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HHS Salary Rate Limitation

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Does anyone have any experience with applying the following HHSAR clause to a firm fixed price commercial item subcontract? We are being told by an HHS agency CO that this salary rate limitation applies to subcontracts for fixed price commercial items as well as non-commercial item subcontracts. They are requesting documentation to prove that subcontractors who will be providing firm fixed price commercial items (services) are not using contract funds to pay the salary of anyone involved in the contract in excess of this rate limitation. As the commercial item services are based on market pricing, and as the individuals performing work will not be invoicing for their direct labor, I am having trouble understanding how this limitation could/should be applied and documented. Note that the clause does not prohibit a contractor from paying its employees a salary in excess of this rate; it only limits the portion of their salary that may be paid with Federal funds. On a fixed price subcontract, how can one determine what portion of an employee's salary is being paid with Federal funds?

The CO is asking for the quoted prices for the subcontracted services to be broken out by labor, fringe, materials, overhead, etc. As commercial for-profit entities providing market priced services, subcontractors may not have a method for doing this, and it may be in conflict with their company policies.

Per 331.101-70, the clause is only required to be included in prime contracts "when a cost-reimbursement, fixed-price level-of-effort, time-and-materials, or labor-hour contract is contemplated". The clause itself states that the salary rate limitation also applies to individuals under subcontracts, but it does not limit that flowdown to the same contract types. Can an argument be made that it should only apply to cost-reimbursement, fixed-price level-of-effort, time-and-materials, or labor-hour subcontracts as well, even though this isn't stated in the clause?

352.231-70 Salary rate limitation.

As prescribed in 331.101-70, the Contracting Officer shall insert the following clause in extramural solicitations and contracts:

SALARY RATE LIMITATION (MAR 2012)

(a) Pursuant to the current and applicable prior HHS appropriations acts, the Contractor shall not use contract funds to pay the direct salary of an individual at a rate in excess of the Federal Executive Schedule Level II in effect on the date an expense is incurred.

(B) For purposes of the salary rate limitation, the terms "direct salary," "salary", and "institutional base salary", have the same meaning and are collectively referred to as "direct salary", in this clause. An individual's direct salary is the annual compensation that the Contractor pays for an individual's direct effort (costs) under the contract. Direct salary excludes any income that an individual may be permitted to earn outside of duties to the Contractor. Direct salary also excludes fringe benefits, overhead, and general and administrative expenses (also referred to as indirect costs or facilities and administrative [F&A] costs).

Note: The salary rate limitation does not restrict the salary that an organization may pay an individual working under an HHS contract or order; it merely limits the portion of that salary that may be paid with Federal funds.

( c) The salary rate limitation also applies to individuals under subcontracts. If this is a multiple-year contract or order, it may be subject to unilateral modification by the Contracting Officer to ensure that an individual is not paid at a rate that exceeds the salary rate limitation provision established in the HHS appropriations act in effect when the expense is incurred regardless of the rate initially used to establish contract or order funding.

(d) See the salaries and wages pay tables on the U.S. Office of Personnel Management Web site for Federal Executive Schedule salary levels that apply to the current and prior periods.

(End of clause)

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I have, but I did not find it particularly illuminating:

Sec. 203. None of the funds appropriated in this title shall be used to pay the salary of an individual, through a grant or other extramural mechanism, at a rate in excess of Executive Level II.

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I found this old thread and, since it didn't seem any conclusions were previously reached, wanted to see if anyone has had any more experience or more clear guidance on this topic. I am wondering about the proper application of this clause on either FFP, T&M, or CR contracts and how folks have administered it internally or how it's been enforced by COs. For instance, staff that make $200k plus and still charge to contracts.

I used to think this was fairly straightforward but now I'm not so sure. The guidance on the HHS site is clear as mud http://www.hhs.gov/asfr/ogapa/acquisition/salary-rate-limitation-qa.html

As an example, what if someone makes, say, $500k per year. At the end of the year, this person charges 1,200 hours to OH, takes 600 hours of PTO, and another 600 of direct labor to a federal contract (roughly $144k). In this scenario, the portion of their (direct) salary paid with federal funds would be less than the Executive Salary Rate limitation. Also, how do you determine what portion of a person's salary was paid with federal funds in this scenario on a FFP contract?

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The Q&A on the site you referenced is somewhat convoluted, but I think the response to Question 11 is pretty clear. It is an annual limit, so in your scenario charging direct labor costs of $144k to the HHS contract should be allowable (as long as it meets all the other criteria for an allowable cost).

