FAR 31.205-6(b) requires each allowable element making up an employee’s compensation package must be reasonable. The allowable elements commonly include wages and salaries, bonuses, deferred compensation and fringe benefits (e.g. pensions and savings plans, health and life insurance and compensated absences). Each allowable element of the compensation package will be compared with data of other firms as long as they are representative of the labor market for jobs being evaluated. The most likely medium for obtaining compensation data is market pay surveys. When evaluating reasonableness of the elements there should be general conformity with its compensation practices of other firms of the same size, in the same industry, the same geographic area, those engaged in predominately non-government work and the costs of comparable services obtained from outside services. DCAA defines these bases of comparability as follows:

Geographic area. Compares firms in the same locale or regional area.

Size. Refers to number of employees or sales volume.

Industry. Means comparisons with firms producing similar products or providing similar services. Examples of industries cited in the guidance includes shipbuilding, aerospace, electrical/electronics, office equipment and computers or research and development. Contractors’ specific industry may be identified by its Standard Industrial Classification (SIC) codes or as of January 1997, its North American Industry Classification System (NAICS). The guidance reminds auditors that compensation survey data often combines several SIC or NAICS codes into groups that are surveyed.

Non-government work. Refers to firms with non-government annual sales of 50 percent.

Comparable Services from firms outside of the contractor. Refers to services which are readily provided by outside contracting services (e.g. janitorial services).

DCAA recognizes that different factors may more heavily influence the relevant market. Generally the contractor competes with other firms for similarly skilled employees or the source of supply. So the geographic area may be key but need not be the same for each labor category. For example, non-exempt clerical or production workers may compete in local markets while exempt jobs (administrative, professional and management) may compete on a regional or national level. For salaries and benefits, size of firm may be critical for executive pay but less for other categories.

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