31.205-6 Compensation for personal services.

(a) General. Compensation for personal services is allowable subject to the following general criteria

and additional requirements contained in other parts of this cost principle:

(1) Compensation for personal services must be for work performed by the employee in the current

year and must not represent a retroactive adjustment of prior years’ salaries or wages (but see

paragraphs (g), (h), (j), (k), (m), and (o) of this subsection).

(2) The total compensation for individual employees or job classes of employees must be reasonable

for the work performed; however, specific restrictions on individual compensation elements apply

when prescribed.

(3) The compensation must be based upon and conform to the terms and conditions of the

contractor’s established compensation plan or practice followed so consistently as to imply, in effect,

an agreement to make the payment.

(4) No presumption of allowability will exist where the contractor introduces major revisions of

existing compensation plans or new plans and the contractor has not provided the cognizant ACO,

either before implementation or within a reasonable period after it, an opportunity to review the

allowability of the changes.

(5) Costs that are unallowable under other paragraphs of this subpart 31.2 are not allowable under

this subsection 31.205-6 solely on the basis that they constitute compensation for personal services.

(6)

(i) Compensation costs for certain individuals give rise to the need for special consideration. Such

individuals include:

(A) Owners of closely held corporations, members of limited liability companies, partners, sole

proprietors, or members of their immediate families; and

(B) Persons who are contractually committed to acquire a substantial financial interest in the

contractor’s enterprise.

(ii) For these individuals, compensation must-

(A) Be reasonable for the personal services rendered; and

(B) Not be a distribution of profits (which is not an allowable contract cost).

(iii) For owners of closely held companies, compensation in excess of the costs that are deductible as

compensation under the Internal Revenue Code (26 U.S.C.) and regulations under it is unallowable.

(b) Reasonableness-

(1) Compensation pursuant to labor-management agreements. If costs of compensation established

under "arm’s length" labor-management agreements negotiated under the terms of the Federal

Labor Relations Act or similar state statutes are otherwise allowable, the costs are reasonable
unless, as applied to work in performing Government contracts, the costs are unwarranted by the

character and circumstances of the work or discriminatory against the Government. The application

of the provisions of a labor-management agreement designed to apply to a given set of

circumstances and conditions of employment (e.g., work involving extremely hazardous activities or

work not requiring recurrent use of overtime) is unwarranted when applied to a Government

contract involving significantly different circumstances and conditions of employment (e.g., work

involving less hazardous activities or work continually requiring use of overtime). It is discriminatory

against the Government if it results in employee compensation (in whatever form or name) in excess

of that being paid for similar non-Government work under comparable circumstances.

(2) Compensation not covered by labor-management agreements. Compensation for each employee

or job class of employees must be reasonable for the work performed. Compensation is reasonable if

the aggregate of each measurable and allowable element sums to a reasonable total. In determining

the reasonableness of total compensation, consider only allowable individual elements of

compensation. In addition to the provisions of 31.201-3, in testing the reasonableness of

compensation for particular employees or job classes of employees, consider factors determined to

be relevant by the contracting officer. Factors that may be relevant include, but are not limited to,

conformity with compensation practices of other firms-

(i) Of the same size;

(ii) In the same industry;

(iii) In the same geographic area; and

(iv) Engaged in similar non-Government work under comparable circumstances.

(c) [Reserved]

(d) Form of payment.

(1) Compensation for personal services includes compensation paid or to be paid in the future to

employees in the form of-

(i) Cash;

(ii) Corporate securities, such as stocks, bonds, and other financial instruments (see paragraph

(d)(2) of this subsection regarding valuation); or

(iii) Other assets, products, or services.

(2) When compensation is paid with securities of the contractor or of an affiliate, the following

additional restrictions apply:

(i) Valuation placed on the securities is the fair market value on the first date the number of shares

awarded is known, determined upon the most objective basis available.

(ii) Accruals for the cost of securities before issuing the securities to the employees are subject to

adjustment according to the possibilities that the employees will not receive the securities and that

their interest in the accruals will be forfeited.

