Creating an Effective Compensation Analysis for a FAR Compliant Overhead Rate

Determining allowable executive compensation is one of the most critical aspects of calculating a Federal Acquisition Regulation (FAR)-compliant overhead rate. The main objective is to demonstrate that claimed compensation costs are reasonable and allowable in compliance with FAR 31.205-6.

Department of Transportation (DOT) contractors, engineering consultants and other businesses with government contracts can do this either independently, by using nationally-published compensation surveys, or by using the National Compensation Matrix (NCM), which was developed by representatives from AASHTO, various state DOTs, the FHWA, ACEC, independent CPAs, and an independent Certified Compensation Professional. The NCM Tool calculates allowable compensation by position based on gross revenues. Compensation includes wages, salary, bonuses, incentive compensation, deferred compensation, and employer contributions to defined contribution pension plans.

Executive Compensation Analysis

As outlined in the AASHTO Uniform Audit & Accounting Guide, Section 7.8, the following information must be provided in the executive compensation analysis:

  1. Employee/owner/officer first and last name or employee identification (ID) number.
  2. Position title.
  3. Total wages/salaries paid, including taxable fringe benefits.
  4. Total bonuses paid.
  5. Total employer contributions to defined contribution pension plans (whether paid, earned, or otherwise accrued).
  6. Total of items 3 through 5 above.
  7. The applicable amount from the consultant's analysis or the NCM.
  8. The excess compensation required to be disallowed from the indirect labor or bonus line item.

Employees to be included in the executive compensation analysis include the Chairman, CEO/President, Executive Vice President/Chief Operating Officer, Senior Vice President, Vice President, Chief Financial Officer, Top Engineering Executive, Human Resources Director, and Director of Business Development. Note that matching positions based solely on job titles may result in an inaccurate comparison. Therefore, an executive’s actual job duties must be compared against his or her formal job title. In cases where a difference exists between the job title and the actual duties described in the NCM job descriptions, the substantive duties performed by the executive will determine the proper classification for the purposes of the NCM.

Fringe benefits are allowances and services provided by the contractor to its employees as compensation in addition to regular wages and salaries. Fringe benefits include, but are not limited to, the cost of vacations, sick leave, holidays, military leave, employee insurance, and supplemental unemployment benefit plans.

When preparing the executive compensation analysis, a good understanding of the nuances is vital. It is recommended to become familiar with AASHTO, Chapter 7, FAR 31-205.6, and the National Compensation Matrix Instructions.

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For more information on this topic, please contact a member of Withum’s Architecture and Engineering Services Team.