The Auditor Strikes Back: Always a Bonus of Contention

calendar iconMay 11, 2020

As we reported in October, the Defense Contract Audit Agency (“DCAA”) Contract Audit Manual (“CAM”) was recently updated. One of the 13 areas of cost updated related to bonus and incentive compensation costs. This topic is covered in Chapter 7 of both the previous version and new version of the CAM.

Bonuses and incentive compensation can mean many things including cash, stock, stock options, stock appreciation rights, phantom stock plans, and/or a combination of the aforementioned forms. Bonus and incentive compensation can also be paid in the short/current term or in the future/long term. These plans can differ greatly between contractors and individual employees based on current position or salary.

In order to determine allowability of bonus and incentive compensation, the auditor needs to first review the plan and obtain a thorough understanding of any unique or unusual terms and conditions of the plan. From there, the auditor can determine the allowability as set forth in Federal Acquisition Regulation (“FAR”) 31.2056.

The definition of these plans and the process of determining allowability remained largely unchanged between the previous version of the CAM and the new version.

The new version of the CAM, however, goes into more depth on each subpart of the FAR and discusses each subpart separately. The new version also quotes the FAR whereas the previous version of the CAM only references the applicable subparts of the FAR leaving the reader to cross walk between the CAM and the FAR on their own.

Both versions explicitly state that bonus and incentive compensation must be adequately supported and must be paid in accordance with the agreement entered into by the contractor and employee prior to any services being rendered:

“FAR 31.205-6(f)(1) Bonuses and Incentive Compensation: Bonuses and incentive compensation are allowable provided the— (i) Awards are paid or accrued under an agreement entered into in good faith between the contractor and the employees before the services are rendered, or pursuant to an established plan or policy followed by the contractor so consistently as to imply, in effect, an agreement to make such a payment; and (ii) Basis for the award is supported.”

The previous version states that compensation based on changes in the prices of corporate securities or corporate security ownership are expressly unallowable. In the new version, such payments are only unallowable in certain circumstances:

“FAR 31.205-6(i) Compensation Based on Changes in the Prices of Corporate Securities or Corporate Security Ownership: Compensation based on changes in the prices of corporate securities or corporate security ownership, such as stock options, stock appreciation rights, phantom stock plans, and junior stock conversions. (1) Any compensation which is calculated, or valued, based on changes in the price of corporate securities is unallowable. (2) Any compensation represented by dividend payments or which is calculated based on dividend payments is unallowable. (3) If a contractor pays an employee in lieu of the employee receiving or exercising a right, option, or benefit which would have been unallowable under this paragraph (i), such payments are also unallowable.”

In the previous version of the CAM, Deferred Compensation Other than Pensions is not specifically discussed in this section of the chapter (7-72123). In the new version, limitations of allowability are outlined:

“FAR 31.205-6(k) Deferred Compensation Other than Pensions: The costs of deferred compensation awards are allowable subject to the following limitations: (1) The costs shall be measured, assigned and allocated in accordance with 48 CFR 9904.415, Accounting for the Cost of Deferred Compensation. (2) The costs of deferred compensation awards are unallowable if the awards are made in periods subsequent to the period when the work being remunerated was performed.”

These three subsections are the only ones specially addressed on the previous version of the CAM. The new version also discusses the allowability and limitations of following:

  • FAR 31.205-6(d)(2) Compensation Paid with Securities
  • FAR 31.205-6(a)(6)(iii) Owners of Closely Held Companies
  • DFARS 231.205-6(f)(1) Part of Restructuring Costs Associated with a Business Combination

Over the next few months, Cherry Bekaert’s Government Contractor Services Group will continue to provide information regarding the other updated areas of cost within the CAM. If you have any questions, please do not hesitate to contact one of our experienced GovCon professionals for assistance.