Compensation is probably one of the largest costs under a government contract. No wonder this cost continues to be scrutinized by the regulators. As such, it is not surprising Federal Acquisition Regulation (FAR) 31.205-6 “Compensation for personal services” is one of the longest FAR cost principles that has been revised numerous times.
According to FAR, “Compensation for personal services includes all remuneration paid currently or accrued, in whatever form and whether paid immediately or deferred, for services rendered by employees to the contractor during the period of contract performance.”
Employee bonuses are part of companies’ compensation plans and government contractors should be extra careful to ensure their bonus plan will qualify as an allowable cost.
What can you do to ensure your company’s bonus plan will qualify as an allowable cost?
- Have a written bonus plan in place as of the beginning of each year. Or at least implement the bonus plan before the services are rendered. Play it safe. Run the bonus plan by the contracting officer to verify the allowability of the costs.
- Include measurable criteria on which the bonus will be paid and ensure your employees have a clear understanding of the criteria. Use clearly measurable criteria, such as rankings in client satisfaction, increasing production levels, reducing costs, achieving new business goals, maintaining or improving specific financial ratios, etc.
- Your company’s bonus plan should be performance based. If you pay the bonus based on ownership percentage, the DCAA will view it as distribution of profits, which is a non-allowable cost.
The bonus plan is part of a company’s compensation program. As a government contractor your goal is to develop a reasonable compensation plan. A reasonable compensation plan will ensure your company’s compensation plan will be considered an allowable cost under your government contract. A compensation plan is reasonable if the total compensation is overall similar to the compensation paid by other companies of similar size, in the same geographical area and industry for similar non-government services. To play it safe, each element of the compensation plan should meet the “reasonableness” criteria, including your bonus plan. Otherwise, please be prepared to justify your compensation plan decisions to the DCAA auditor or your contracting officer, as most probably they will question anything outside of the “reasonableness” criteria.
For each allowable compensation cost specified in FAR, there is a long list of conditions that have to be met. This would make it a risky endeavor to attempt listing them briefly in this article, without going into all the restriction details. Contact us at 321-426-3040 instead so we can review the particulars of your government cost accounting system, your company’s compensation plan, and the bonus structure. We can help you ensure your costs are allowable, you can successfully submit your rates, and pass the DCAA audit with flying colors.