Executive Compensation

The Office of Federal Procurement Policy has established the FY 2008 compensation cap for the contractors’ five most highly compensated executives at $612,196.  Contractors are free to compensate executives above that amount, but pursuant to FAR 31.205-6(p) the cap sets the limit for how much of the compensation is reimbursable under government contracts.  The yearly amount is derived from commercial surveys and reflects “the median (50th percentile) amount of compensation accrued over a recent 12 month period for the top five highest paid executives of publicly traded companies with sales over $50 million.”  73 FR 15,779.

In a related development, on March 4, 2008, the DCAA issued guidance on the method for application of the executive compensation cap.  Under the guidance, the cap only applies after determining the amount of allowable executive compensation.  Portions of executive compensation may not be allowable for reasons unrelated to the cap – e.g., the executive may be compensated for performing unallowable activities, the compensation may be based on changes in the stock price, which is unallowable under FAR 31.205-6(i)(1), or the amount may be unreasonable.  Such unallowable elements are to be subtracted from the total compensation amount before determining whether the compensation cap has been exceeded.  The DCAA also reminded the auditors that under FAR 31.205-6(p)(2) not all forms of compensation are subject to the cap, but only “wages, salary, bonuses, deferred compensation, and employer contributions to defined contribution pension plans.”

CAS Administration Provisions

Effective March 31, 2008, FAR Part 30 contains updates regarding CAS administration rules.  The proposed changes were first published in October 2006 and are the result of comments received following earlier revisions to FAR Part 30 made in March 2005.  The new provisions specify that the cost impact of a noncompliance that affects cost estimating and cost accumulation must be measured by combining impacts on both.  In addition, the provisons now require the CFAO to consider the auditor’s advice in administering the CAS and to evaluate the detailed cost impact proposals.

3% Tax Withholding

The IRS is seeking public input on the implementation of the statutorily mandated 3% tax withholding on payments to contractors for any service or property.  The withholding was added by Sec. 511 of the Tax Increase Prevention and Reconciliation Act of 2005, and requires federal, state, and local governments to withhold 3% from payments for goods and services as an effort to stem tax delinquency.  Although industry groups are advocating its repeal, the withholding requirement currently is scheduled to go into effect on January 1, 2010.  The comments are sought with respect to how the withholding should be applied to purchases with credits cards, to government contractors and subcontractors, etc., and how the withholding should be transmitted to the IRS.  Comments are due by April 28, 2008.  For more information, see Internal Revenue Bulletin 2008-13.

Prompt Payment Act Interest

In Essex Electro Engineers Inc. v. US, the Court of Federal Claims held on February 20, 2008 that the USG did not owe PPA interest where the due date of payment was not specified.  The parties had entered into a settlement agreement and contract modification under which the USG was to make a payment “as soon as possible” and to use its best efforts to obtain funding.  This imprecise language did not provide the date payment is due under the contract and was “fundamentally inconsistent with the underlying assumption” of the PPA.  Rather, the PPA interest accrued  30 days after the receipt of a proper invoice.

Authored by:

Aleksander Lamvol

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