DoD’s relentless march towards more firm-fixed-price and fewer cost-reimbursable contracts continues: recently, the Federal Acquisition Regulation (FAR) Council added language to its regulations to encourage a greater use of firm-fixed-price contracts over cost-reimbursable and time and materials contracts.

The key change for contractors: FFP contracts shift much of the risk posed by unforeseen costs, cost overruns and other unexpected occurrences from the government to the contractor. With a firm fixed price, the contractor is more likely to have to eat costs above the contract amount, and it probably won’t taste too good.

Add to that the 2012 Defense Authorization Bill, which requires contractors to track, and take financial responsibility for, counterfeit parts, and caps the costs that will be reimbursed for executive salaries, and 2012 looks to be a challenging year for government contractors.

The federal Prompt Payment Act is supposed to ensure that contractors don’t have to wait for the federal government to pay them, and that contractors will receive interest if payment is delayed. But the act says more than that.

First, it says that if a federal agency believes an invoice submitted by a contractor is improper, the agency must notify the contractor within 7 days. Secondly, the act says that contractors must be paid within 30 days (unless the contract specifies otherwise), and must be paid interest if the 30-day timeframe is not met. The act also says that prime contractors must pay subcontractors within 7 days of receipt of payment from the government.

The deadline is shorter for certain food products. And the interest rate? The number is recalculated every six months; for January-June, 2012, contractors can expect a 2% extra payment from Uncle Sam.

The National Defense Authorization Act (NDAA), recently passed by Congress and awaiting the president’s signature, includes a provision that contractors should watch closely: a new strategy and timeline for government agencies to post, and contractors to protest, contractor performance data.

The background: government agencies post information about contractor performance on contracts, including timeliness, costs vs. budgets, and other data. Agency contracting officers are required to check those databases prior to awarding contracts. For a federal contractor, these databases are the equivalent of a report card, and can sometimes mean the difference between winning and losing a contract.

Provisions in the NDAA would shrink the window of opportunity for contractors to protest or explain any negative performance data or comments, and publish that information much faster. According to the NDAA, the Federal Acquisition Regulations (FAR) will be amended to provide affected contractors the data that will go into performance databases in a “timely” manner, and the contractor will have only 14 days to respond. In another 14 days, that information is to be available in performance databases.

The bottom line: companies must be prepared to respond quickly to any negative performance information.

Noting that the number of federal contractor employees now outnumbers the number of federal workers, Sen. Claire McCaskill, D-Mo. is proposing that contractor employes receive some of the same protections that federal employees do when it comes to whistle blowing.

A bill she introduced with Sen. Jim Webb, D-Va., S.241 Non-Federal Employee Whistleblower Protection Act, would allow for protected disclosures to be made to employers, shield workers against retaliation, and provide other protections.

Current law provides some protection for contractor employees, but not all of the protections that federal workers have.

New proposals to cap the amount contractors can include as a reimbursable expense on a contract are arriving at an increasing frequency. The newest, attached as an amendment to the Defense authorization bill by Senators Boxer, Grassley and Rockefeller, would cap that pay at $400,000, which is what the president earns. In additon, the proposal would extend that cap to more executives in an organization. (Current rules set a cap of almost $700,000 and apply only to a company’s top five executives.)

Senate and House proposals have set limits of $200,000 and $400,000, broadened the cap to include more (and in some cases all) of a company’s employees, and generated furious debate on both sides of the issue. The bottom line: reimbursement for executive pay in federal contracts may change drastically next year.

The Prompt Payment Act initially required federal agencies to pay small contractors within 30 days of receiving the required documentation, such as invoices and confirmation that the contract items had been received and accepted by the relevant agency. A new memo issued by the Office of Management and Budget sets the payment goal at 15 days, and agencies were supposed to notify OMB on November 1 when they were going to start meeting the 15-day deadline.

In another rule change, DCAA has announced that it will no longer initiate audits of contractors’ Purchasing System Internal Controls, apparently feeling that such audits were duplicated by a similar audit conducted by the DCMA.

