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.
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).
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.
Caitlin Lewis, Manager, Government Contracting
858.300.3428
Hareem Malik, Manager, Government Contracting
703.744.7425