Hi,

I am working with a PCO regarding a situation in which a CEO of a small business (one Government contract and no other business) has a salary of more than $175K included in the G&A pool. We later discover that he is also fulfilling a full-time direct charge position within that contract. The contractor is currently working under a UCA to which we are now trying to definitize. This CEO direct charged the contract 228 hours during the month of December alone against a billing rate that also includes his salary as CEO in the G&A. In summary, one individual receiving compensation for two full-time positions (direct charge and CEO).

For a small business not subject to CAS, is it allowable or even is it potentially fraudulent?

I can give more details about my inquiry, but I am curious to here the initial responses to my question.

Thanks in advance to all who are able to reply!

-ContractPriceAnalyst

Rather than get into accounting and potential fraud, try this:

1. Calculate an hourly rate for the CEO's salary: $175,000/2080 = $84/hr..

2. Determine the allowable cost for the CEO salary by multiplying the number of direct labor hours worked by the CEO rate and then deducting the result from the CEO salary to determine the allowable CEO cost for calculation of G&A: direct labor hours X CEO rate = amount to be deducted from the CEO salary for G&A calculation.

3. Determine a reasonable hourly rate for the type of work done based on market research.

4. Tell the contractor, looking them dead in the eye, that the amount it wants (CEO + direct) is not reasonable and that you will not pay it. Tell them that you will pay a reasonable hourly rate for the number of hours of direct work. Tell them that you will deduct that number of hours at the CEO hourly rate from the CEO's salary for G&A calculation purposes.(Let him pay himself what he wants, but don't let him allocate all of it to you.)

If you want to really be tough, tell them that $175,000 is too much for the CEO of a company that size and come up with the amount you will pay before doing the above. You might do some market research before stating your amount.

No need to go into accounting and fraud. Too much trouble.

Hi,

I am working with a PCO regarding a situation in which a CEO of a small business (one Government contract and no other business) has a salary of more than $175K included in the G&A pool. We later discover that he is also fulfilling a full-time direct charge position within that contract. The contractor is currently working under a UCA to which we are now trying to definitize. This CEO direct charged the contract 228 hours during the month of December alone against a billing rate that also includes his salary as CEO in the G&A. In summary, one individual receiving compensation for two full-time positions (direct charge and CEO).

For a small business not subject to CAS, is it allowable or even is it potentially fraudulent?

I can give more details about my inquiry, but I am curious to here the initial responses to my question.

Thanks in advance to all who are able to reply!

-ContractPriceAnalyst

Is this a start-up company? If so how long has it been in business? What type of contract is involved? Does the company have a policy of paying individuals for all hours worked regardless of whether they are FLSA exempt? The same dollars should not be charged twice to a contract, but as Vern indicated, the same individual can have costs allocated to a contract for work (s)he performs in separate capacities

The business started 10 years ago (S-Corporation) and is a FMS directed source. The contract is a FFP-LOE undefinitized contract for a base year for 25 full-time support services positions.

The number of hours in the contract are based on 25 positions at 2050 hours each per year. The equivalent of 33 holidays and vacation days are included in the overhead rate for all positons. The CEO is fulfilling the role of a direct charge Program Manager while also claiming a full-time salary as CEO in the G&A pool.

The owner believes that the IRS tax code substantiates his position that the dual salary is reasonable because he is a S-Corporation. The owner believes that the direct portion of the salary can in no way be considered compensation for performing the functions within the scope of duties as a corporate officer. Therefore, his opinion is that a salary as CEO in the G&A rate and a salary as direct charge Program Manager is reasonable.

The hours that are direct charged are accounted for on a time-sheet and accepted by the customer. The owner doe not track any additional hours worked in support of his CEO functions as he claims that he does not need to track his time since he is a salaried employee as CEO.

Personally, I don't see how one individual receiving dual full-time compensation is reasonable, but the owner has almost convinced the PCO that it is reasonable.

Thank you Vern and Retreadfed for your input.

