31.205-6
Compensation for personal services
Only reasonable, properly documented, and consistently applied compensation for personal services is allowable as a contract cost, with strict limitations on special payments, owners, and non-cash compensation.
Overview
FAR 31.205-6 details the allowability of compensation for personal services as a contract cost, outlining what forms of compensation are permissible, under what conditions, and the limitations or exclusions that apply. It covers salaries, wages, bonuses, severance, deferred compensation, pensions, fringe benefits, and postretirement benefits, among others. The regulation ensures that compensation is reasonable, consistent with established practices, and not a disguised distribution of profits. It also addresses special considerations for owners, closely held corporations, and compensation paid in forms other than cash, such as securities.
Key Rules
- General Allowability
- Compensation must be for current-year work, reasonable, and consistent with established plans; retroactive adjustments are generally unallowable except in specific cases.
- Reasonableness
- Compensation must be reasonable compared to similar firms, industries, and geographic areas; labor-management agreements are presumed reasonable unless discriminatory or unwarranted.
- Form of Payment
- Compensation may be paid in cash, securities, or other assets, but securities must be valued at fair market value and subject to forfeiture adjustments.
- Bonuses, Incentives, and Deferred Compensation
- Allowable if paid under good faith agreements or consistent plans; deferred payments must relate to the period when work was performed.
- Severance and Backpay
- Severance is allowable only if required by law, agreement, or policy; backpay is generally unallowable except for underpaid work or certain labor negotiations.
- Pensions and Postretirement Benefits
- Must comply with Cost Accounting Standards and funding requirements; special rules apply for defined-benefit, defined-contribution, and early retirement plans.
- Fringe Benefits and Other Exclusions
- Allowable if reasonable and required by law or policy; personal use of company assets and employee rebates are unallowable.
Responsibilities
- Contracting Officers: Must review compensation plans for reasonableness, ensure compliance with allowability criteria, and assess special cases (e.g., owners, securities, severance).
- Contractors: Must maintain consistent, documented compensation practices, ensure payments are reasonable and allowable, and provide required disclosures for plan changes.
- Agencies: Oversee compliance, may waive certain severance restrictions, and ensure equitable cost allocation.
Practical Implications
- This section prevents excessive or disguised compensation from being charged to government contracts, ensuring fairness and cost control.
- Contractors must carefully document and justify all forms of compensation, especially for owners and special arrangements.
- Common pitfalls include retroactive pay, excessive bonuses, improper valuation of securities, and unallowable fringe benefits.