Compensation Cap on Federal Contractors, Latest FAR Requirement

ed murphy

Article Ed Murphy – CEO at Financial Management Institute

For an explanation of the recent FAR change imposing a new employee compensation cap on federal contractors, go visit:




The recently revised FAR Part 31 cost principles neither preclude nor forbid contractors from incurring employee compensation in excess of the cap. Instead they make employee compensation in excess of the cap unallowable in determining or negotiating the contract price. But only when the FAR Part 31 cost principles apply. And they don’t always apply! For example, any fixed-price type contract where the price is market-based.

But cost reimbursement and other flexibly priced contracts will be affected by this change. As will those fixed price contracts where cost analysis and related FAR 31 cost principles are used to negotiate the contract price.

So how will the change impact you or your government contractor clients? You decide.

The impact will be zero, if…

No employee earns compensation in excess of the cap, or
All business with Uncle Sam or prime contractors is based on “bottom-line” market based selling prices.

The impact may be minimum or insignificant depending on —

The dollar value of aggregate compensation in excess of the cap;
How and where the excess is recorded (direct or indirect costs); and
The mix of contracts based on market-based vs, cost-based pricing.

My opinion, for what it’s worth.

Take good care of yourselves. Or as Garrison Keillor would say “Be well, do good work, and keep in touch.”
federalregister.gov federalregister.gov

Five Years; time to give back to our wonderful readers! Part 1 of 4:

As Arrowhead celebrates our 5th anniversary, we realize that we could not have done it without all the support from you – our readers and clients!

To give back, we’d like to share some government contracting tips and tricks so that you can be the best government contractor possible. Each week, throughout the month of March, we’re going to be posting 5 tips to celebrate 5 years. Cheers!

This week’s post: Government Contracting: Tips and Tricks Part 1 – DCAA and Government Accounting

#1: Ask “How would we fair during a DCAA audit?” Not sure? Try a mock audit with Arrowhead’s experts on the other side of the table before there is DCAA in the picture.

#2: Make sure you know what wrap rate means. Need a refresher?

#3: Be familiar with indirect and direct rates. Read On…

#4: Read RFQs carefully – response instructions must be followed exactly as stated.

#5: Make sure to time your GSA proposal right  (if you have one). Not sure? Just call Arrowhead and we’ll help you sort it out. Don’t know if you really need a GSA? You could be right. Not all companies can benefit from being on a GSA Schedule. Arrowhead will also help you sort this out.

Don’t forget to follow Arrowhead Solutions on Twitter (@arrowheadllc) for daily tips, too!

See you next week!

What Does The Term Wrap Rate Mean?

Also referred to as the direct labor “multiplier”, it is a fully burdened labor rate – the rate at which an organization must bill out its direct labor units to cover its direct and indirect costs; before any profit is made.

For an organization to break even on a total cost basis – each unit of direct labor must cover the direct costs of that labor plus a proportionate share of the organizations indirects – fringe, overhead, g&a etc.

Understanding how to calculate these rates is crucial for a services based organization. Simply guessing at a labor rate in a proposal could be disastrous and costly for an organization, especially in a multiyear proposal where rates are locked in for several years.

Make sure you start with a solid budget. Understand what your staffing costs are and how they will change in the budget period.

Understand what your fringe benefits, overhead costs and g&a costs are comprised of and if they will change as your organization grows.

So the wrap rate for $1 of direct labor is the burdened rate that effectively covers all the direct and indirect costs necessary to support that labor, it could typically be anywhere from $1.50 to $2.25 for a small business.

Indirect Rates: Government vs. Commercial

I am interested in your feedback!

Does your company (or your client) separate their indirect pools for government contracts from commercial contracts?

In assessing the cost / benefit for clients I am curious as to what strategies small government contractors are using to manage this process without overburdening the accounting department.

