01.16.12

New Provisions of the Defense Authorization Act of 2012 Signed Into Law

On December 31, 2011 the President signed National Defense Authorization Act for Fiscal Year 2012 (“the Act”).  The Act is the annual bill which establishes the budget and activities for the Department of Defense.  Within the Act, there are several key provisions which directly impact Government contractors.  The Act not only makes changes, but creates ambiguities as well.

The key provisions which concern our clients are as follows:

Sec. 803.  Extension of applicability of the senior executive benchmark compensation amount for purposes of allowable cost limitations under defense contracts.

Previously, the compensation cap applied to only the top five senior executives at each business segment.  Now, the senior executive compensation cap has been extended for Defense Contracts to all employees, with the potential for minor exceptions.  Compensation in excess of the cap is deemed unallowable and will limit the cost recovery on highly compensated individuals who are not currently included in the top five senior executives. 

This limitation is effective for all compensation beginning January 1, 2012.  The Federal Acquisition Regulation (FAR) is to be amended within 180 days to reflect this change. 

Currently, the 2011 compensation cap remains unchanged from the 2010 level of $693,951.  The only exceptions to the new compensation limits are to be made by the Secretary of Defense and are “narrowly targeted exceptions for scientists and engineers.”  The Secretary must issue a determination to exempt these labor categories.

It is still unclear whether the Act changes the existing language in the FAR to make this applicable to all government contractors vice only those with Defense contracts.  However assuming it applies to only Defense contracts as the language of the Act states, it is likely only a matter of time before this limitation is extended to Civilian contracts as a result of the current political, budget-cutting environment.  With the advent of the Act, contractors will need to begin considering the manner in which they identify “compensation” for all employees.  Argy will keep you updated on any extensions of the limitation and the implementation of the requirements in the FAR.

Sec. 808.  Temporary limitation on aggregate annual amount available for contract services.

This section of the Act requires Defense Agencies to establish a negotiation objective for labor rates and overhead rates in any fiscal year 2012 and 2013 contract or task order for services in excess of ten million dollars ($10M).  Under this provision, labor rates and overhead rates shall not exceed the labor rates and overhead rates paid to the contractor for contract services in fiscal year 2010. 

While there is no mandate that contracts must be negotiated at 2010 labor and indirect rates, contractors should be aware of this negotiation objective for any service contracts or task orders in their new business pipeline.  Defense Agencies will try to negotiate to these rates as a result of this provision.  This provision is not yet applicable to Civilian Agencies  in their negotiation objectives, but may be coming further down the road.  Argy will keep you updated on any additional changes and requirements.

Sec. 816.   Covered contracts for purposes of requirements on Contractor Business Systems.

Paragraph (3) of section 893(f) of the Ike Skelton National Defense Authorization Act for Fiscal Year 2011 has changed.  The new rule works in conjunction with the May 2011 interim DFARS business systems rule and determines that the term ‘covered contract’ now means a contract that is subject to coverage by the Cost Accounting Standards (CAS) that could be affected if the data produced by the contractor business system has a significant deficiency.

The change does not specify whether ‘covered contract’ applies to modified CAS covered contract or only to fully CAS covered contracts, so there is still ambiguity over which contracts are required by statute to implement the business systems clause.

The full text of the final bill can be found at:  http://www.gpo.gov/fdsys/pkg/BILLS-112hr1540enr/pdf/BILLS-112hr1540enr.pdf

For more information on these changes, please contact us at info@argy.com.

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