(e) Income tax differential pay.
(1) Differential allowances for additional income taxes resulting from foreign assignments are

allowable.

(2) Differential allowances for additional income taxes resulting from domestic assignments are

unallowable. (However, payments for increased employee income or Federal Insurance

Contributions Act taxes incident to allowable reimbursed relocation costs are allowable under

31.205-35(a)(10).)

(f) Bonuses and incentive compensation.

(1) Bonuses and incentive compensation are allowable provided the-

(i) Awards are paid or accrued under an agreement entered into in good faith between the

contractor and the employees before the services are rendered or pursuant to an established plan or

policy followed by the contractor so consistently as to imply, in effect, an agreement to make such

payment; and

(ii) Basis for the award is supported.

(2) When the bonus and incentive compensation payments are deferred, the costs are subject to the

requirements of paragraphs (f)(1) and (k) of this subsection.

(g) Severance pay.

(1) Severance pay is a payment in addition to regular salaries and wages by contractors to workers

whose employment is being involuntarily terminated. Payments for early retirement incentive plans

are covered in paragraph (j)(6) of this subsection.

(2) Severance pay is allowable only to the extent that, in each case, it is required by-

(i) Law;

(ii) Employer-employee agreement;

(iii) Established policy that constitutes, in effect, an implied agreement on the contractor’s part; or

(iv) Circumstances of the particular employment.

(3) Payments made in the event of employment with a replacement contractor where continuity of

employment with credit for prior length of service is preserved under substantially equal conditions

of employment, or continued employment by the contractor at another facility, subsidiary, affiliate,

or parent company of the contractor are not severance pay and are unallowable.

(4) Actual normal turnover severance payments shall be allocated to all work performed in the

contractor’s plant. However, if the contractor uses the accrual method to account for normal

turnover severance payments, that method will be acceptable if the amount of the accrual is-

(i) Reasonable in light of payments actually made for normal severances over a representative past

period; and

(ii) Allocated to all work performed in the contractor’s plant.
(5) Abnormal or mass severance pay is of such a conjectural nature that accruals for this purpose

are not allowable. However, the Government recognizes its obligation to participate, to the extent of

its fair share, in any specific payment. Thus, the Government will consider allowability on a case-bycase basis.

(6) Under 10 U.S.C. 3744(a)(13) and 41 U.S.C.4304(a)(13), the costs of severance payments to

foreign nationals employed under a service contract performed outside the United States are

unallowable to the extent that such payments exceed amounts typically paid to employees providing

similar services in the same industry in the United States. Further, under 10 U.S.C. 3744(a)(14) and

41 U.S.C.4304(a)(14), all such costs of severance payments that are otherwise allowable are

unallowable if the termination of employment of the foreign national is the result of the closing of, or

the curtailment of activities at, a United States facility in that country at the request of the

government of that country; this does not apply if the closing of a facility or curtailment of activities

is made pursuant to a status-of-forces or other country-to-country agreement entered into with the

government of that country before November 29, 1989. 10 U.S.C. 3744(b) and 41 U.S.C.4304(b)

permit the head of the agency to waive these cost allowability limitations under certain

circumstances (see 37.113 and the solicitation provision at 52.237-8).

(h) Backpay. Backpay is a retroactive adjustment of prior years’ salaries or wages. Backpay is

unallowable except as follows:

(1) Payments to employees resulting from underpaid work actually performed are allowable, if

required by a negotiated settlement, order, or court decree.

(2) Payments to union employees for the difference in their past and current wage rates for working

without a contract or labor agreement during labor management negotiation are allowable.

(3) Payments to nonunion employees based upon results of union agreement negotiation are

allowable only if-

(i) A formal agreement or understanding exists between management and the employees concerning

these payments; or

(ii) An established policy or practice exists and is followed by the contractor so consistently as to

imply, in effect, an agreement to make such payments.