GSA Schedules – Opinions Change

For so long, the common belief among my government colleagues was that GSA is inappropriate and took “work” away  from contracting offices for the procurement of services.  Primarily, those services offered on Schedules like LOGWORLD, MOBIS, PES, and IT 70 were routinely purchased outside of GSA.  I remember when I worked for the Air Force that even the mention of using a GSA Schedule to procure engineering services was met with scorn and dirty looks.  The Industrial Funding Fee and the fact that GSA wasn’t in line with Air Force contracting principles were the two arguments most commonly heard.

Over time, some agencies have been more open to using GSA Schedules than others. These same agencies have also procured certain products and services using Schedules, more than other products and services.  As time moved on, companies arose (and we have blogged on this topic before) convincing every small business in site that they NEED a GSA Schedule in order to do business with the government.  The GSA Shops provided these companies with Schedules that these companies did not need and did not sell anything on and therefore the Schedules were taken away by GSA.

However, the legend continued (and does to this day) and so the influx of proposals to GSA kept growing, and then so did the review times of proposals by GSA.  Just within this year, Arrowhead had cautioned small businesses about going after a GSA Schedule.  Our concerns were based around these long review times and our findings regarding slow agency activity using GSA for certain professional services.

How quickly times and opinions change this day and age.  What we’re hearing through the grapevine and seeing in actual practice is an uptick in the government using GSA and GSA dedicating more resources to reviewing proposals to cut the lead time.  From what we are hearing, due to the ever increasing burdens on contracting officers in their normal course of procurement, GSA is looking like a beacon of hope to get requirements met.  But doesn’t that mean the government is commoditizing and limiting competition of highly specialized services?  Yes, it does. But, it gets the job done from what we have been told.

We say “commoditizing” because GSA is intended to allow the government to use the services out there in the commercial world for their own commercial-type needs.  However, “commercial” is being stretched and pulled to pretty much cover any service the government needs. We say “limiting competition” because a CO can just pull up a handful of companies at random from the GSA eLibrary list by SIN and choose a few to send a solicitation to.  No FBO listing, no GSA eBuy competition.

Using GSA, the government CO’s can cut their processing times, avoid rate negotiations, avoid Ts and Cs negotiations, avoid agency specific internal reviews, and the list goes on.  The more red tape wrapped around the CO’s, the more we hear them trying to use GSA for some of the most non-commercial things just so they can “get things done” and make their own customers happy.

Of course agencies do have their huge own MAS’s that function in pretty much the same way (DESP III for Air Force, SeaPort-e for Navy, etc.)  But if you miss the boat during the one proposal time of year or one proposal time every 5  or 10 years, then you’re out of luck.  GSA has rolling admissions, so the door is open to obtain this tool whenever a company is ready.

It still takes a long time (average 12 months for the most popular Schedules) to get into this game, but once you do, and once you find that customer who likes you, GSA Schedules are looking more and more like the tool that may help out both parties.  Still be cautioned on if GSA is right for you, but the potential that it is right for you may be more true than ever before.

What will 2011 bring for government contracting?

On Face the Nation the other Sunday, the panel of reporters was asked to provide their predictions for 2011.  It will be interesting to see what materializes and who was right come this time next year.  This got me thinking about what 2011 may bring for our industry; one that is rarely ever spotlighted (unless there is some sort of drama). Although in our world the new year started on October 1st, it seems January 1st is still a significant milestone for us all.

This past year we saw GTSI get burned a bit and I don’t believe that the microscope will be lifted in 2011.  In fact, according to the WashingtonTechnology.com article, “Contract management becomes top priority for the White House”, the scrutiny will only get more intense.  The December 13th article quotes Dan Gordon, administrator of the Office of Federal Procurement Policy as stating, “We have got to stop situations where everybody knows that there are sham arrangements going on out there, but no one pays attention. We’re paying attention,” he adds,“We are taking this seriously, folks.”

Scrutiny, oversight, and better agency contract management is what government contracting in 2011 needs.  Post award management is crucial and hasn’t been given as much attention as preaward functions have in recent decades.  Granted, the preaward phase is critical to saving money with planning and selecting qualified suppliers. However, if a contractor goes on their merry way and the contract is left to collect dust until closeout, problems, and thus costs, will arise.  As the WashingtonTechnology.com article states, management and communication make all the difference in a successful acquisition and I couldn’t agree more.