Again, the key is not accounting. The key is what you think is a reasonable amount to pay. I would not pay what they want you to pay. Period.

One of my clients is an S-Corp where the CFO is also a direct-charging employee.

We divide his annual salary by 2080 hours to derive an hourly rate.

The CFO tracks his time on a weekly timesheet. Each project has a charge number. There is also a charge number for indirect/admin work (CFO stuff).

We charge his direct hours at his hourly rate to the contracts. We charge his indirect hours at the same hourly rate to the G&A expense pool.

So far, all is well. (Fingers crossed.)

H2H

You have multiple problems/issues here. This can still be worked out, here is some input.

1) You need to account for all of your time on the timesheets. Normally, your direct time (contracts) is charged direct and your indirect time (CEO stuff, vacation, training, sick, holiday, etc., ) goes to indirect, obviously. This should all total 2080 hours or more.

2) A CEO normally never charges direct, but there are always exceptions (especially at small companies such as yours) as long as they are consistent. So if this company's policy is to have everyone charge both direct and indirect, then so be it.

3) This company wants to charge its CEO direct. They can do this, assuming they do this consistently on all contracts and that ALL hours of all employees are recorded. However, what they cannot do is;

(a) charge more time then you actually worked. If he worked and recorded 2080 hours and recorded that correctly to direct, indirect, sick, vacation, holiday, etc.., then everything is working as it should.

( in their forecast/estimate of the indirect rates (overhead, G&A whatever), they cannot place all of the CEO's costs in the indirect pools knowing that part of his time will be direct. Until you get some decent history on this company after it starts recording all of its time, just ask him to meet you in the middle and reduce his costs in the indirect pool by 50%. Then move forward.

If this person fights you on these common sense issues, then take your business elsewhere if you are able. But I do not see how he could not agree to this. What concerns me is his statement about being an S corporation, that is someone trying to baffle you with b*llsh** because that is tremendously irrelevant, so be ready.

4) Last but not least you have an enormous problem. You state that the hours are based on 2050 hours for 25 positions. In addition, there are 33 holidays in the overhead rate. There are only 2080 hours in a year (260 days x 8 hours). If you remove the 33 holidays (that are and should be in the indirect (overhead) rates, that leaves (227 days x 8 hours) 1816 hours. So the estimate is overbid by 13%.

This happens all the time, do not beat yourself up.

Good luck.

I am confused by the comment from X DCAA; is there ever a time when more than 2080 hours per year for one individual is appropriate?

I am confused by the comment from X DCAA; is there ever a time when more than 2080 hours per year for one individual is appropriate?

Yes, if the individual works more than 2080 hours a year. I know of some companies that expect their FLSA exempt employees to work a standard 45 or 50 hour week. Other companies pay their FLSA exempt employees for all hours worked. Thus, the more productive an employee is, the more the employee can earn.

You have a fixed price contract. In negotiating the price, you should form your negotiation objective using the cost principles in FAR Part 31. FAR 31.205-6( says compenation should be reasonable for the work actually done. Following Vern's advice, if the contractor is not paying the CEO two separate amounts for CEO work and program manager work, determine what would be a reasonable amount to be paid for each type of work and apportion the $175K accordingly. If the contractor is paying the CEO two amounts, determine if each amount is reasonable for the work done. In short, the contractor should not reasonably expect to recover from the government more than it pays.

I warned you--forget the accounting. See what's happening? People are getting confused. Negotiate reasonableness. No sensible businessperson would accept what the contractor is trying to do, even if it's okay from an accounting standpoint. Why worry about what the contractor is paying its CEO? Who cares? Worry about what the government is paying the contractor.

I am not sure the CEO?s S-corporation argument was completely captured or understood by ContractPriceAnalyst. I am assuming that under the S-corporation that the CEO is a salaried shareholder ? meaning he gets two forms of compensation, the salary and a share of the corporation?s income. This share of corporate income might be a loss. The share of corporate income is reported on the shareholder?s personal income tax ? there is essentially no corporate tax for an S-corporation, only shareholder?s income tax.

