Holding the Government Accountable

White House Backing Down on Contractor Compensation Cap

Updated 5/31/2013

The White House is backing down on its call to significantly reduce the cap on compensation for defense and civilian contractor employees. Last year, the White House proposed reducing the cap to $200,000, roughly equal to a Senate proposal to reduce the cap to $230,700. Despite those efforts, the reduced cap was stripped by the conference committee. Instead, Congress approved a Government Accountability Office report on contractor compensation (Sect. 864).

Now, the White House is backing a significantly higher compensation cap of $400,000 for federal contractor employees. The proposal is in the Defense Department’s legislative package that was sent to Congress in mid-March and, according to Federal News Radio and the file’s metadata, the author of the proposal was an Office of Federal Procurement Policy official.

Currently, defense contractors are permitted to price or seek reimbursement of up to $763,029 in costs for each of their employees’ compensation packages from the government. (The same limit applies to civilian agency contractors, but only for the five most lavishly paid executives. There are no limits on civilian agency contractors beyond the top five.) This is nearly twice the salary of the President of the United States. Reforming the cap would save billions of dollars.

The current formula, enacted in 1997, is based on corporate senior executive compensation packages and has resulted in the cap more than doubling since 1998. The cap increased nearly $70,000 last year, reaching $763,029. Without reform, the FY 2012 cap will exceed $950,000. Yes, it will approach $1 million! The Professional Services Council (PSC), a trade association representing service contractors, is willing to do its part to help the government. The PSC has signaled its willingness to allow the cap to stay (for a short time only) at its current $763,000 price tag, arguing in the past that such reimbursement from the federal government is needed to lure in skilled workers.

The cap does not limit how much contractors can pay their employees—only how much the federal government will recognize for pricing or reimbursement purposes. Private firms are free to compensate employees whatever they desire out of profits.

Debate over the compensation cap has grown heated in recent years. Last week, our friends at the Center for Effective Government (CEG) wrote a letter to the Office of Federal Procurement Policy arguing that the cap should apply to the pricing of fixed priced contracts as well as cost-type contracts. At the same time, contractors are doing their best to stop any reduction in the cap or, in the alternative, limit the cap to cost-type contracts only, which will significantly reduce the taxpayer savings that should be realized. CEG knows the law and offers a well-reasoned argument, so this should lead to a battle between watchdog and contractor cost allowability experts.

We’ll have to see how all of this wrangling shakes out in Congress as the Defense Authorization bill works its way through the House (H.R. 1960) and Senate. However, the White House shift in policy especially inside OFPP, is startling and might be bad news for taxpayers.