate may be reasonable for an administrative position; however, a specialized engineering position may require an adjustment to escalation based on market factors.
Labor and fringe rates
In some cases, the government is generous and likes to do the hard part for the contractor. Furthermore, the RFP provides certain labor and fringe rates to use as part of the proposal. This may be easier for the contractor on a proposal development basis, however, it is incredibly important that the contractor assess the rates for reasonableness and cost realism. This analysis should be documented (again with the documentation) as it will likely be assessed by the contracting officer. In addition, contractors should avoid putting themselves in such a position in which they are unable to obtain staff at the RFP provided labor rates and sustain RFP provided fringe rates. Trust us, the nightmares and ulcers will not be worth it. The analysis should also include an assessment of whether the required workforce is readily available to perform the work necessary.FAR 52.222-46 evaluation of compensation for professional employees
A FAR solicitation clause that certain contractors should become well acquainted with is FAR 52.222-46, Evaluation of Compensation for Professional Employees. Contractors should check the RFP for this clause as it details pre-award compensation requirements which include a total compensation plan submittal that will be assessed for realism and must be adequately supported. There have been protests, that the Government Accountability Office (GAO) has sustained, where the awardee did not comply sufficiently with the requirements of FAR 52.222-46.Conclusion
There are a multitude of requirements related to compensation. Taking the time to thoroughly understand the RFP and FAR requirements provides the advantage of helping assure allowable compensation costs are included in your proposal. Look out for our upcoming articles on post award compensation requirements and compensation reasonableness analysis. CohnReznick has a variety of compensation consultants to assist with pre-award and/or post-award requirements that you may encounter.Contact
Caitlin Lewis, Manager, Government Contracting
858.300.3428
Hareem Malik, Manager, Government Contracting
703.744.7425
Subject matter expertise
Jeffrey Shapiro
CPA, Partner
Caitlin Lewis
CPA, Manager
Hareem Malik
CPA, Manager, Government Contracting
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This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.