During evaluation of labor cost the contractor marked up FICA, SUTA, WC an additional 25% above actual costs; in the response to the evaluation notice the contractor explained the 25% as "annual employee bonuses and company sponsored events." In reviewing FAR Part 31.206-5; I am able to find employee bonuses are allowed on Personal Service contracts; however the FAR does not address bonuses paid to non-personal service contract employees. This is the first contractor I have had to add bonuses paid to employees to labor costs. Are bonuses allowed to non-personal services contract employees? If so, how does the contractor account for the bonus on the labor break-out?
Great question! First, you will need to see if contractor has a disclosure statement and review procedures from disclosure statement. You can reach out to the cognizant DCMA office to see if they can help you answer this question.
According to CAS 9904.402-50(c), if the contractor does not have a disclosure statement, then the contactor's accounting practices used at the time of contract proposal are utilized in determination of cost allocation.
Bonuses are deferred compensation. Traditionally deferred compensation is an indirect cost, allocated to more than two (2) cost objectives. According to CAS 9904.415-40(a), the cost of deferred compensation costs are assigned to the accounting period or periods in which the contractor incurs an obligation to compensate an employee. CAS 9904.415-50 (a) lists six (6) criteria in which the contractor incurs an obligation for deferred compensation. If the contractor meets all six of the criteria, then the cost of deferred compensation is included in the indirect cost pool and allocated as an indirect rate. If the deferred compensation does not meet the six criteria, then the deferred cost is recognized when it is paid.
It is possible that deferred compensation can be a direct cost, if the deferred compensation is directly related to one cost objective.
CAS 9904.414-50 (1) through (6), the six (6) criteria are:
(1) There is a requirement to make the future payment(s) which the contractor cannot unilaterally avoid.
(2) The deferred compensation award is to be satisfied by a future payment of money, other assets, or share of stock of the contractor.
(3) The amount of the future payment can be measured with reasonable accuracy.
(4) The recipient of the award is known.
(5) If the terms of the award require that certain events must occur before an employee is entitled to receive the benefits, there is a reasonable probability that such events will occur.
(6) For stock options, there must be a reasonable probability that the option ultimately will be exercised.