Six years ago, Congress mandated that the federal government withhold 3% of contractors’ payments and hold the funds in reserve for tax obligations. The reasoning: this would improve tax compliance.

The regulation, which was part of a larger bill enacted in 2005, has been delayed more than once. This year, contractors and the Obama administration have lobbied hard to repeal the regulation, claiming it will unfairly burden federal contractors. The House has already passed a bill to repeal the measure, and the Senate is debating the issue and expected to vote soon. Signs point to the regulation’s repeal.

The issue now is how to replace the revenue the regulation would have generated, with groups on both sides of the issue debating the revenue and revenue loss if the measure stands or is repealed. Hopefully, the issue will be resolved before contractors’ tax returns are due.

The Small Business Jobs Act of 2010, recently signed into law by President Obama, included many tax and other changes for small businesses. For federal contractors, some of the key provisions will change the way small businesses compete for and fulfill federal contractors, whether as prime contractors or subcontractors. According to the Small Business Adminsitration:

The law establishes a legal standing of “presumption of loss” when a business misrepresents its ownership status or size in winning a government contract. This allows a federal agency to claim a loss on the purchase, enabling those agencies, including the Department of Justice, to vigorously pursue fraudulent firms.

Second, the law holds large prime contractors more accountable to their own subcontracting plans by requiring written justification when plans aren’t met and when small business subcontractors aren’t paid on time. This helps eliminate “bait-and-switch” tactics that occur when large primes – after winning the prime contract – don’t follow through with their own plans to give subcontracts to small businesses.

The act also contain tax breaks, changes in export regulations and other provisions that will affect small businesses. The SBA published new regulatiopns as a response to the act on October 7 on its website, sba.gov.

The annual survey of contractor pay, which surveys firms that generate at least 50% of their income, was just released by the Professional Services Council and the Human Resources Association, and compensation gains were modest: an average of 2.1% in salary increases over 2010. In addition, fewer firms are paying a premium for secret clearances — only 48%, down from 53%.

The survey, which covered 448 job titles at 100 firms, showed that about 25% of the job titles saw a pay decrease, albeit a modest one.

Three proposals currently being discussed in Congress could severely limit the amount of executive compensation contractors can include on cost-reimbursement contracts.

Nothing in the current or proposed regulations limits the amount companies pay their executives. But what is limited, and has been since 2004, is the amount of that compensation companies can allocate to government contracts. For example, in fiscal year 2010 the maximum amount of allowable compensation costs for federal contractors was $693,951. (The amount is reset every year, as outlined in Section 39 of the OFPP Act, 41 U.S.C. § 435, and is published in the Federal Registry.)

Three proposed changes in the regulations have huge consequences for contractors.

• First, the White House and the American Federation of Government Employees, the nation’s largest federal employee union, support a proposal to lower the amount of executive compensation that can be reimbursed as a federal contract cost to $199,700, which is the current salary for Cabinet Secretaries.
• A second proposal would be even more far-reaching: currently, the compensation limit only applies to the top five highest paid senior executives of publicly traded companies with sales of $50 million or more. The figure includes the executive’s total wages, salary, bonuses and deferred compensation, whether paid or otherwise accruing. The Project on Government Oversight (POGO) proposes that those limits be extended to all employees, not only the five highest paid executives.
• A third proposal, again by POGO, would change the way the compensation limit is calculated. Currently, the limit is determined by looking at the median compensation paid during the previous fiscal year. That method, critics argue, provides incentives for firms to increase executive pay to boost the median.

If the proposal to set the limit at $200,000 and extend it to all employees, for example, the uninetnded result could be to drive top talent from government contracts. Many technically skilled employees, scientists and researchers receive total compensation in excess of $200,000. If a firm can only be reimbursed for a portion of the total compensation that their top talent earns, top talent will either not be assigned to government contracts, or not hired at all.