81 FR 67778 - Federal Acquisition Regulation: Limitation on Allowable Government Contractor Employee Compensation Costs

DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

Federal Register Volume 81, Issue 190 (September 30, 2016)

DoD, GSA and NASA are adopting as final, with changes, an interim rule amending the Federal Acquisition Regulation (FAR) to implement a section of the Bipartisan Budget Act of 2013. The final rule revises the allowable cost limit relative to the compensation of contractor and subcontractor employees. Also, this final rule implements the narrowly targeted exception to this allowable cost limit for scientists, engineers, or other specialists upon an agency determination that such exceptions are needed to ensure that the executive agency has continued access to needed skills and capabilities.

[Federal Register Volume 81, Number 190 (Friday, September 30, 2016)]
[Rules and Regulations]
[Pages 67778-67780]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-23204]


-----------------------------------------------------------------------

DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Part 31

[FAC 2005-91; FAR Case 2014-012; Item X; Docket No. 2014-0012; Sequence 
No. 1]
RIN 9000-AM75


Federal Acquisition Regulation: Limitation on Allowable 
Government Contractor Employee Compensation Costs

AGENCY: Department of Defense (DoD), General Services Administration 
(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: DoD, GSA and NASA are adopting as final, with changes, an 
interim rule amending the Federal Acquisition Regulation (FAR) to 
implement a section of the Bipartisan Budget Act of 2013. The final 
rule revises the allowable cost limit relative to the compensation of 
contractor and subcontractor employees. Also, this final rule 
implements the narrowly targeted exception to this allowable cost limit 
for scientists, engineers, or other specialists upon an agency 
determination that such exceptions are needed to ensure that the 
executive agency has continued access to needed skills and 
capabilities.

DATES: Effective: September 30, 2016.

FOR FURTHER INFORMATION CONTACT: Ms. Kathlyn J. Hopkins, Procurement 
Analyst, at 202-969-7226, for clarification of content. For information 
pertaining to status or publication schedules, contact the Regulatory 
Secretariat Division at 202-501-4755. Please cite FAC 2005-91, FAR Case 
2014-012.

SUPPLEMENTARY INFORMATION:

I. Background

    DoD, GSA, and NASA published an interim rule in the Federal 
Register at 79 FR 35865 on June 24, 2014, to implement section 702 of 
The Bipartisan Budget Act of 2013 (Pub. L. 113-67), which amended the 
allowable cost limits of contractor and subcontractor employee 
compensation. Specifically, section 702 revised the application of the 
compensation cap, the amount of the cap, and the associated formula for 
annually adjusting it. The existing formula for determining the limit 
on the allowability of contractor and subcontractor employee 
compensation costs under 41 U.S.C. 1127 was repealed for contracts 
awarded on or after June 24, 2014. Section 702 of the law set the 
initial limitation on allowable contractor and subcontractor employee 
compensation costs at $487,000 per year, which will be adjusted 
annually to reflect the change in the Employment Cost Index for all 
workers as calculated by the Bureau of Labor Statistics. This final 
rule also implements the authority provided by 10 U.S.C. 2324(e)(1)(P) 
and 41 U.S.C. 4304(a)(16), as amended by section 702(a), in which 
Congress has authorized the heads of Executive agencies to establish 
``one or more narrowly targeted exceptions for scientists, engineers, 
or other specialists upon a determination that such exceptions are 
needed to ensure that the executive agency has continued access to 
needed skills and capabilities.''

II. Discussion and Analysis

    The Civilian Agency Acquisition Council and the Defense Acquisition 
Regulations Council (the Councils) reviewed the public comments in the 
development of the final rule. A discussion of the comments is provided 
as follows:

