Proper charging for bonuses - Fringe or DL?

[Corduroy Frog]

Contractor is not disclosed anything with DCAA.  No DS-1 or anything at all.

Suppose an employee is awarded a $5000 bonus for performance on a particular contract.  Emphasize this is not a company-wide bonus, seasonal bonus, or anything else other than a performance bonus.  We wish to charge Direct Labor instead of Fringe for this $5000.

In absence of anything disclosed to DCAA, is there a FAR Clause that allows charging to Direct Labor, or disallows such charging??

Thanks in advance for your help.

[Don Mansfield]

Assuming the cost principles at FAR subpart 31.2 apply, then see FAR 31.202(a):

Quote

No final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool to be allocated to that or any other final cost objective. Direct costs of the contract shall be charged directly to the contract. All costs specifically identified with other final cost objectives of the contractor are direct costs of those cost objectives and are not to be charged to the contract directly or indirectly.

In the absence of a disclosure statement, what matters is consistency with past company practice.

[Corduroy Frog]

Good answer Don.  Thank you.

[ji20874]

I agree that Don's answer is good -- but I am wondering if you are talking about charging for your internal bookkeeping (such as for a fixed-price contract), or if are you talking about charging for payments (such as for a cost-reimbursement contract)?

 

Or, since you mentioned "Fringe," are you wondering about complying with payments to employees under the Service Contract Act or Davis Bacon Act?

[here_2_help]

ji20874,

I believe Mr. Frog is asking about contractor payment of incentive compensation -- bonuses -- to its employees that are not otherwise expressly required by contract terms. He called it a "performance bonus" which strongly implies the employee received the bonus not because the contractor or employer-employee agreement required that it be paid, but because the employee's performance merited it. Had the employee's performance not be of sufficient quality, the bonus presumably would not have been paid.

[ji20874]

I get that.  

If this is a cost-reimbursement contract, do you believe the bonus should be charged as (1) a direct cost by the contractor and reimbursed by the government directly; or (2) an indirect cost?

[joel hoffman]

I would think that it should be charged as a direct cost, since it is paid based upon performance on the specific contract. Thus it would be a cost directly related to performance under the contract (allocable to the contract).

My understanding is that indirect costs are allocable to two or more final cost objectives. The contract shouldn’t be charged for bonuses partially or fully earned on other contracts.

But isn’t a “fringe benefit” a direct cost anyway? I’m not familiar with the difference between direct labor and fringe if both are direct costs of labor for the job.

 

[joel hoffman]

A performance bonus is a perk above and beyond normal pay but would be included as taxable income. Not all fringe benefits may be directly taxable. But what is really the difference ? Does it matter whether charged as a “fringe” vs. “direct labor”? 

[here_2_help]

9 hours ago, ji20874 said:

I get that.  

If this is a cost-reimbursement contract, do you believe the bonus should be charged as (1) a direct cost by the contractor and reimbursed by the government directly; or (2) an indirect cost?

If the question is directed at me, then I think Don answered it along the lines I would have. I would have quoted the same FAR citation and I would have emphasized the same phrase as Don emphasized. The only difference would have been that I would have posted that the contractor must be consistent in direct vs. indirect cost determinations unless the cost is incurred in different circumstances.

The answer to your question is "it depends."

[here_2_help]

8 hours ago, joel hoffman said:

But what is really the difference ? Does it matter whether charged as a “fringe” vs. “direct labor”? 

Oh, yes. Very much so, Joel. Often, direct labor dollars are used as the allocation base for one or more indirect cost pools.

[ji20874]

I agree that it depends.

But I wouldn't want a contractor who is close to finishing the work and who sees that it is under-running to suddenly decide to give bonuses to all of its good employees, since there is money available on the contract for direct charges.

[here_2_help]

28 minutes ago, ji20874 said:

But I wouldn't want a contractor who is close to finishing the work and who sees that it is under-running to suddenly decide to give bonuses to all of its good employees, since there is money available on the contract for direct charges.

