GAO: Lower Contractor Compensation Caps Would Save Hundreds of Millions

by Nick Schwellenbach, 6/20/2013

Hundreds of millions of dollars per year could be saved if Congress lowers the maximum amount the government reimburses contractors for their employees’ compensation, according to a new report released yesterday by the Government Accountability Office (GAO), Congress’ investigative arm.


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Source: Government Accountability Office

The report comes as multiple proposals are being floated in Congress for how to change the amount, often called the contractor compensation cap. For the last few years, the White House has called upon Congress to lower the cap, currently set at $763,000, and change the formula for how increases in the cap are calculated.

GAO surveyed 30 Department of Defense (DoD) contractors of varying sizes; only 27 were fully responsive. The three largest DoD contractors – Lockheed Martin, Boeing, and Northrop Grumman – refused to “provide data on the number of employees with compensation costs greater than the salaries of the U.S. President or Vice President or on the estimated amount of total compensation that would no longer be allowable at these cap levels.” These three contractors collectively received about 18 percent of all DoD obligations in 2012, according to GAO. The other 27 represent seven percent of DoD’s contract obligations for that same year.

However, for the 27 contractors that responded, GAO was able to give important insights into how much money some of the proposals being floated could save.

As the cap is lowered, more contractor compensation would not fall under the new, lowered cap. The contractors can still pay their employees above the compensation cap; however, the gap would need to be taken out of their profits or from another source.

With the cap levels that existed between 2010 and 2012, “the 27 contractors reported over $80 million” per year in employee compensation that exceeded the cap levels – compensation that they did not charge taxpayers.

If the cap had been lowered to the president’s salary – $400,000 – more than $180 million annually would not have been charged to taxpayers during these years, everything else being equal. That means a cap at that level would have saved an additional $100 million ($180 million minus $80 million) for each of those three years.

The savings would be even greater if the cap was set at the Vice President’s salary: $230,700. At least $440 million would not have been charged to the government, leading to $360 million in additional savings annually ($440 million minus $80 million).

These estimated savings are just for these 27 contractors, although the bulk of the savings and employees affected are at the largest seven of the 27 firms that responded to GAO – these seven all have contract obligations in 2012 that are between $2 billion and $25 billion. If the three biggest contractors and all other contractors government-wide are factored in, the savings undoubtedly would be greater.

Unfortunately, the House version of the National Defense Authorization Act (NDAA) would not lower the cap. Furthermore, it would create a large loophole: any contractor with less than $500 million in contracts would be exempt from the cap.

That would be a mistake. The cap should be lower as its rate of increase in recent years has exceeded the growth of private sector salaries, federal worker salaries, and far outstripped the rate of inflation. And although the biggest potential savings from a lower cap come from the biggest contractors, exempting contractors with under $500 million in contracts still leaves money on the table. Furthermore, exempting them from caps opens the door to reimbursing them for compensation in excess of the cap, whatever it may be.

An amendment to the House National Defense Authorization Act (NDAA) offered last week by Reps. Paul Tonko (D-NY) and Jackie Speier (D-CA) would have lowered the cap to the Vice President’s salary with no exemptions for contractor size. The amendment failed to go anywhere. Yesterday, Tonko introduced H.R. 2444, the Commonsense Contractor Compensation Act, which is essentially identical to the amendment. It has a Senate counterpart being co-sponsored by Sens. Barbara Boxer (D-CA), Chuck Grassley (R-IA), and Joe Manchin (D-WV).

Legislation like this, not the current House NDAA, is needed to address the growing cost of excessive contractor compensation.

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