(i) Compensation based on changes in the prices of corporate securities or corporate security

ownership, such as stock options, stock appreciation rights, phantom stock plans, and junior stock

conversions.

(1) Any compensation which is calculated, or valued, based on changes in the price of corporate

securities is unallowable.

(2) Any compensation represented by dividend payments or which is calculated based on dividend

payments is unallowable.

(3) If a contractor pays an employee in lieu of the employee receiving or exercising a right, option, or

benefit which would have been unallowable under this paragraph (i), such payments are also

unallowable.

(j) Pension costs.
(1) Pension plans are normally segregated into two types of plans: defined-benefit and definedcontribution pension plans. The contractor shall measure, assign, and allocate the costs of all

defined-benefit pension plans and the costs of all defined-contribution pension plans in compliance

with 48 CFR9904.412-Cost Accounting Standard for Composition and Measurement of Pension Cost,

and 48 CFR9904.413-Adjustment and Allocation of Pension Cost. Pension costs are allowable subject

to the referenced standards and the cost limitations and exclusions set forth in paragraph (j)(1)(i)

and in paragraphs (j)(2) through (j)(6) of this subsection.

(i) Except for nonqualified pension plans using the pay-as-you-go cost method, to be allowable in the

current year, the contractor shall fund pension costs by the time set for filing of the Federal income

tax return or any extension. Pension costs assigned to the current year, but not funded by the tax

return time, are not allowable in any subsequent year. For nonqualified pension plans using the payas-you-go method, to be allowable in the current year, the contractor shall allocate pension costs in

the cost accounting period that the pension costs are assigned.

(ii) Pension payments must be paid pursuant to an agreement entered into in good faith between the

contractor and employees before the work or services are performed and to the terms and

conditions of the established plan. The cost of changes in pension plans are not allowable if the

changes are discriminatory to the Government or are not intended to be applied consistently for all

employees under similar circumstances in the future.

(iii) Except as provided for early retirement benefits in paragraph (j)(6) of this subsection, one-timeonly pension supplements not available to all participants of the basic plan are not allowable as

pension costs, unless the supplemental benefits represent a separate pension plan and the benefits

are payable for life at the option of the employee.

(iv) Increases in payments to previously retired plan participants covering cost-of-living adjustments

are allowable if paid in accordance with a policy or practice consistently followed.

(2) Defined-benefit pension plans. The cost limitations and exclusions pertaining to defined-benefit

plans are as follows:

(i)

(A) Except for nonqualified pension plans, pension costs (see 48 CFR9904.412-40(a)(1)) assigned to

the current accounting period, but not funded during it, are not allowable in subsequent years

(except that a payment made to a fund by the time set for filing the Federal income tax return or any

extension thereof is considered to have been made during such taxable year). However, any portion

of pension cost computed for a cost accounting period, that exceeds the amount required to be

funded pursuant to a waiver granted under the provisions of the Employee Retirement Income

Security Act of1974 (ERISA), will be allowable in those future accounting periods in which the

funding of such excess amounts occurs (see 48 CFR9904.412-50(c)(5)).

(B) For nonqualified pension plans, except those using the pay-as-you-go cost method, allowable

costs are limited to the amount allocable in accordance with 48 CFR9904.412-50(d)(2).

(C) For nonqualified pension plans using the pay-as-you-go cost method, allowable costs are limited

to the amounts allocable in accordance with 48 CFR9904.412-50(d)(3).

(ii) Any amount funded in excess of the pension cost assigned to a cost accounting period is not

allowable in that period and shall be accounted for as set forth at 48 CFR9904.412-50(a)(4). The

excess amount is allowable in the future period to which it is assigned, to the extent it is not
otherwise unallowable.

(iii) Increased pension costs are unallowable if the increase is caused by a delay in funding beyond

30 days after each quarter of the year to which they are assignable. If a composite rate is used for

allocating pension costs between the segments of a company and if, because of differences in the

timing of the funding by the segments, an inequity exists, allowable pension costs for each segment

will be limited to that particular segment’s calculation of pension costs as provided for in 48

CFR9904.413-50(c). The contractor shall make determinations of unallowable costs in accordance

with the actuarial method used in calculating pension costs.

