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RalfW

Executive Compensation

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FAR 31.205-6(f) Bonus and incentive compensation makes bonuses allowable under certain condition.

The issue is that a manager is assigned 100% of his time under a single contract with his salary completely charged as a direct cost to the contract, and in accordance with the contractor's written policies can only earn a bonus for work performed under that contract,

Has anyone run into the situation where such a bonus is funded from an indirect pool from the contractors home office? Furthermore, that indirect pool is funded from funds from multiple agencies other than the agency who awarded the contract in question. The agency that awarded the contract is the only funding source for that contract.

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RalfW,

Yes. Typically "incentive compensation" (including bonuses) is not charged directly to a contract -- even if all the rest of the labor costs are charged to the contract -- because it's too hard to estimate. How does one estimate a future bonus for one (or a small group) of employees whose performance has not been been evaluated? Plus if the bonus was a direct cost then the contractor would expect fee on the bonus, which might make negotiations difficult.

Your question points to the need for contractors to have robust policy statements identifying which costs are direct and which costs are indirect ... and then consistently follow those policy statements.

Finally, contractors tend not to care as much about funding source ("color of money") as the Federal customers do. Contractors care about color of money just as much as the contract terms and conditions require them to care, not one bit more. It's generally considered to be "Federal bookkeeping" and not the contractor's concern. This is especially true with respect to indirect costs, which are allocated across many contracts, contracts that may have been issued by different agencies, contracts that may have multiple CLINs/SLINs and ACRNs. Indirect costs are allocated (in general) without concern for those differences in funding source.

So if the contractor has a policy statement that says all incentive compensation is charged to its indirect cost pool and allocated to contracts as part of an indirect cost rate, and then it follows that policy consistently (even though a manager charged 100% of his time to a single contract and his bonus is based on contract work), then that would be fine and in accordance with standard industry practices.

Hope this helps.

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Appreciate insight, most definitely.

Here for example, the home office has 10 contracts, 9 are typical cost reimbursement contracts supporting DoD and the other one is a non-DoD cost contract and it was set up for a single purpose where all costs are direct. Bonuses are paid in accordance with the home office written policy. This results in approximately 93% of the bonus under the non-DoD contract being funded by DoD funds. The rest by my activity. Does that sound right when DoD is bearing the brunt of the bonus when they see no benefit from the non-DoD contract?

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RalfW,

Your question is hard to parse. Have you read Navigating the Sea of Overhead, which is available from DAU?

Let me give you an example of my confusion: You wrote "9 [of 10] are typical cost reimbursement contracts ... and the other one is a non-DoD cost contract and it was set up for a single purpose where all costs are direct."

So all 10 are cost-type contracts but all 10 also have direct and indirect costs. What does "single purpose where all costs are direct" mean in that context?

You seem to be moving toward a theory that the contractor's indirect cost pools are not logical. See FAR 31.203 ("The contractor shall accumulate indirect costs by logical cost groupings with due consideration of the reasons for incurring such costs. The contractor shall determine each grouping so as to permit use of an allocation base that is common to all cost objectives to which the grouping is to be allocated. The base selected shall allocate the grouping on the basis of the benefits accruing to intermediate and final cost objectives.")

Is that what you are trying to say? If so, what do the auditors think?

Here's where I am on this, based on your description of the situation.

Contractor has $100,000 in bonuses, charged to a home office indirect cost pool. The cost pool is allocated to all 10 contracts of which 9 are DoD and 1 is non-DoD. DoD pays for 9/10 or 90% (in your example 93%) of the bonus costs, or $90,000 (or $93,000 if you like). The non-DoD contract only pays for $10,000 (or $7,000 if you like) of the bonus costs. If the $100,000 is only generated by employees working on the non-DoD contract, and zero dollars are generated by employees working on the 9 DoD contracts, then you may have a good point -- depending on how big the pool is.

What I mean by that last part is that $100,000 may seem like a lot of money but if the pool is $100,000,000 then it's insignificant. And the FAR and CAS rules permit insignificant amounts of direct costs to be accumulated in indirect pools, simply for ease and transaction cost avoidance. So we need to know how big the pool is and what percentage of the pool is related to the bonuses and how much of the bonuses are generated from DoD vs. non-DoD contracts in order to really know if this is a problem or not.

Did I ask you what your auditors thought of your concerns?

Hope this helps.

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Thank you Sir. Your answers have been insightful and helpful. We have, subsequent to our recent exchange, contacted DCAA to see where they stand in this and have to await their answers. Therefore, your question as to what the auditors have thought was very helpful.

Your analysis in regard to the insignificant amounts was also enlightening. We will await now what the auditors come back with.

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overclock,

Your post is unnecessarily harsh, not to mention wrong.

First, although RalfW doesn't explicitly say, I think it's reasonable to assume s/he works for the government, not a contractor. If I'm correct, then DCAA absolutely does perform an advisory function for government contracting officers and other functions in the acquisition team.

Second, you are correct that the most consistent aspect of DCAA's opinion on many topics will be the inconsistency of the opinion. But your statement that "none" of the opinions will be correct does a disservice to many auditors. Sure I have my differences with auditors' opinions, but I also respect them and their function. (Especially on the individual level.)

Third, your statement "the Government ... can't make you record a cost as either direct or indirect" is true insofar as it goes, but it also misses the bigger point that the Government can assert a non-compliance with applicable FAR or CAS requirements and disallow costs on that basis. The goal is to avoid unilateral contract price adjustments, paying penalties and interest, or (in extreme cases) paying attorneys for litigation costs (either as appellant or as defendant). The goal is to avoid those things, not to wave a red flag in front of auditors or contracting officers and "dare" them to disallow costs; nor is the goal to intentionally record costs in violation of applicable requirements, secure in the knowledge that nobody will notice for 5 years because DCAA is so far behind.

In that vein, your statement "charging bonuses for direct to contract employees as indirect is okay as long as this is your established practice and is disclosed if required to file a CASB-1" is flat-out wrong, because you are ignoring the point that the contractor may have disclosed a non-compliant practice. Disclosing and consistently following a non-compliant practice does not estop the government from asserting it's been wronged from that practice, as Judge Dyk decided in one of his Pratt & Whitney decisions several years ago.

I think you would offer better advice (to both government employees and to contractors) if you reduce your anti-DCAA rhetoric and focus on understanding the implications of your positions, including what happens if the government disagrees with those positions.

Sheesh. I can't believe I'm defending DCAA. That surely doesn't happen often!

H2H

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