Sigh. I know I shouldn't do this. I should just let your post go because you're expressing an opinion. I know I'm going to regret this ...

Recognizing that when a cost is disallowed by the contracting officer, the burden is on the contracting officer to provide a basis for that disallowance (see FAR 42.801 and the clause 52.242-1) -- what would your regulatory basis be for asserting that the costs in question were unallowable? What would be your Part 31 citation?

[ji20874]

I don't know for sure, because I haven't seem everything.  Maybe because it might not be a bonus rendered or pursuant to an established plan or policy followed by the contractor so consistently as to imply, in effect, an agreement to make such a payment -- citation:  FAR 31.205-6(f)(1)(i).  Would this work as a reason? 

Note: If there was such a plan or policy, it would have been known at the time of proposal evaluation and included in the estimated cost of the contract -- thus, it wouldn't catch the Government by surprise during contract administration.  And if the original poster's company had such a plan or policy, he or she would already know that.

I'm wondering -- are you okay with a contractor who is close to finishing the work on a cost-reimbursement contract and who sees that it is under-running to suddenly decide to give bonuses to all of its good employees, since there is money available on the contract for direct charges?

[here_2_help]

1 hour ago, ji20874 said:

I'm wondering -- are you okay with a contractor who is close to finishing the work on a cost-reimbursement contract and who sees that it is under-running to suddenly decide to give bonuses to all of its good employees, since there is money available on the contract for direct charges?

The question is not one of budget or funding availability, the question is whether the contractor, in similar circumstances and for the same purpose, treated the bonuses as being direct or indirect expenses.

If the contractor had never, ever, awarded such performance bonuses before, then it has the choice to elect treatment as either a direct or indirect expense. If the contractor had awarded such bonuses before, then in similar circumstances the treatment must be consistent with prior treatment. (As Don originally posted. I was fine with that response.)

But if the contractor can identify different circumstances, then it is free to treat the bonuses differently than it did in the past, for the new circumstances.

I will add that, if the contractor has elected to treat the bonuses as direct expenses, it would be stupid not to have cleared that decision with the CO prior to implementing it.

 

[ji20874]

2 hours ago, here_2_help said:

If the contractor had never, ever, awarded such performance bonuses before...

Then maybe FAR 31.205-6(f)(1)(i) applies?

2 hours ago, here_2_help said:

I will add that, if the contractor has elected to treat the bonuses as direct expenses, it would be stupid not to have cleared that decision with the CO prior to implementing it.

Agreed -- because otherwise, a prudent contracting officer might disallow the cost as a direct charge and only admit it as an indirect charge.

[here_2_help]

Maybe FAR 31.205-6(f)(1) applies. You could also have cited to 31.201-3(b)(4).

But in the instance where there is no history to look at, it's relatively easy to gin-up a bonus plan. It doesn't have to be especially detailed, and you could fill it with ambiguous weasel words to permit maximum flexibility. It could be a one-page memo and that would pass a lot of scrutiny.

Similarly, one could implement a prospective change to a bonus plan. Say, about 5 minutes before bonus award time. That could work as well.

[ji20874]

I am okay with a bona fide bonus plan, and, if such plan complies with FAR 31.201-3(b)(4) and 31.205-6(f)(1)(i) (and especially the latter citation), I am okay with admitting those costs as indirect charges.  I am troubled by the thought of a contractor who is close to finishing the work on a cost-reimbursement contract and who sees that it is under-running to suddenly decide to give bonuses to all of its good employees, since there is still unspent money available on the contract for more direct charges; provided, the contractor goes through some sham motions to create a plan.  If I were reviewing the original poster's request, I would want to make sure that isn't the case.

[joel hoffman]

11 hours ago, here_2_help said:

Oh, yes. Very much so, Joel. Often, direct labor dollars are used as the allocation base for one or more indirect cost pools.

Thanks, H!