(Editor’s Note. This past year involved more significant guidelines issued by the Defense Contract Audit Agency than we can remember. The following summarizes some of the most important guidelines DCAA issued to its auditors.)

Executive Comp Cap to Be Applied After Deducting Unallowables

The guidance stressed that the Federal Acquisition Regulation cap on unallowable compensation on federal contracts should be applied only after the executive’s compensation has been adjusted to account for unallowable cost elements. Executives subject to the compensation cap at FAR 31.205-6(p) – contractor’s five most highly compensated executives (or those five executives at each business unit) – may sometime perform activities or be compensated amounts which are unallowable. For example, unallowable activities for which related compensation needs to be adjusted might be for significant lobbying, advertising, reorganization or merger activities which must be deducted as well as unallowable compensation amounts such as stock appreciation rights or changes in the price of corporate securities. In determining whether the senior level executives’ compensation are below the cap – currently $684,181 – auditors are told to make sure that all unallowable cost elements are first deducted from the salary being benchmarked (08-PAC-010(R). (Editor’s Note. Though the audit guidance explicitly addresses OMB caps established for larger companies, informal inquiries we made to DCAA indicate the provisions of the guidance will apply equally to reviews of smaller companies where lower caps are in effect.)

{TAG_FORM_TITLE}