A. Summary of Significant Changes

    This final rule adopts the interim rule with four changes for 
clarification.
     The first clarification entails the addition of a table to 
FAR 31.205-6(p) that summarizes the applicability dates contained in 
this FAR section.
     The second clarification concerns the reorganization of 
the FAR text. Existing FAR paragraph 31.205-6(p)(4) has become new 
paragraph (p)(1), with existing paragraph (p)(1) becoming new paragraph 
(p)(2). Existing FAR paragraphs 31.205-6(p)(2) and (p)(3) have become 
new paragraphs (p)(3) and (p)(4), respectively.
     The third clarification entails the removal of the 
following redundant FAR 31.205-6 text:
    [cir] Paragraph (p)(2)(ii) text ``Costs incurred after January 1, 
1998.''
    [cir] Paragraph (p)(3)(ii) text ``Costs incurred after January 1, 
2012.''
    [cir] Paragraph (p)(4)(ii) text ``Costs incurred on or after June 
24, 2014.''
     The fourth clarification entails reference links in 
paragraphs (p)(2) and (p)(3) (see https://www.whitehouse.gov/omb/procurement_index_exec_comp/)

[[Page 67779]]

and another reference link in paragraph (p)(4) (see http://www.whitehouse.gov/omb/procurement/cecp). Additionally, some statutory 
references and explanatory text were added in FAR paragraphs 31.205-
6(p)(3) and (p)(4).

B. Analysis of Public Comments

    The Regulatory Secretariat Division received responses from three 
respondents to the interim rule, which are discussed below:
1. Support for the Rule
    Comment: One respondent strongly supported the interim rule and 
applauded the FAR issuing agencies for meeting the statutory deadline 
for issuance of this rule.
    Response: The Government notes the public support for this rule.
2. Application of Rule to Nonprofit Organizations
    Comment: One respondent stated that the rule only referenced FAR 
31.205-6. Respondent questioned whether this means that the new 
compensation cap will only apply to contractors or subcontractors that 
follow this FAR section; would a nonprofit organization that complies 
with FAR subpart 31.7 be exempt from the compensation cap; or will FAR 
subpart 31.7 be amended as well.
    Response: A nonprofit organization that complies with FAR subpart 
31.7 is not exempt from the compensation cap in this rule. Previously, 
FAR 31.702 referenced the Office of Management and Budget (OMB) 
Circular Number A-122, Cost Principles for Non-Profit Organizations. 
The recent FAR case 2014-023 updated the reference from OMB Circular A-
122 to the revised OMB Uniform Guidance at 2 CFR 200, subpart E, and 
applicable appendices, as in effect on the date of the contract, which 
references the statutory compensation ceilings. These cost principles 
reference the compensation cap contained in this FAR rule.
3. Retroactive Application of Rule Not Appropriate
    Comment: The interim rule stated that the revised compensation cap 
``will apply to the costs of compensation for all contractor and 
subcontractor employees for contracts awarded, and cost incurred, on or 
after June 24, 2014.'' One respondent stated that reading this sentence 
literally, the interim rule provides that all executive compensation 
costs are subject to the revised cap no matter when the contracts to 
which such costs are allocated were awarded which makes application of 
the rule retroactive which is inappropriate.
    Response: The rule applies to costs incurred on contracts awarded 
on or after June 24, 2014, and does not apply retroactively to 
contracts awarded before June 24, 2014. For further clarification, 
Table 31.1 has been added as a summary of the applicability of the 
three compensation caps.
4. Application of Rule to Fixed-Price Contracts
    Comment: One respondent requested that specific preamble language 
be included in the final rule that reinforces the existing FAR part 31 
language which specifies the application of the cost principles to 
fixed-price contracts whenever cost analysis is performed. Respondent 
also stated that by allowing fixed-price contracts that are subject to 
cost analysis to evade this compensation cap defeats Congressional 
intent and costs taxpayers significantly.
    Response: The reinforcement of this existing FAR part 31 language 
is unnecessary. This FAR rule revises FAR 31.205-6 specifically 
regarding the allowability of executive compensation. Other FAR cost 
principle sections such as 31.102 remain unchanged in their application 
and use, including when the cost principles are applicable to fixed-
price contracts.

III. Executive Orders 12866 and 13563

    Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). E.O. 
13563 emphasizes the importance of quantifying both costs and benefits, 
of reducing costs, of harmonizing rules, and of promoting flexibility. 
This is a significant regulatory action and, therefore, was subject to 
review under Section 6(b) of E.O. 12866, Regulatory Planning and 
Review, dated September 30, 1993. This rule is not a major rule under 5 
U.S.C. 804.