(iv) The contracting officer will consider the allowability of the cost of indemnifying the Pension

Benefit Guaranty Corporation (PBGC) under ERISA Section 4062 or 4064 arising from terminating

an employee deferred compensation plan on a case-by-case basis, provided that if insurance was

required by the PBGC under ERISA Section 4023, it was so obtained and the indemnification

payment is not recoverable under the insurance. Consideration under the foregoing circumstances

will be primarily for the purpose of appraising the extent to which the indemnification payment is

allocable to Government work. If a beneficial or other equitable relationship exists, the Government

will participate, despite the requirements of 31.205-19(c)(3) and (d)(3), in the indemnification

payment to the extent of its fair share.

(v) Increased pension costs resulting from the withdrawal of assets from a pension fund and transfer

to another employee benefit plan fund, or transfer of assets to another account within the same

fund, are unallowable except to the extent authorized by an advance agreement. If the withdrawal of

assets from a pension fund is a plan termination under ERISA, the provisions of paragraph (j)(3) of

this subsection apply. The advance agreement shall-

(A) State the amount of the Government’s equitable share in the gross amount withdrawn or

transferred; and

(B) Provide that the Government receives a credit equal to the amount of the Government’s

equitable share of the gross withdrawal or transfer.

(3) Pension adjustments and asset reversions.

(i) For segment closings, pension plan terminations, or curtailment of benefits, the amount of the

adjustment shall be-

(A) For contracts and subcontracts that are subject to full coverage under the Cost Accounting

Standards (CAS) Board rules and regulations, the amount measured, assigned, and allocated in

accordance with 48 CFR9904.413-50(c)(12); and

(B) For contracts and subcontracts that are not subject to full coverage under the CAS, the amount

measured, assigned, and allocated in accordance with 48 CFR9904.413-50(c)(12), except the

numerator of the fraction at 48 CFR9904.413-50(c)(12)(vi) is the sum of the pension plan costs

allocated to all non-CAS-covered contracts and subcontracts that are subject to subpart 31.2 or for

which certified cost or pricing data were submitted.

(ii) For all other situations where assets revert to the contractor, or such assets are constructively

received by it for any reason, the contractor shall, at the Government’s option, make a refund or give

a credit to the Government for its equitable share of the gross amount withdrawn. The Government’s

equitable share shall reflect the Government’s participation in pension costs through those contracts

for which certified cost or pricing data were submitted or that are subject to subpart 31.2. Excise
taxes on pension plan asset reversions or withdrawals under this paragraph (j)(3)(ii) are unallowable

in accordance with 31.205-41(b)(6).

(4) Defined-contribution pension plans. In addition to defined-contribution pension plans, this

paragraph also covers profit sharing, savings plans, and other such plans, provided the plans fall

within the definition of a pension plan at 31.001.

(i) Allowable pension cost is limited to the net contribution required to be made for a cost accounting

period after taking into account dividends and other credits, where applicable. However, any portion

of pension cost computed for a cost accounting period that exceeds the amount required to be

funded pursuant to a waiver granted under the provisions of ERISA will be allowable in those future

accounting periods in which the funding of such excess amounts occurs (see 48

CFR9904.412-50(c)(5)).

(ii) The provisions of paragraphs (j)(2)(ii) and (iv) of this subsection apply to defined-contribution

plans.

(5) Pension plans using the pay-as-you-go cost method. When using the pay-as-you-go cost method,

the contractor shall measure, assign, and allocate the cost of pension plans in accordance with 48

CFR9904.412 and 9904.413. Pension costs for a pension plan using the pay-as-you-go cost method

are allowable to the extent they are not otherwise unallowable.