So what might the CEO be saying? His salary of $175K alone is not adequate for a CEO and is far below industry standard? Salaries for shareholders are typically well below their peers because of their share of the corporate income ? some salaries for salaried shareholders are zero.

Let?s assume that the normal direct charge for an hour under the contract is something higher than what would be derived from a $175 base salary and that the normal direct charge individual is not a share holder ? does not have a salary which is supported by share income. So what is the issue ? what is the normal fixed price for the work to be performed and how does it compare to the $175K salary even with application of an unadjusted overhead and G&A rate?

Is it reasonable - Less accounting more negotiation.

I am not sure the CEO?s S-corporation argument was completely captured or understood by ContractPriceAnalyst. I am assuming that under the S-corporation that the CEO is a salaried shareholder ? meaning he gets two forms of compensation, the salary and a share of the corporation?s income. This share of corporate income might be a loss. The share of corporate income is reported on the shareholder?s personal income tax ? there is essentially no corporate tax for an S-corporation, only shareholder?s income tax.

So what might the CEO be saying? His salary of $175K alone is not adequate for a CEO and is far below industry standard? Salaries for shareholders are typically well below their peers because of their share of the corporate income ? some salaries for salaried shareholders are zero.

Let?s assume that the normal direct charge for an hour under the contract is something higher than what would be derived from a $175 base salary and that the normal direct charge individual is not a share holder ? does not have a salary which is supported by share income. So what is the issue ? what is the normal fixed price for the work to be performed and how does it compare to the $175K salary even with application of an unadjusted overhead and G&A rate?

Is it reasonable - Less accounting more negotiation.

Whynot, the thing is that the contract is currently undefinitized and will definitize to an FFP-LOE, if I read the posts correctly. Because of the UCA situation, the contractor is obliged to treat it as, essentially, a cost-reimbursable type until definitization (since the government will need to know actual costs incurred in order to definitize). Thus, the CEO needs a salary and a hourly rate to generate direct labor dollars that are accumulated for contract costing purposes.

(Yes, in theory the government may choose not to have the contractor report actual costs incurred as part of contract definitization. My experience, however, tells me otherwise.)

H2H

I think that an S-corporation with only one contract poses some interesting issues.

Let?s look at a very simple case, there is only one shareholder and that shareholder has a salary of $0 and that salaried shareholder is the CEO and his cost is captured as G&A expense and the CEO?s expense is the only expense that makes up G&A. Last period the CEO?s share = $50,000.

Under normal operations, the S-corporation provides FP services by hiring a contractor, not a share holder. The S-corporation treats contractors as direct labor. Let?s assume that the contract has only this one contractor. Contractor?s cost = $200,000.

The contract has derived a FP using the contractors cost, plus all OH (lets assume 0% for simplicity), plus all G&A expense (CEO), plus profit.

Contractor Cost = $200,000

Overhead = $0

G&A = $50,000 (Projected based on last year?s performance)

Profit = $25,000 (Based on 10% Fee)

Total = $275,000

Now, what happens if the CEO has to provide the direct work? Should the CEO collect a salary? Should the CEO?s share be considered G&A expense? What cost do you use? ($0 salary, $50,000 last year?s share, or $200,000 market equivalent)

I think that an S-corporation with only one contract poses some interesting issues.

Let?s look at a very simple case, there is only one shareholder and that shareholder has a salary of $0 and that salaried shareholder is the CEO and his cost is captured as G&A expense and the CEO?s expense is the only expense that makes up G&A. Last period the CEO?s share = $50,000.

Under normal operations, the S-corporation provides FP services by hiring a contractor, not a share holder. The S-corporation treats contractors as direct labor. Let?s assume that the contract has only this one contractor. Contractor?s cost = $200,000.