IV. Regulatory Flexibility Act

    DoD, GSA, and NASA have prepared a Final Regulatory Flexibility 
Analysis (FRFA) consistent with the Regulatory Flexibility Act, 5 
U.S.C. 601, et seq. The FRFA is summarized as follows:

    DoD, GSA, and NASA do not expect this rule to have a significant 
economic impact on a substantial number of small entities within the 
meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. 
because, an analysis of data in the Federal Procurement Data System 
(FPDS) revealed that most contracts awarded to small entities are 
awarded on a fixed-price basis, and do not require application of 
the cost principle contained in this rule.
    The rule imposes no reporting, recordkeeping, or other 
information collection requirements. The rule does not duplicate, 
overlap, or conflict with any other Federal rules, and there are no 
known significant alternatives to the rule.

    Interested parties may obtain a copy of the FRFA from the 
Regulatory Secretariat. The Regulatory Secretariat has submitted a copy 
of the FRFA to the Chief Counsel for Advocacy of the Small Business 
Administration.

V. Paperwork Reduction Act

    The rule does not contain any information collection requirements 
that require the approval of the Office of Management and Budget under 
the Paperwork Act (44 U.S.C. chapter 35).

List of Subject in 48 CFR Part 31

    Government procurement.

    Dated: September 19, 2016.
William F. Clark,
Director, Office of Government-wide Acquisition Policy, Office of 
Acquisition Policy, Office of Government-wide Policy.

Interim Rule Adopted As Final With Changes

0
Accordingly, the interim rule amending 48 CFR part 31 which was 
published in the Federal Register at 79 FR 35865 on June 24, 2014, is 
adopted as a final rule with the following changes:

PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES

0
1. The authority citation for 48 CFR part 31 continues to read as 
follows:

    Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 51 
U.S.C. 20113.


0
2. Amend section 31.205-6 by revising paragraph (p) to read as follows:


31.205-6   Compensation for personal services.

* * * * *
    (p) Limitation on allowability of compensation.

[[Page 67780]]



                                    Table 31-1--Employee Compensation Limits
----------------------------------------------------------------------------------------------------------------
         Contract award date               Applicable agencies         Covered employees          31.205-6
----------------------------------------------------------------------------------------------------------------
Before June 24, 2014................  Executive Agencies Other      Senior Executive......  (p)(2).
                                       than DoD, NASA and Coast
                                       Guard.
Before December 31, 2011............  DoD, NASA and Coast Guard...  Senior Executive......  (p)(2).
On/after December 31, 2011, and       DoD, NASA, and Coast Guard..  All Employees.........  (p)(3).
 before June 24, 2014.
On/after June 24, 2014..............  All Executive Agencies......  All Employees.........  (p)(4).
----------------------------------------------------------------------------------------------------------------

