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scottpcook

Executive Compensation Taken From Profit

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I'm researching a contract in anticipation of a court case, and I found that the compensation agreement for one of the officers is that he receive 15% of the profit on the contract, after all other profit obligations are taken care of.  If the contract gets a lot of task orders, this could be an incredible amount of money, far in excess of the allowable costs for executive compensation.  But that just means it's not an allowable direct or indirect charge against the govt.  If the contractor wants to spend his profit in that manner, I don't think we can prevent it, can we?  The contractor can do whatever he wants with his profit - give it to charity or buy his mistress a Lambo, right?  The govt has no way to prohibit or regulate it.  If I'm wrong, let me know.

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I'm a bit confused here. Let's start with this statement about one of the contractor's executive officers: "... he receive 15% of the profit on the contract, after all other profit obligations have been taken care of." What are "profit obligations"? What are "other profit obligations"?

As you recognized, in order to calculate the "profit of the contract" one would subtract contract total costs (which is a term defined at 31.201-1) from total revenue. At the end of the day, total revenue = total billings. So "profit of the contract" means what's left over after the contractor has billed (and presumably received) all payments. Therefore, it is not a contract cost. You noted that and you are correct.

Therefore, you are also correct that there is nothing you can do about it. More to the point, why should the government care how a contractor distributes its profit? Raytheon and Northrop and Lockheed and many other publicly traded contractors distribute their profits to shareholders in the form of dividends. Many publicly traded contractors pay dividends in excess of 50% of their annual profits. That's just business. If this contractor is not publicly traded and owned by a few individuals, there is nothing wrong with 15% (or 50%) of the profits going to one individual. That's just business.

Hope this helps.

 

 

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H2H is correct so far as what the exec receives.  However, the government has imposed restrictions on what use can be made of funds received from the government as compensation for contract work.  See, for example, FAR 52.203-5, Covenant against contingent fees and 52.203-7 Anti-Kickback Procedures. This applies to profits on contracts.

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I believe there is also a ceiling on the executive compensation that can be put in the indirect cost pool. 

H2H, is that factoid germane to the question?  What I could find only addressed the amount of the compensation, didn't seem to address the manner in which they awarded it . . . 

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2 hours ago, apsofacto said:

I believe there is also a ceiling on the executive compensation that can be put in the indirect cost pool. 

H2H, is that factoid germane to the question?  What I could find only addressed the amount of the compensation, didn't seem to address the manner in which they awarded it . . . 

The ceiling on executive compensation found in 31.205-6 only pertains to the calculation of allowable compensation for purposes of determining total contract costs. Since we've already established that the distribution of profit occurs after total contract costs have been determined, that limitation is not relevant. As the FAR Council (and DCAA) is fond of saying, "We are not telling you how much to pay your executives. That's entirely up to you. We're only telling you how much of that compensation will be reimbursed by USG."

Hope this helps

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apso, note that the limitation in 31.205-6(p) applies to all contractor employees on contracts awarded after June 23, 2014.  This makes for some interesting issues because some contractors can have different universes of contracts that are subject to three different ceiling limitations.

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