(6) Early retirement incentives. An early retirement incentive is an incentive given to an employee to

retire early. For contract costing purposes, costs of early retirement incentives are allowable subject

to the pension cost criteria contained in paragraphs (j)(2)(i) through (iv) of this subsection provided-

(i) The contractor measures, assigns, and allocates the costs in accordance with the contractor’s

accounting practices for pension costs;

(ii) The incentives are in accordance with the terms and conditions of an early retirement incentive

plan;

(iii) The contractor applies the plan only to active employees. The cost of extending the plan to

employees who retired or were terminated before the adoption of the plan is unallowable; and

(iv) The present value of the total incentives given to any employee in excess of the amount of the

employee’s annual salary for the previous fiscal year before the employee’s retirement is

unallowable. The contractor shall compute the present value in accordance with its accounting

practices for pension costs. The contractor shall account for any unallowable costs in accordance

with 48 CFR9904.412-50(a)(2).

(k) Deferred compensation other than pensions. The costs of deferred compensation awards are

allowable subject to the following limitations:

(1) The costs shall be measured, assigned, and allocated in accordance with 48 CFR 9904.415,

Accounting for the Cost of Deferred Compensation.

(2) The costs of deferred compensation awards are unallowable if the awards are made in periods

subsequent to the period when the work being remunerated was performed.

(l) Compensation incidental to business acquisitions. The following costs are unallowable:
(1) Payments to employees under agreements in which they receive special compensation, in excess

of the contractor’s normal severance pay practice, if their employment terminates following a

change in the management control over, or ownership of, the contractor or a substantial portion of

its assets.

(2) Payments to employees under plans introduced in connection with a change (whether actual or

prospective) in the management control over, or ownership of, the contractor or a substantial

portion of its assets in which those employees receive special compensation, which is contingent

upon the employee remaining with the contractor for a specified period of time.

(m) Fringe benefits.

(1) Fringe benefits are allowances and services provided by the contractor to its employees as

compensation in addition to regular wages and salaries. Fringe benefits include, but are not limited

to, the cost of vacations, sick leave, holidays, military leave, employee insurance, and supplemental

unemployment benefit plans. Except as provided otherwise in subpart 31.2, the costs of fringe

benefits are allowable to the extent that they are reasonable and are required by law, employeremployee agreement, or an established policy of the contractor.

(2) That portion of the cost of company-furnished automobiles that relates to personal use by

employees (including transportation to and from work) is unallowable regardless of whether the cost

is reported as taxable income to the employees (see 31.205-46(d)).

(n) Employee rebate and purchase discount plans. Rebates and purchase discounts, in whatever

form, granted to employees on products or services produced by the contractor or affiliates are

unallowable.

(o) Postretirement benefits other than pensions (PRB).

(1) PRB covers all benefits, other than cash benefits and life insurance benefits paid by pension

plans, provided to employees, their beneficiaries, and covered dependents during the period

following the employees’ retirement. Benefits encompassed include, but are not limited to,

postretirement health care; life insurance provided outside a pension plan; and other welfare

benefits such as tuition assistance, day care, legal services, and housing subsidies provided after

retirement.

(2) To be allowable, PRB costs shall be incurred pursuant to law, employer-employee agreement, or

an established policy of the contractor, and shall comply with paragraphs (o)(2)(i), (ii), or (iii) of this

subsection.

(i) Pay-as-you-go. PRB costs are not accrued during the working lives of employees. Costs are

assigned to the period in which-

(A) Benefits are actually provided; or

(B) The costs are paid to an insurer, provider, or other recipient for current year benefits or

premiums.

(ii) Terminal funding. PRB costs are not accrued during the working lives of the employees.

(A) Terminal funding occurs when the entire PRB liability is paid in a lump sum upon the termination
of employees (or upon conversion to such a terminal-funded plan) to an insurer or trustee to

establish and maintain a fund or reserve for the sole purpose of providing PRB to retirees.

(B) Terminal funded costs shall be amortized over a period of 15 years.