    (1) Definitions. As used in this paragraph (p)--
    (i) Compensation means the total amount of wages, salary, bonuses, 
deferred compensation (see paragraph (k) of this subsection), and 
employer contributions to defined contribution pension plans (see 
paragraphs (j)(4) and (q) of this subsection), for the fiscal year, 
whether paid, earned, or otherwise accruing, as recorded in the 
contractor's cost accounting records for the fiscal year.
    (ii) Senior executive means--
    (A) Prior to January 2, 1999--
    (1) The Chief Executive Officer (CEO) or any individual acting in a 
similar capacity at the contractor's headquarters;
    (2) The four most highly compensated employees in management 
positions at the contractor's headquarters, other than the CEO; and
    (3) If the contractor has intermediate home offices or segments 
that report directly to the contractor's headquarters, the five most 
highly compensated employees in management positions at each such 
intermediate home office or segment.
    (B) Effective January 2, 1999, the five most highly compensated 
employees in management positions at each home office and each segment 
of the contractor, whether or not the home office or segment reports 
directly to the contractor's headquarters.
    (iii) Fiscal year means the fiscal year established by the 
contractor for accounting purposes.
    (iv) Contractor's headquarters means the highest organizational 
level from which executive compensation costs are allocated to 
Government contracts.
    (2) Senior executive compensation limit for contracts awarded 
before June 24, 2014--(i) Applicability. This paragraph (p)(2) applies 
to the following:
    (A) To all executive agencies, other than DoD, NASA and the Coast 
Guard, for contracts awarded before June 24, 2014;
    (B) To DoD, NASA, and the Coast Guard for contracts awarded before 
December 31, 2011;
    (ii) Costs incurred after January 1, 1998, for the compensation of 
a senior executive in excess of the benchmark compensation amount 
determined applicable for the contractor fiscal year by the 
Administrator, Office of Federal Procurement Policy (OFPP), under 41 
U.S.C. 1127 as in effect prior to June 24, 2014, are unallowable (10 
U.S.C. 2324(e)(1)(P) and 41 U.S.C. 4304(a)(16), as in effect prior to 
June 24, 2014). This limitation is the sole statutory limitation on 
allowable senior executive compensation costs incurred after January 1, 
1998, under contracts awarded before June 24, 2014, and applies whether 
or not the affected contracts were previously subject to a statutory 
limitation on such costs. (Note that pursuant to section 804 of Pub. L. 
105-261, the definition of ``senior executive'' in paragraph (p)(1) of 
this section has been changed for compensation costs incurred after 
January 1, 1999.) See https://www.whitehouse.gov/omb/procurement_index_exec_comp/.
    (3) All employee compensation limit for contracts awarded before 
June 24, 2014.
    (i) Applicability. This paragraph (p)(3) applies to DOD, NASA, and 
the Coast Guard for contracts awarded on or after December 31, 2011, 
and before June 24, 2014.
    (ii) Costs incurred after January 1, 2012, for the compensation of 
any contractor employee in excess of the benchmark compensation amount, 
determined applicable for the contractor fiscal year by the 
Administrator, Office of Federal Procurement Policy (OFPP) under 41 
U.S.C. 1127 as in effect prior to June 24, 2014 are unallowable (10 
U.S.C. 2324(e)(1)(P) as in effect prior to June 24, 2014.) This 
limitation is the sole statutory limitation on allowable employee 
compensation costs incurred after January 1, 2012, under contracts 
awarded on or after December 31, 2011 and before June 24, 2014. (Note 
that pursuant to section 803 of Pub. L. 112-81, 10 U.S.C. 2324, 
Allowable costs under defense contracts, was amended by striking 
``senior executives'' and inserting ``any contractor employee'', making 
unallowable the excess compensation costs incurred after January 1, 
2012, under affected contracts.) See https://www.whitehouse.gov/omb/procurement_index_exec_comp/.
    (4) All employee compensation limit for contracts awarded on or 
after June 24, 2014.
    (i) Applicability. This paragraph (p)(4) applies to all executive 
agency contracts awarded on or after June 24, 2014, and any 
subcontracts thereunder.
    (ii) Costs incurred on or after June 24, 2014, for the compensation 
of all employees in excess of the benchmark compensation amount 
determined applicable for the contractor fiscal year by the 
Administrator, Office of Federal Procurement Policy (OFPP) are 
unallowable under 10 U.S.C. 2324(e)(1)(P) and 41 U.S.C. 4304(a)(16), as 
in effect on or after June 24, 2014, pursuant to section 702 of Public 
Law 113-67. This limitation is the sole statutory limitation on 
allowable employee compensation costs incurred on or after June 24, 
2014, under contracts awarded on or after June 24, 2014. See http://www.whitehouse.gov/omb/procurement/cecp.
    (iii) Exceptions. An agency head may establish one or more narrowly 
targeted exceptions for scientists, engineers, or other specialists 
upon a determination that such exceptions are needed to ensure that the 
executive agency has continued access to needed skills and 
capabilities. In making such a determination, the agency shall 
consider, at a minimum, for each contractor employee in a narrowly 
targeted excepted position--
    (A) The amount of taxpayer funded compensation to be received by 
each employee; and
    (B) The duties and services performed by each employee.

[FR Doc. 2016-23204 Filed 9-29-16; 8:45 am]
BILLING CODE 6820-EP-P