Q.  Our CEO has received a substantial raise but, for competitive purposes, we do not want to either bill him out or claim (about 30% of his time is direct) a higher salary rate.  On our cost type contracts, can we keep the same old direct and indirect rates that reflect his old salary or do we need to increase them?

A.  Yes, you may use the lower amount - we do not know of many contracting officers or auditors who will object to a contractor claiming less costs than they incurred.  Assuming the amount of increase and the salary level will not be challenged on reasonableness grounds, we would recommend showing in your incurred cost proposal (or even forward pricing rates) a pool of costs that include the total costs and then insert a line item called “management concession” or “voluntary reduction” or similar title that demonstrates the amount you are voluntarily deducting from the overhead pool.  The purpose of identifying the amount you are reducing rather than simply proposing a lower rate is the management concession may be used as an offset to other questioned costs.  We say “may” because we have seen it work both ways – the auditor will offset questioned costs by the amount deducted while others will not, claiming the reduced rate is the proposed rate and any questioned costs are a reduction from there.

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