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Lawmakers likely to expand cap on contractor pay

Dec. 14, 2011 - 10:48AM   |  
By SARAH CHACKO   |   Comments
Sen. Barbara Boxer, D-Calif., vowed to continue to work on reining in "exorbitant taxpayer-funded salaries for contractors."
Sen. Barbara Boxer, D-Calif., vowed to continue to work on reining in "exorbitant taxpayer-funded salaries for contractors." (Brendan Hoffman / Getty Images)

Congress is poised to reduce how much the government pays defense contractors as reimbursement for the salaries they give their employees.

The government has a cap on how much it will pay for salaries of each defense contractor's top five executives all other contractor employees are fully reimbursed for their pay regardless of how much it is. Executive compensation is generally part of the overhead rates charged by a contractor.

But Congress appears likely to widen that reimbursement cap to cover all personnel employed by defense contractors.

The legislation is included in the defense authorization bill, which Congress is expected to vote on this week.

The reimbursement cap now is set at $693,951 for the top five executives. That figure is based on a review of the median amount of compensation wages, salary, bonuses and deferred compensation paid to the senior executives of publicly owned U.S. corporations that exceed $50 million in annual sales.

There was disagreement within Congress over whether that cap should be lowered or not the House sought to keep it where it is while the Senate pressed to lower it to $400,000, which is the president's salary, and apply it to all defense contractors.

The conference committee that reconciled differences between the two bills settled on the House version, which would extend the current cap for contractor executives to all employees on defense contracts. The Defense Department also would be authorized to create an exemption for scientists and engineers if officials determine an exemption is necessary to attract skilled workers in those areas. The House and Senate still have to approve the conference committee report.

Sen. Barbara Boxer, D-Calif., who amended the Senate bill, said she will continue to work on reining in "exorbitant taxpayer-funded salaries for contractors."

"It is outrageous that under this bill, defense contractors can continue to charge taxpayers $700,000 a year for their salaries," she said in a statement.

Supporters of the measure to extend the reimbursement cap to all defense contractor employees say it will save the government millions of dollars in overhead and contract labor costs.

No official cost estimates have been released on how much the extended reimbursement caps would save.

Boxer and other sponsors of the Senate provision asked the Joint Select Committee on Deficit Reduction in October to lower the reimbursement rate and expand it to all government contract employees, not just defense contractor employees.

An analysis done by a former Defense executive shows annual savings would range from $712 million with a $700,000 cap on all government contractor compensation to $5 billion with a $200,000 cap on all contractor compensation.

The Office of Management and Budget, which currently determines the compensation cap, could also decide to apply a defense contractor compensation cap to all agencies in the interest of continuity, said Richard Loeb, a former federal procurement executive and current adjunct professor of government contract law at the University of Baltimore law school.

"If the provision passes for the Defense Department, I could see several avenues where there might be authority to apply it governmentwide to include the civilian agencies," said Loeb, a former official at OMB's Office of Federal Procurement Policy.

Rob Burton, a former OFPP deputy administrator, said the savings from any compensation cap will be nominal because contractors eventually recoup their costs through price increases that they can say are due to inflation or other expenses.

"There's a fear that the contractors are going to make up that money in other overhead," said Scott Amey, general counsel for the Project on Government Oversight, "but this is where the government has to make sure that the reductions are applied."

If the measure takes effect, federal auditors would have to expand their efforts to ensure compensation caps are being applied to all contract employees, Amey said.

Ultimately, the cap is not a savings issue but a policy issue regarding how tax dollars are spent on private employees' compensation, Burton said.

It's "like how the government doesn't pay for alcoholic beverages," Burton said. "It's not necessarily a cost issue. It doesn't look good. It doesn't look good for the American taxpayer to be paying millions of dollars to reimburse contractor executives for compensation."

A group of industry and trade associations called the Acquisition Reform Working Group, which includes the Professional Services Council, National Defense Industrial Association and U.S. Chamber of Commerce, oppose lowering the cap and extending the cap beyond contractor senior executives because it would limit the ability of contractors to compete with their industry peers for talented, skilled workers.

Contractors can continue to pay their employees whatever they want, Boxer said in previous statements about the bill. But there is no reason taxpayers should pay contractors more than they pay the president, she said.

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