What about the budget?  Let’s talk DOD.  According to the White House’s website, “The 2011 Budget for DOD provides $548.9 billion for the Department of Defense base budget in 2011, a 3.4 percent increase over the 2010 enacted level. This funding increase allows DOD to address its highest priorities, such as the President’s commitment to reform defense acquisition, develop a ballistic missile defense system that addresses modern threats, and continue to provide high quality health care to wounded servicemembers.” Notice the first priority listed? Reform of defense acquisition!

These numbers are good news for small business contractors.  More money directly from the DOD and through primes.  We’ll just have to see what the funding looks like once it is actually signed into law. The House passed a stripped down version of the bill on the 17th.  Here are the details of the reform points:

  • Ends the C-17 aircraft program because additional aircraft are not needed, saving $2.5 billion.
  • Eliminates the Joint Strike Fighter (JSF) Alternate Engine program, saving $465 million, because this program raises logistical, management, and cost concerns.
  • Saves an additional $73 million by terminating the Third Generation Infrared Surveillance program, and instead procures upgraded Space Based Infrared System Satellites in the future; it saves $8.5 million more by eliminating the Net-Enabled Command Capability program, which has been unable to meet its requirements on schedule.
  • Reduces the use of high-risk contracts in areas that relate to time-and-materials and labor hours by 17 percent through the end of 2011, and takes steps to ensure that military requirements for weapons are reasonable, program costs and schedules are realistic, and acquisition funding is stable and affordable.
  • Implement the Weapon Systems Acquisition Reform Act.

With the reduction of T&M contracts, will this cause more small businesses to consider getting their systems ready for DCAA audit so they can compete on the Cost Type RFPs?  I actually hope so – although not a high priority for many small businesses who are comfy in their T&M contracts, having their accounting systems get approved may provide an edge in 2011.

Money, reform and the ever constant march of the government contracting life-cycle should make this a good year!

Creative Acquisition

When I was working for the Air Force, I would hear the term Creative Contracting being dropped by my COs.  It was a way to get things done and it was a term used to urge the contracting folks on by our program people.  I think the descriptor “creative” is the best way to describe how to accomplish a complicated field.  Hence, the title of this blog.

I’ve been on both the buy and sell side of government contracting. Buying = Acquisition.  So today’s temporary blog title is “Creative Acquisition”.  When a Contracting Officer friend of mine at the DOE sent me an online news story about the DAU’s new gaming site that anyone can play at any time, I thought it was an e-mail joke circulating through the office.  This looks like something me and my fellow OSCAPS (we’ll leave the acronym undefined to protect the innocent) would have made up to combat boredom during that time of year everyone was on use or lose except for us.

But no, this is for real. DAU has a whole suite of games for us all to play whenever we want.  From Treasure Cheese to Acquisition Proposition to Ratner Racing.  I really don’t have the time during my day to play games, but too tempting.  Here is my report:

Operation Sticky Notes: Ratner must navigate through a myriad of obstacles and avoid pesky critters in an effort to help his student friends acquire the necessary skills/requirements needed to compete for the upcoming CAS (Cost Accounting Superstars) competition.

Ok – I learned that I have a lot of trouble jumping as a little rat.  The dusty blobs will shock me and did many times. I fell off desks.  And, I had trouble remembering what question I was trying to answer (you answer questions by picking up sticky notes) since I was attempting to survive. Did I learn anything beneficial? Yes. The real definition of Outlay.

My take?  I don’t have time this morning  to play this game to completion. But, I can see if I had found this game as an OSCAP back in the day I know how I would have spent all the days between Christmas and New Year’s at the office.  Truthfully, one can probably learn some from these games.  But I’m on the fence on the benefit to our acquisition community vs. the cost of implementation and assumed loss of productivity.