(iii) Accrual basis. PRB costs are accrued during the working lives of employees. Accrued PRB costs

shall comply with the following:

(A) Be measured and assigned in accordance with one of the following two methods described under

paragraphs (o)(2)(iii)(A)(1) or (o)(2)(iii)(A)(2) of this subsection:

(1) Generally accepted accounting principles. However, transitions from the pay-as-you-go method to

the accrual accounting method must be handled according to paragraphs (o)(2)(iii)(A)(1)(i) through

(iii) of this subsection.

(i) In the year of transition from the pay-as-you-go method to accrual accounting for purposes of

Government contract cost accounting, the transition obligation shall be the excess of the

accumulated PRB obligation over the fair value of plan assets determined in accordance with

subparagraph (E) of this section; the fair value must be reduced by the prepayment credit as

determined in accordance with subparagraph (o)(2)(iii)(F) of this subsection.

(ii) PRB cost attributable to the transition obligation assigned to the current year that is in excess of

the amount assignable to accounting periods on the basis of a straight line amortization of the

transition obligation over the average remaining working lives of active employees covered by the

PRB plan or a 20-year period, whichever period is longer, is unallowable. However, if the plan is

comprised of inactive participants only, the PRB cost attributable to the transition obligation

assigned to the current year that is in excess of the amount assignable to accounting periods on a

straight line amortization of the transition obligation over the average future life expectancy of the

participants is unallowable.

(iii) For a plan that transitioned from pay-as-you-go to accrual accounting for Government contract

cost accounting prior to July 22, 2013, the unallowable amount of PRB cost attributable to the

transition obligation amortization shall continue to be based on the cost principle in effect at the

time of the transition until the original transition obligation schedule is fully amortized.

(2) Contributions to a welfare benefit fund determined in accordance with applicable Internal

Revenue Code. Allowable PRB costs based on such contributions shall-

(i) Be measured using reasonable actuarial assumptions, which shall include a health care inflation

assumption unless prohibited by the Internal Revenue Code provisions governing welfare benefit

funds;

(ii) Be assigned to accounting periods on the basis of the average working lives of active employees

covered by the PRB plan or a 15 year period, whichever period is longer. However, if the plan is

comprised of inactive participants only, the cost shall be spread over the average future life

expectancy of the participants; and

(iii) Exclude Federal income taxes, whether incurred by the fund or the contractor (including any

increase in PRB costs associated with such taxes), unless the fund holding the plan assets is taxexempt under the provisions of 26 USC 501(c).

(B) Be paid to an insurer or trustee to establish and maintain a fund or reserve for the sole purpose

of providing PRB to retirees. The assets shall be segregated in the trust, or otherwise effectively
restricted, so that they cannot be used by the employer for other purposes.

(C) Be calculated in accordance with generally accepted actuarial principles and practices as

promulgated by the Actuarial Standards Board.

(D) Eliminate from costs of current and future periods the accumulated value of any prior period

costs that were unallowable in accordance with paragraph (o)(3) of this section, adjusted for interest

under paragraph (o)(4) of this section.

(E) Calculate the unfunded actuarial liability (unfunded accumulated postretirement benefit

obligation) using the market (fair) value of assets that have been accumulated by funding costs

assigned to prior periods for contract accounting purposes.

(F) Recognize as a prepayment credit the market (fair) value of assets that were accumulated by

deposits or contributions that were not used to fund costs assigned to previous periods for contract

accounting purposes.

(G) Comply with the following when changing from one accrual accounting method to another: the

contractor shall-

(1) Treat the change in the unfunded actuarial liability (unfunded accumulated postretirement

benefit obligation) as a gain or loss; and

(2) Present an analysis demonstrating that all costs assigned to prior periods have been accounted

for in accordance with paragraphs (o)(2)(iii)(D), (E), and (F) of this section to ensure that no

duplicate recovery of costs exists. Any duplicate recovery of costs due to the change from one

method to another is unallowable. The analysis and new accrual accounting method may be a

subject appropriate for an advance agreement in accordance with 31.109.