The contract has derived a FP using the contractors cost, plus all OH (lets assume 0% for simplicity), plus all G&A expense (CEO), plus profit.

Contractor Cost = $200,000

Overhead = $0

G&A = $50,000 (Projected based on last year?s performance)

Profit = $25,000 (Based on 10% Fee)

Total = $275,000

Now, what happens if the CEO has to provide the direct work? Should the CEO collect a salary? Should the CEO?s share be considered G&A expense? What cost do you use? ($0 salary, $50,000 last year?s share, or $200,000 market equivalent)

Oops, I somehow replied without replying.

I wanted to let Whynot know that his most recent post captures some of our struggle.

The PCO recently received advice from his legal counterpart that we have to allow him the CEO salary in G&A eventhough he can't possibly devote his full-time effort toward that end because executive compensation is not based on hours worked. We also can't disallow him the hours that he works in support of a direct charge positon in support of a contract requirement. Therefore, we end up with two full-time salaries for one individual. I don't see how this is reasonable, but I just calculate the numbers.

Thank you everyone for your input and advice!

I understand the point about executive salary may not be based on hours worked and the amount needs to remain in the G&A pool. However the concept of executive salary usually doesn't involve that executive billing simultaneously as a direct worker under a contract either. In fact, the OP stated that the executive or CEO billed 228 hours for the month of December. That's roughly 140% of a normal month.

The CEO, and the company, can't have their cake and eat it too. It's unreasonable for taxpayers to pay twice for the same person, regardless of whether the corporation is an S one or not. I would ask the CEO to reduce his executive salary that goes in the G&A pool by the amount planned for direct billable work. I would also negotiate a reduction in the hourly rate based upon what a normal amount is for that work.

I understand the point about executive salary may not be based on hours worked and the amount needs to remain in the G&A pool. However the concept of executive salary usually doesn't involve that executive billing simultaneously as a direct worker under a contract either. In fact, the OP stated that the executive or CEO billed 228 hours for the month of December. That's roughly 140% of a normal month.

The CEO, and the company, can't have their cake and eat it too. It's unreasonable for taxpayers to pay twice for the same person, regardless of whether the corporation is an S one or not. I would ask the CEO to reduce his executive salary that goes in the G&A pool by the amount planned for direct billable work. I would also negotiate a reduction in the hourly rate based upon what a normal amount is for that work.

i.e., see posts 2, 5 & 10.

I read 2, 5 and 10 the first time. I replied and said the same thing again in the context of Whynot bringing up an interesting point about S-Corporation most posters here probably don't know. In the absence of no one responding, people might assume everyine agrees with the CEOs position.

I read 2, 5 and 10 the first time. I replied and said the same thing again in the context of Whynot bringing up an interesting point about S-Corporation most posters here probably don't know. In the absence of no one responding, people might assume everyine agrees with the CEOs position.

The CEO's position is unreasonable. It has the effect of paying yourself for two positions at the same time. Don't agree to it.

The PCO recently received advice from his legal counterpart that we have to allow him the CEO salary in G&A even though he can't possibly devote his full-time effort toward that end because executive compensation is not based on hours worked. We also can't disallow him the hours that he works in support of a direct charge positon in support of a contract requirement. Therefore, we end up with two full-time salaries for one individual. I don't see how this is reasonable, but I just calculate the numbers.

Thank you everyone for your input and advice!

Hold on a dad-gummed minute here! This is forward pricing not a claim, correct? Where the Heck does a lawyer decide that you "have to allow" or "cannot disallow" dual compensation if it doesn't appear to be reasonable???? That isn't the lawyer's call or authority to determine. While it might not be illegal or legally improper, it still has to pass the stink test of reasonableness and common sense. It is up to the KO to determine what is "reasonable", not the lawyer. If the proposed prices are not reasonable, then you don't have to accept the proposal. It is up to the proposer to show that charging the taxpayers for the same person, paid full time for his position as CEO and then charging him as a direct hire is fair and reasonable. I'm with Vern on this all the way! As a fellow taxpayer, please advise the PCO to drink some gumption and not to be overly dependent upon some legal opinion.

