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TITLE VIII--ACQUISITION POLICY, ACQUISITION MANAGEMENT, AND RELATED MATTERS

Subtitle B — Amendments To General Contracting Authorities, Procedures, And Limitations

P. L. 113-66

Explanatory Statement, H7894

The House bill contained a provision (sec. 813) that would amend section 2324(e)(1)(P) of title 10, United States Code, and section 4304(a) of title 41, United States Code, to replace the current statutory benchmark compensation formula used to determine the amount of contractor compensation that is considered an allowable cost for a federal contract, with the current compensation benchmark amount for fiscal year 2013 of $763,209. This section would also make unallowable the entire cost of compensation for the five most-highly compensated employees of a contractor that was awarded more than $500.0 million in federal contracts in the previous fiscal year.

The Senate committee-reported bill contained a similar provision (sec. 841) that would reduce the cap on allowable costs of compensation of contractor employees to an amount consistent with the original legislative cap, adjusted for inflation, and provide for future annual adjustments by reflecting the change in the Employment Cost Index for all workers, as calculated by the Bureau of Labor and Statistics. According to this calculation, the cap for fiscal year 2014 would be at $487,325.

The agreement contains the provision with an amendment that would revise the cap on compensation of contractor employees and provide for future annual adjustments.

House Report 113-102

SECTION 813--GOVERNMENT-WIDE LIMITATIONS ON ALLOWABLE COSTS FOR CONTRACTOR COMPENSATION

This section would amend section 2324(e)(1)(P) of title 10, United States Code, and section 4304(a) of title 41, United States Code, to replace the current statutory benchmark compensation formula used to determine the amount of contractor compensation that is considered an allowable cost for a federal contract, with the current compensation benchmark amount for fiscal year 2013 of $763,209. This section would limit additional changes to the current compensation baseline to the U.S. Bureau of Labor Statistics Employment Cost Index (ECI). This section would also make unallowable the entire cost of compensation for the five most-highly compensated employees of a contractor that was awarded more than $500.0 million in federal contracts in the previous fiscal year.

The committee believes the application of the current formula by the Office of Federal Procurement Policy is flawed, as it has resulted in an escalation of $422,559, or nearly 225 percent, in the 15 years since the compensation cap was established in law. The committee does not believe this escalation reflects the actual adjustments in compensation for defense contractors over this same period due to inflation and other market factors. The committee notes that section 1127 of title 41, United States Code, directs the Administrator for Federal Procurement Policy to `review commercially available surveys of executive compensation and, on the basis of the results of the review, determine a benchmark compensation amount to apply for each fiscal year.' The Administrator is also directed to consult with the Director of the Defense Contract Audit Agency and other officials from executive agencies in making the determination. However, rather than using all available data and input from appropriate officials to inform decision-making, it appears that the Administrator has interpreted the requirements of section 1127 to require that the benchmark compensation amount be established at an amount equal to the median amount of the total compensation (total amount of wages, salary, bonuses and deferred compensation) accrued over a 12-month period for the top five highest paid employees in management positions at each home office and each segment of publicly traded U.S. companies with annual sales over $50.0 million. According to the Congressional Budget Office, if the current approach remains in place the compensation cap could be raised to as high as $1.6 million by fiscal year 2020.

Senate Report 113-044

Maximum amount of allowable costs of compensation of contractor employees (sec. 841)

The committee recommends a provision that would reduce the cap on allowable costs of compensation of contractor employees to an amount consistent with the original legislative cap, adjusted for inflation, and provide for future annual adjustments by reflecting the change in the Employment Cost Index (ECI) for all workers, as calculated by the Bureau of Labor and Statistics.

Section 808 of the National Defense Authorization Act for Fiscal Year 1998 (Public Law 105-85) limited the amount of contractor executive compensation allowable for reimbursement under federal contracts to a benchmark based on the median amount of compensation provided to senior executives in large U.S. corporations, as calculated by the Office of Federal Procurement Policy (OFPP)--then $340,650.

Since that time the cap has more than doubled to $763,029 for 2011 and 2012, and is expected to increase to more than $950,000 in 2013. By contrast, if the original cap had been adjusted for inflation it would now be only $487,325. The committee concludes that the growth of the cap by almost $300,000 more than the rate of inflation cannot be justified.

At a time when most Americans are seeing little or no increase in their paychecks and budget constraints require the Department of Defense to find efficiencies in all areas, the committee concludes that increases of this magnitude are unsupportable.