(3) To be allowable, PRB costs must be funded by the time set for filing the Federal income tax

return or any extension thereof, or paid to an insurer, provider, or other recipient by the time set for

filing the Federal income tax return or extension thereof. PRB costs assigned to the current year, but

not funded, paid or otherwise liquidated by the tax return due date as extended are not allowable in

any subsequent year.

(4) Increased PRB costs caused by delay in funding beyond 30 days after each quarter of the year to

which they are assignable are unallowable.

(5) The Government shall receive an equitable share of any amount of previously funded PRB costs

which revert or inure to the contractor. Such equitable share shall reflect the Government’s previous

participation in PRB costs through those contracts for which certified cost or pricing data were

required or which were subject to subpart 31.2.

(p) Limitation on allowability of compensation.

Employee Compensation Limits

Contract Award Date Applicable Agencies Covered

Employees 31.205-6
Contract Award Date Applicable Agencies Covered

Employees 31.205-6

Before June 24, 2014

Executive Agencies Other

than DoD, NASA and Coast

Guard

Senior Executive (p)(2)

Before December 31,

2011

DoD, NASA and Coast

Guard Senior Executive (p)(2)

On/after December 31,

2011, and before June

24, 2014

DoD, NASA, and Coast

Guard All Employees (p)(3)

On/after June 24, 2014 All Executive Agencies All Employees (p)(4)

(1) Definitions. As used in this paragraph (p)-

(i) "Compensation" means the total amount of wages, salary, bonuses, deferred compensation (see

paragraph (k) of this subsection), and employer contributions to defined contribution pension plans

(see paragraphs (j)(4) and (q) of this subsection), for the fiscal year, whether paid, earned, or

otherwise accruing, as recorded in the contractor's cost accounting records for the fiscal year.

(ii) "Senior executive" means–

(A) Prior to January 2, 1999–

(1) The Chief Executive Officer (CEO) or any individual acting in a similar capacity at the

contractor's headquarters;

(2) The four most highly compensated employees in management positions at the contractor's

headquarters, other than the CEO; and

(3) If the contractor has intermediate home offices or segments that report directly to the

contractor's headquarters, the five most highly compensated employees in management positions at

each such intermediate home office or segment.

(B) Effective January 2, 1999, the five most highly compensated employees in management positions

at each home office and each segment of the contractor, whether or not the home office or segment

reports directly to the contractor's headquarters.

(iii) Fiscal year means the fiscal year established by the contractor for accounting purposes.

(iv) Contractor's headquarters means the highest organizational level from which executive

compensation costs are allocated to Government contracts.

(2) Senior executive compensation limit for contracts awarded before June 24, 2014.

(i) Applicability. This paragraph (p)(2) applies to the following:
(A) To all executive agencies, other than DoD, NASA and the Coast Guard, for contracts awarded

before June 24, 2014;

(B) To DoD, NASA, and the Coast Guard for contracts awarded before December 31, 2011;

(ii) Costs incurred after January 1, 1998, for the compensation of a senior executive in excess of the

benchmark compensation amount determined applicable for the contractor fiscal year by the

Administrator, Office of Federal Procurement Policy (OFPP), under 41 U.S.C. 1127 as in effect prior

to June 24, 2014, are unallowable (10 U.S.C. 3744(a)(16) and 41 U.S.C. 4304(a)(16), as in effect

prior to June 24, 2014). This limitation is the sole statutory limitation on allowable senior executive

compensation costs incurred after January 1, 1998, under contracts awarded before June 24, 2014,

and applies whether or not the affected contracts were previously subject to a statutory limitation on

such costs. (Note that pursuant to section 804 of Pub. L. 105-261, the definition of "senior executive"

in paragraph (p)(1) of this section has been changed for compensation costs incurred after January

1, 1999.) See

https://www.whitehouse.gov/wp-content/uploads/2017/11/ContractorCompensationCapContractsAwa

rdedBeforeJune24.pdf.

(3) All employee compensation limit for contracts awarded before June 24, 2014.

