Stopping Excessive Payments for Contractor Compensation

Next week, the Administration will be transmitting to Congress a legislative proposal to stop excessive payments to Federal contractors. The proposal builds on previous Administration proposals and language included in the President’s Budget, and marks another important step in our ongoing effort to buy smarter and end wasteful, fiscally imprudent contract spending.

Under current law, contractors that are paid based on their incurred costs (which represents about one-third of current contract spending) may demand reimbursement for executive salaries, bonuses and other compensation up to the level of the Nation’s top private sector CEOs and other senior executives. This taxpayer reimbursement level has skyrocketed by more than 300 percent since the law was enacted in the mid-1990s. Taxpayers have been required, by law, to foot this unaffordable expense, despite the fact that this rapidly increasing cost has had little bearing on the value agencies receive under their government contracts. 

When the cap was raised to $693,000 for FY 2010, the President called on Congress to repeal the current statutory formula and replace it with a lower, more sensible limit that is on par with what the government pays its own executives and employees. The last Congress considered several reform proposals, but ultimately could only agree on a modest change that expanded application of the statutory cap for defense contractors from the contractor’s senior executives to all of its employees.

As a result of Congressional inaction, the Administration was forced to raise the cap to $763,000 for FY 2011. In the coming weeks, the cap will need to be raised again for FY 2012 - this time to more than $950,000 - continuing down a path of cap increases that is far outpacing the growth of inflation and the wages of most of America’s working families. This wasteful expenditure of taxpayer resources must stop.

The Administration’s proposal calls on Congress to abolish the current formula and instead tie the reimbursement cap to the President’s salary and apply it across-the-board to all defense and civilian cost-reimbursement contracts. Tying the cap to the President’s salary provides a reasonable level of compensation for high value Federal contractors while ensuring taxpayers are not saddled with paying excessive compensation costs.

Importantly, the proposal provides for an exemption to the cap if, and only if, an agency determines such additional payment is necessary to ensure it has access to the specialized skills required to support mission requirements, such as for certain key scientists or engineers. And to be clear, nothing in the proposal limits the amount contractors pay their executives. The cap only limits how much the government will reimburse the contractors for the services of those executives. Taking these steps has the potential to save taxpayers hundreds of millions of dollars over what they would have to pay if the cap remains unchanged.

This proposal is part of the President’s broader Campaign to Cut Waste and the Administration’s ongoing effort to eliminate inefficient spending in contracting – an effort that has resulted in a noteworthy decline in annual contract spending since the President took office in 2009. We hope that this Congress, unlike the last one, will heed the urgent call to restore fiscal responsibility before additional taxpayer dollars that could be used to fund critical agency mission work are wasted unnecessarily to pay for costly overhead in the form of excessive contractor compensation.

Joe Jordan is the Administrator for Federal Procurement Policy

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