Defense Contractors: Information on the Impact of Reducing the Cap on Employee Compensation Costs

Since the 1990s, federal law has placed a limitation, or cap, on the amount of employee compensation that contractors can charge to federal contracts. The cap has increased by 63 percent in real terms since first use of the current approach in 1998. The cap was set at $693,951 in 2010 and $763,029 for 2011 and 2012. The National Defense Authorization Act for Fiscal Year 2013 directed GAO to provide information on the effect of reducing the cap to the salary of the U.S. President or Vice President. GAO identified, among other things, the following: (1) estimates of the number of employees in a sample of DoD contractors whose compensation would have exceeded a cap set at the salaries of either the U.S. President or Vice President and the amount of compensation that would not have been allowable, and (2) the views of government and contractor representatives on potential effects of a reduction in the cap. GAO collected data from a nongeneralizable, stratified random sample of 10 large-tier, 10 mid-tier, and 10 small-tier contractors; reviewed relevant laws and regulations; and interviewed government and contractor representatives. Data on the number of employees affected by the cap was received from 27 of the 30 contractors; the three largest contractors in GAO's sample did not provide these data. GAO is not making any recommendations in this report. DoD and OMB commented on a draft, noting the need to pay reasonable compensation costs. DoD also cited the need for more research given GAO's sample size. GAO believes this analysis provides valuable insights into the potential effects of cap changes. Report to Congressional Committees.