In fact, if the lawyer actually said that you "cannot disallow" the proposed pricing approach, he or she is legally off-base. See, for instance: 31.201-2 -- Determining Allowability.

"(a) A cost is allowable only when the cost complies with all of the following requirements:

(1) Reasonableness.

(2) Allocability.

(3) Standards promulgated by the CAS Board, if applicable; otherwise, generally accepted accounting principles and practices appropriate to the circumstances.

(4) Terms of the contract.

(5) Any limitations set forth in this subpart."

See also, for instance: 31.201-3 -- Determining Reasonableness.

"(a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer?s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.

(b ) What is reasonable depends upon a variety of considerations and circumstances, including --

(1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor?s business or the contract performance;

(2) Generally accepted sound business practices, arm?s-length bargaining, and Federal and State laws and regulations;

(3) The contractor?s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and

(4) Any significant deviations from the contractor?s established practices."

Edit- this a definitization action on a letter contract. Ok. But my opinion is the same. It isn't reasonable.

How can you say the CEO's total compensation is unreasonable without knowing his field of expertise, location or background?

Let's say the CEO was COO at his last company and was paid 350k. He decides to start his own company, works billable full time at a rate that is in line with industry standard $84hr and receives the rest of his compensation from overhead to maintain an income of 350k.

It's not paying him twice, it's one total compensation package. The KO should simply focus on the Rate for that job and determine if it's reasonable or not.

Stop trying to do the company's accounting and do the job of the KO.

Imagine a situation where a single government buyer has ten different FP contracts with ten different firms for the exact same service. Everything is exactly equal between these firms other than each firm has a different cost structure. Each firm?s contract is identical to the other except that prices are based on cost. Why should I have 10 different FP prices for each of these firms for the exact same service?

Imagine a situation where a single government buyer has ten different FP contracts with ten different firms for the exact same service. Everything is exactly equal between these firms other than each firm has a different cost structure. Each firm?s contract is identical to the other except that prices are based on cost. Why should I have 10 different FP prices for each of these firms for the exact same service?

Is the same service being performed at the same location? If so, why do you have 10 separate FP contracts? I am assuming that these are not ID/IQ's, since you didnt refer to such. Not understanding the overall scenario.

How can you say the CEO's total compensation is unreasonable without knowing his field of expertise, location or background?

Let's say the CEO was COO at his last company and was paid 350k. He decides to start his own company, works billable full time at a rate that is in line with industry standard $84hr and receives the rest of his compensation from overhead to maintain an income of 350k.

It's not paying him twice, it's one total compensation package. The KO should simply focus on the Rate for that job and determine if it's reasonable or not.

Stop trying to do the company's accounting and do the job of the KO.

Good questions, plus we dont know how the cost is actually proposed. One month direct cost was identified.

However, it appears that the Contractor direct billed one person's cost for more than a normal monthly number of hours and additionally for the position of CEO. Does this appear to be reasonable? I'd surmise that one person cant physically perform two full time positions. At some point they have to go home, eat and sleep. Right now, they are proposing charges based upon both direct and indirect, full-time efforts for one person.

If a person can perform CEO duties on a part-time basis, then the salary "appears" to be unreasonable to me for the possible involvement necessary to be the CEO. But the KO needs to use some business judgement and not simply take the lawyer's "ruling" literally. The overall question isnt the lawyer's call or purview from what was described.

I feel that my point that the lawyer doesnt make a determination as to allowability of a proposed cost, based only upon a cost principle in FAR, is "reasonable" (no pun intended). There are business judgements involved in determining "allowability" and "reasonableness", in addition to the accounting principles. In addition to performing 2 full-time positions (seemingly) simultaneously and simultaneously billed in two different ways, is the total proposed compensation reasonable for the situation? The KO must determine whether all this is reasonable.