In Appeal of American West Construction, LLC, the Armed Services Board of Contract Appeals considered whether the U.S. Army Corps of Engineers (Government) lost its right to claim a credit under the Changes Clause by waiving its right to insist on compliance with the contract specifications prior to insisting on such compensation.  Finding the Government was fully aware of the Contractor’s use of a less expensive construction method than in the specifications, the Board found the right to claim there was a change to the contract was “dead” and no credit was owed for the work not performed.

American West was awarded a MATOC contract for design-build construction services.  In August 2015, the Government awarded Delivery Order 02 (DO2) under the MATOC contract for construction of bridges over irrigation canals in El Paso, Texas.  The DO2 specifications provided that the work would be performed by first building two temporary bridges over the canals so the Contractor could access the site.  The Contractor, however, sought access to the construction site via a levee owned by the local water district.  However, because negotiations with the water district over access to the levee were pending and the Contractor could not be sure that access would be granted, the Contractor proceeded under the assumption the temporary bridges would still be necessary. Continue Reading You Don’t Always Get What You Pay For: Government Waives a Credit for Work Not Performed

6869764745_7087710505_zIt is common for corporations to compensate executives (and other employees) based upon stock price performance.  Tax implications lend support for this practice with respect to high-paid employees, as executive compensation is only deductible up to a limit of $1 million per year, so companies are inclined to compensate executives with stock performance-based compensation because it is not subject to a deductible cap.

However, the tax benefits of stock performance based compensation lead to competing interests for government contractors with respect to allowable compensation.  These contractors must be cautious with stock performance based compensation because the Federal Acquisition Regulation (FAR) puts several restrictions on what is allowable compensation.  The restriction that most frequently comes up is the FAR’s own cap on allowable compensation ($487,000 as of 2014 and adjusted for inflation annually).  However, unlike the tax code which treats stock performance based compensation favorably, FAR 31.205-6(i) deems compensation based upon stock performance strictly an unallowable cost, stating in part: “Any compensation which is calculated, or valued, based on changes in the price of corporate securities is unallowable.”

The rationale for deeming stock performance based compensation an unallowable cost has largely been based on the view that compensation is to be based on the employees’ performance, and compensation based on stock prices is not sufficiently related to work actually performed.  A further concern that has been raised is the possibility of short term stock price manipulation by managers.

While these compensation restrictions are not a new development (the FAR provision was first implemented in 1983 and is frequently revised), companies sometimes seek to find ways to indirectly incorporate stock performance into compensation in a way that would deem such compensation allowable under FAR, presumably to allow for the best of both worlds under both tax code and FAR.  For example, in one recent ASBCA decision, the Board wholly rejected the contractor’s argument that because (a) the pool of cash available to the employees was set separately from its stock price, and (b) the formula for calculating compensation was based upon performance relative to its peers, and not on the contractor’s stock price alone, FAR 31.205-6(i) was not applicable.

The takeaway from this recent decision is that the interpretation of this FAR provision continues to be strictly construed, and if contractors with cost reimbursement contracts (and in some cases fixed price contracts that are sole sourced) intend to maximize the amount of allowable compensation to employees, they must balance both the FAR cost caps, and the structure of the compensation packages, avoiding stock performance based compensation entirely.

Image Courtesy of Flickr (licensed) by 401(K) 2013