The House Armed Services Committee Proposes Weakening Contractor Compensation Cap

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The House committee in charge of overseeing the Department of Defense (DOD) and drafting the National Defense Authorization Act (NDAA) has answered the White House’s call to address the ever-increasing contractor compensation cap. But the House Armed Services Committee (HASC) is serving up something far weaker than what the White House wants and a substantial reversal from the status quo. Namely it would exempt a large universe of contractors that are subject to the cap currently.

The cap is the maximum amount the government will price or reimburse to federal contractors to pay their employees.  Contractors can pay their employees beyond the cap but cannot  charge taxpayers for those amounts.  Currently the cap is $763,029 and applies to all employees on DOD, NASA, and Coast Guard contracts and just the top five employees solely on all other agency contracts. The formula for determining annual increases in the cap is based on executive compensation paid at  publicly traded U.S. firms with over $50 million in sales – and private sector executive compensation has skyrocketed in the last decade. The formula was created by Congress and is set in law, so legislation is required to change it.

Within weeks, the cap will rise above $950,000. And by 2020, the Congressional Budget Office estimates it could reach $1.6 million.

"As a result of this rapid growth of private sector executive compensation over the past 15 years, taxpayers are being forced to reimburse contractors at a rate which has outpaced the growth of inflation and the wages of most of America's working families – as well as the growth of Federal salaries," according to the White House.

The HASC wants:

  • The cap to only apply to contractors with more than $500 million in “covered contracts,” which would radically reduce the number of contractors subject to the cap (for instance, take a look at some of the companies with under $500 million but still with hundreds of millions per year in contract dollars);
  • To take the current cap baseline of $763,029 and peg increases to the cap using the U.S. Bureau of Labor Statistics Employment Cost Index (ECI) instead of using the old formula; and
  • Have “narrowly targeted exceptions for positions in the science, technology, engineering, mathematics, medical, and manufacturing fields.”

This is substantially different from the White House’s current proposal to reset the cap at $400,000 – the level of the president’s salary – and apply it government-wide to cost reimbursement contracts with all contractor employees with seemingly fewer exceptions. There are other legislative proposals, such as Reps. Paul Tonko (D-NY) and Jackie Speier’s (D-CA) that would lower the cap to $230,700 – the vice president’s salary – and would apply it to the same number and types of of contractors as the status quo.

UPDATE: In a statement of administration policy issued yesterday, the White House objected to the HASC's proposal, stating that "the Administration urges adoption of its proposal that would tie the cap to the President's salary; this approach is more cost-effective and would achieve a better result for taxpayers." However, the White House reacted to an older version of the HASC's bill, not the most current one that exempts contractors with less than $500 million in covered contracts. The older version did exempt a smaller number of contractors as well though. It appears that the White House is more focused on the amount of the cap, rather than its applicability.



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