(i) Applicability. This paragraph (p)(3) applies to DOD, NASA, and the Coast Guard for contracts

awarded on or after December 31, 2011, and before June 24, 2014.

(ii) Costs incurred after January 1, 2012, for the compensation of any contractor employee in excess

of the benchmark compensation amount, determined applicable for the contractor fiscal year by the

Administrator, Office of Federal Procurement Policy (OFPP) under 41 U.S.C. 1127 as in effect prior

to June 24, 2014 are unallowable (10 U.S.C. 3744(a)(16) as in effect prior to June 24, 2014.) This

limitation is the sole statutory limitation on allowable employee compensation costs incurred after

January 1, 2012, under contracts awarded on or after December 31, 2011 and before June 24, 2014.

(Note that pursuant to section 803 of Pub. L. 112-81, 10 U.S.C. 3744, Allowable costs under defense

contracts, was amended by striking "senior executives" and inserting "any contractor employee",

making unallowable the excess compensation costs incurred after January 1, 2012, under affected

contracts.) See

https://www.whitehouse.gov/wp-content/uploads/2017/11/ContractorCompensationCapContractsAwa

rdedBeforeJune24.pdf.

(4) All employee compensation limit for contracts awarded on or after June 24, 2014.

(i) Applicability. This paragraph (p)(4) applies to all executive agency contracts awarded on or after

June 24, 2014, and any subcontracts thereunder.

(ii) Costs incurred on or after June 24, 2014, for the compensation of all employees in excess of the

benchmark compensation amount determined applicable for the contractor fiscal year by the

Administrator, Office of Federal Procurement Policy (OFPP) are unallowable under 10 U.S.C.

3744(a)(16) and 41 U.S.C 4304(a)(16), as in effect on or after June 24, 2014, pursuant to section 702

of Pub. L. 113-67. This limitation is the sole statutory limitation on allowable employee compensation

costs incurred on or after June 24, 2014, under contracts awarded on or after June 24, 2014. See

http://www.whitehouse.gov/omb/procurement/cecp.

(iii) Exceptions. An agency head may establish one or more narrowly targeted exceptions for

scientists, engineers, or other specialists upon a determination that such exceptions are needed to

ensure that the executive agency has continued access to needed skills and capabilities. In making
such a determination, the agency shall consider, at a minimum, for each contractor employee in a

narrowly targeted excepted position-

(A) The amount of taxpayer funded compensation to be received by each employee; and

(B) The duties and services performed by each employee.

(q) Employee stock ownership plans (ESOP).

(1) An ESOP is a stock bonus plan designed to invest primarily in the stock of the employer

corporation. The contractor’s contributions to an Employee Stock Ownership Trust (ESOT) may be in

the form of cash, stock, or property.

(2) Costs of ESOPs are allowable subject to the following conditions:

(i) The contractor measures, assigns, and allocates costs in accordance with 48 CFR 9904.415.

(ii) Contributions by the contractor in any oneyear that exceed the deductibility limits of the Internal

Revenue Code for that year are unallowable.

(iii) When the contribution is in the form of stock, the value of the stock contribution is limited to the

fair market value of the stock on the date that title is effectively transferred to the trust.

(iv) When the contribution is in the form of cash-

(A) Stock purchases by the ESOT in excess of fair market value are unallowable; and

(B) When stock purchases are in excess of fair market value, the contractor shall credit the amount

of the excess to the same indirect cost pools that were charged for the ESOP contributions in the

year in which the stock purchase occurs. However, when the trust purchases the stock with

borrowed funds which will be repaid over a period of years by cash contributions from the

contractor to the trust, the contractor shall credit the excess price over fair market value to the

indirect cost pools pro rata over the period of years during which the contractor contributes the cash

used by the trust to repay the loan.

(v) When the fair market value of unissued stock or stock of a closely held corporation is not readily

determinable, the valuation will be made on a case-by-case basis taking into consideration the

guidelines for valuation used by the IRS.

Parent topic: 31.205 Selected costs.