Update: Contractor Employee Compensation Limits

Update: Contractor Employee Compensation Limits

With the annual Incurred Cost Submission (ICS) deadline right around the corner, it’s once again time to be mindful of statutory contractor compensation caps.  For all contracts awarded after June 24, 2014, reimbursement of compensation costs for all contractor employees is limited to the following:

  • $619,000 for costs incurred between 1/1/2023 and 12/31/2023
  • $646,000 for costs incurred between 1/1/2024 and 12/31/2024

These annual limits were established by Section 702 of Bipartisan Budget Act (BBA) of 2013 and are adjusted annually to reflect changes in the Employment Cost Index, as determined by the Bureau of Labor Statistics.  The limitations are designed to cap total compensation paid to any single employee, which includes base salary or wages, bonus, 401(k) match, and other benefits, and allowances paid by the contractor.  Under Section 702, a cap waiver may be obtained for certain highly specialized scientists, engineers, or other positions.

It should be noted that while the BBA cap is the maximum amount of compensation which can be considered an allowable cost, limiting compensation to this threshold does not guarantee DCAA compliance.  Under FAR 31.205-6(b) and FAR 31.201-3, the compensation must still be considered reasonable for it to be allowable.

Generally speaking, if the compensation is pursuant to “arm’s length” labor-management agreement (i.e., collective bargaining agreement or union contract) the costs are reasonable, as long as they are appropriate for the nature and circumstance of the work being performed.  If the compensation is not covered by a labor-management agreement, the FAR requires contractors to consider whether the compensation conforms with the practices of other similar companies that are “(i) of the same size; (ii) in the same industry; (iii) in the same geographic area; and (iv) engaged in similar non-Government work under comparable circumstances”.

To help support the reasonableness of employee compensation, contractors should document these considerations for both executive and non-executive employees. The documentation should include management’s policy for determining compensation ranges and should be backed up by benchmarking surveys from a third party, which are particularly useful for supporting a DCAA audit.

For more information on contractor compensation limits, please see our companion blog on Supplemental Schedule B of the Incurred Cost Submission.

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