This clause should not be included in a FFP prime contract. Per HHSAR 331.101-70, this clause is required "when a cost-reimbursement, fixed-price level-of-effort, time-and-materials, or labor-hour contract is contemplated." In a fixed-price level-of-effort, time-and-materials, or labor-hour contract the employee would be required to record the number of hours spent working on the contract, so you could calculate the percentage of his salary that is allocable to the contract. However, since the clause does not restrict the salary that a company pays employees out of its own funds, I agree that it would be difficult to show whether the contract funds were actually used to pay for that portion of the employee's salary. If you have provided details on how the price for each hour of service was derived (direct labor plus fringe plus overhead, etc.), then I suppose one could use the direct labor amount per hour of service from that calculation and multiply by the number of hours incurred during the year to derive the total annual salary paid out of contract funds.

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I appreciate the additional info. It seems to me that maintaining compliance with this clause, as a contractor, would be a bit of a moving target. That is, if someone earning a salary which far exceeds the cap charges to several different accounts such as business development or PTO, they would have to be cognizant of how much direct salary has been actually charged to the contract. If we're in agreement that the scenario described above is allowable, I've seen this clause misinterpreted on both sides. COs think a contractor can only propose a salary up to the salary rate limitation (say 200k) when in fact this person may allocate substantial hours to indirect accounts thereby making their effective "direct" salary far less than their current salary may dictate. On the other hand, contractors have withheld billable salary costs far in advance of knowing whether the costs would actually exceed the limitation.

Anyway, not trying to beat a dead horse here. If anyone has any objections to the above interpretations or different experience with this clause I would be interested in hearing it. Still curious in how others have worked around the part about not using contract funds to pay for the portion of a person's salary above the limitation. Seems like an awful lot of ambiguity for a clause which could have substantial implications under a services contract.

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I have no experience with the clause, but I do object to the above interpretations, because they ignore the word "rate" in the statutory language. Rate requires two parameters, such as in a rate of speed (miles per hour) or rate of pay (dollars per year (or per month, or per hour)). I think I can say, without fear of contradiction, that someone who gets paid at the "rate" of $144,000 per 600 hours is clearly getting paid at a "rate" that exceeds $200,000 per year. Oh, I almost forgot; this is WIFCON, so I probably will be contradicted by someone - but I just don't fear it.

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Navy - I assume you are objecting to HHS's interpretation in the policy memo Q&A referenced above and not to my interpretation of their response to Question 11. I personally find the clause somewhat ambiguous; I was merely interpreting HHS's Q&A.

Michael - Yes, applying the limitation on an annual basis requires more tracking of hours/costs charged to the contract by highly paid employees.

I have also seen this clause interpreted differently by some contractors and COs. Many are not aware of this HHS policy memo.

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I think I can say, without fear of contradiction, that someone who gets paid at the "rate" of $144,000 per 600 hours is clearly getting paid at a "rate" that exceeds $200,000 per year.

Navy, I'm afraid I will have to be the first to contradict you (somewhat) that someone who is paid $144,000 for 600 hours is not actually getting paid a "rate" which exceeds $200k because, for purposes of this clause, "rate" seems to be defined as the gross direct salary costs (excluding fringe, OH, G&A) incurred annually. At least that's what I'm going with today (and I think mrsbadexample is also on board). I think the disparity in the interpretation of this clause is proof it's poorly written and leads to unnecessary confusion.

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Navy - I assume you are objecting to HHS's interpretation in the policy memo Q&A referenced above and not to my interpretation of their response to Question 11. I personally find the clause somewhat ambiguous; I was merely interpreting HHS's Q&A.

Your assumption is correct.

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Navy, I'm afraid I will have to be the first to contradict you (somewhat) that someone who is paid $144,000 for 600 hours is not actually getting paid a "rate" which exceeds $200k because, for purposes of this clause, "rate" seems to be defined as the gross direct salary costs (excluding fringe, OH, G&A) incurred annually. At least that's what I'm going with today (and I think mrsbadexample is also on board). I think the disparity in the interpretation of this clause is proof it's poorly written and leads to unnecessary confusion.

I don't believe "rate" is defined by the clause in any way, so per FAR 1.108(a), “rate” retains its common dictionary meaning. In the context as used in this clause, Random House Dictionary defines "rate" as "a certain quantity or amount of one thing considered in relation to a unit of another thing and used as a standard or measure: at the rate of 60 miles an hour." Another example would be dollars in relation to time.

In your example, the employee is being paid at the rate of $500,000 per year. But I expect he doesn't get paid just once a year; he probably gets paid at a rate of $41,866 a month, or perhaps he gets paid at the rate of $19,230 every two weeks, or even, possibly, at the rate of $240 per hour. And doesn't $240 an hour equate to $144,000 for 600 hours? My point is, those are all the same "rate."

Thus, no matter what anyone else says, or how they interpret some memo or FAQ, to my way of thinking, allowing that $144,000 for that employee’s 600 of work on that contract is a violation of both the letter and the spirit of the law, and of the clause.

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