If you’d like to spend time you probably don’t have either, but can appreciate the creativity of Acquisition, go for it. Watch out, this stuff is addicting I’m told!


A Case for Small Business Size Redefinition

I just finished reading the SBA’s “Size Standards Methodology” White Paper (yes, I do this for fun).  This white paper is relatively new with an April 2009 publication date. It clearly spells out how the SBA has determined size standards for NAICS codes.  Complete with fancy equations! Equations however do not fit our small business world. Logic should.

The reason I went looking for such a good read is that, here at Arrowhead, we have a constant discussion about the “real and true small businesses” lost in these SBA size standards.  The question keeps coming up, “How can XYZ company be SMALL?!”  The answer is – because SBA has determined either a dollar threshold or employee number they consider to be small. However, I submit that these numbers absolutely do not provide a fair battleground for small business.

Example – Army releases a total small business set-aside for an IT services contract. IDIQ, option years, CPFF terms, lots of labor categories, etc.  Nothing too huge, doable by a small business for sure. You get the picture.  There are a few interested parties (we’ll forego the large business with a small business front for now – we all know it happens). So that leaves us a couple good generic offerors.

Offeror #1 stats: Small Business, receipts of $4.5M, 200 employees.

Offeror #2: Small Business, receipts of $1M, 25 employees.

Both are small business, both fall under the size standard threshold for any NAICS you want to throw at it for IT Services. Who has the advantage?  Oh, but it is open competition – it is equal! Not in our book.  Offeror #1 has total advantage.

It’s like trying to determine who has a better chance of selling you your first car. Mr. Everyone-Knows-My-Name Auto in Denver or Mr. Pine Auto down the street from our office.  They can both fulfill the same need – they can sell you the same great car.  However, Mr. Everyone has full time salespeople who have experience, a fancy package in their building and lights, has more negotiating power, can dip into his overhead, tv commercials even.  Mr. Pine Auto has a car, him  and maybe his brother-in-law, a small Tuff-Shed looking office, and hand written sign.  Mr. Franchise and Mr. Pine Auto both have fantastic service and never have had a car returned.  For this analogy, we’ll say they’re both small in size standards, since SBA would. So, who has the one up?

According to the SBA, “If a business concern is small it is eligible for Federal government programs reserved for small business concerns.”  So  it is Mr. Everyone vs.  Mr. Pine Auto  competing for the same exact customer.  This is not what we consider to be fair.

There are so many VERY small businesses with amazing past performance, qualified people, competitive labor rates, and the whole bit who get kicked to the side for so many small business set-asides.  It is tough to go up against what we like to call a Large, Small Business.  They have proposal managers, contracts managers, subcontracts managers, capital to pay for proposals, printing, and business development guys to go schmooze around the country.

But what about the 25 person engineering firm where the CEO and VP are also the senior engineers on their client’s projects?  Who just barely have an office space, probably don’t have an administrative assistant, and when it comes to proposal time, don’t even try to propose on a government prime contract because they feel they can’t compete in a set-aside meant for them?

The current size standards, particularly for 541712 (R&D), is 500 employees and is the only Services NAICS with an employee size standard only. Seriously?  So, the  not-disadvantaged, male, ex-professor who has a team of amazing engineers doing amazing work, work that is necessary for the U.S. to compete in the global economy, has an uphill battle against 499 employee company XYZ.  All we can say is maybe it is time to create a new category of thresholds for these small, deserving businesses?  Here are some good stats from the U.S. Census Bereau – granted from 2002, but probably hasn’t changed too drastically.


Receipts Size of Enterprise Firms
Total Employer firms 5,697,759
Less than $100 thousand 1,291,552
$100 to $499 thousand 2,387,780
$500 to $999 thousand 819,513
$1 to $4.9 million 906,936
$5 to $9.9 million 138,195
$10 to $49.9 million 122,785
$50 to $99.9 million 15,895
$100 to $249.9 million 8,732
$250 to $499.9 million 2,880
$500 to $999.9 million 1,544
$1 to 2.499 billion 1,056
$2.5 billion or more 891