Contractor Pay Caps

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Major corporations often pay their CEOs millions of dollars in salary, which may seem enormous to the average Joe, but are pretty much in line with the size of these enterprises. For executives of government contracting forms, things are not that simple. Congress and the FAR council are working on a law that will put a new cap on contractor salaries.

As the administration has slowly tried to put the squeeze on contractors, they have used procurement approaches like “lowest price technically acceptable” (LPTA) to affect the cost structures, and also adjusted organizational conflict of interest rules (OCI) so that there has been a wave of divestitures (TASC from NGC, Leidos and SAIC split, etc.).

This pay cap approach directly targets “allowable costs” (an arcane term that refers to what can legitimately be used to build up indirect rates under DCAA rules), by limiting salaries. Amounts that exceed that level will still be tax-deductible as a true expense, so there will be no change in taxes filed with IRS, but you can’t bring these amounts into your indirect rates that the government pays you.

While this will have the effect of theoretically lowering costs, as with all things there are offsets and so forth. I foresee that all of a sudden, more costly executives will find themselves targeting commercial, and state and local accounts, while the federal sector will be adjusted accordingly. The notion that this will actually affect pay rates is naïve, actually almost laughably naïve. The real effect will be felt in smaller and mid-tier companies, who don’t have the alternate accounts to offset and cannot move their executives around, and so will have difficulty attracting the real high-end talent.

From the work I did on service level agreements that lead to what our company calls Behavior-Based Performance Metrics Methodology® (what you measure is what will be paid attention to, and the converse is also true), I predict that lowering contractor pay caps will produce “unintended consequences” – negatively affect small businesses, and further, lead to a lowered talent pool in federal sector – is that what we really want?


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