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Audit Alert Issued for DCMA Implementation Guidance on Blended Compensation Caps

On February 19, 2016, the Defense Contract Audit Agency (“DCAA”) issued Memorandum for Regional Directors (“MRD”) 16-PSP-005(R), Audit Alert on DCMA Implementation Guidance on Blended Compensation Caps. The Alert provides auditors with official guidance when dealing with blended compensation caps with contractors, and in tandem with the Defense Contract Management Agency (“DCMA”).

What does this mean?

Let’s take a few steps back to October 2014, when Shay Assad, the Director of Defense Pricing Acquisition Technology, and Logistics OUSD (“AT&L”), issued a memo stating that use of a blended rate is deemed “practical and cost efficient.” This was in reaction to the revisions to Federal Acquisition Regulation (“FAR”) 31.205-6(p), which established new cost limitations on compensation as a result of the Bipartisan Budget Act of 2013. Additionally, the memo stated that contractors may elect to use a blended rate, manage multiple compensation caps, or assume a compensation limit of $487,000 for all employees, which is indeed the most conservative (and arguably) easiest method to manage. The memo concluded stating that DCMA and DCAA will issue guidance on the blended cap approach.

About a year and a half later, DCMA and DCAA have officially broken their silence on how blended compensation caps will be handled by both agencies. DCAA’s MRD, which includes the aforementioned AT&L memo and DCMA’s memo issued on January 29, 2016, features the following high points:

  • The blended cap for each year (starting in 2012 and beyond) should have an accurate, auditable, and verifiable basis for the blended cap compensation.
  • For final overhead rates, DCAA should audit the data to ensure the cap is properly calculated and applied.
  • If a contractor decides to use a blended cap approach, the Administrative Contracting Officer will need to execute an advance agreement which will include the process and frequency for how often auditable data is to be provided from the contractor; and the expiration date for the blended compensation cap method.
  • For those contractors with Cost Accounting Standards covered contracts, the DCMA memo states that use of a blended compensation cap would not be an accounting change, presumptive that the contractor does not make any other changes in tandem with the adoption of this practice for rate calculation purposes.

Both memos provide extensive guidance and examples on how DCAA and DCMA plan to approach the review, coordination, and administration of blended compensation caps. If you are a contractor who has been using the blended compensation cap method, or are planning to use this method, close review of this memorandum may help aid facilitating how to develop and how to manage the blended caps.

For questions related to this MRD or blended compensation caps, feel free to contact a member of Cherry Bekaert’s Government Contractor Services Group.

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