Reasonableness of Contract Costs

Q. Do you have any guidance on how to monitor and control Direct Labor Costs in CPFF contracts, especially when it relates to annual salary adjustments? Can firms increase salaries substantially and what is the buyer’s recourse?

A. The allowability of costs on CPFF contracts is determined by FAR Part 31 cost principles. Direct labor costs must pass the test of "reasonableness." This means that the rates being paid are consistent with salaries being paid by other firms for the particular skill level in the same geographic area in which the work is being done. We would say the best one way to "control" salary levels or salary increases would be to negotiate advance agreements in the CPFF contracts requiring all increases (for personnel working on the contract) above a certain percentage to be submitted for approval by the Contracting Officer. The initial allowable percentage threshold stated in the contract should reflect what typical businesses in your area could be expected to grant given current salary inflation trends, typical merit pay adjustments in the industry, etc.

If you wish to challenge salary increases after the fact you will have the responsibility of demonstrating that the increases are unreasonable, and the burden of proof will be on your agency to establish why the increases are unreasonable given the criteria established in FAR Part 31 as interpreted and applied by Federal Boards of Contract Appeals. Given the difficulty of trying to document after the fact why the raises are unreasonable, it is obviously best to structure the contracts in the beginning with a mechanism to identify and negotiate areas of cost that
are likely to be problematic, and the technique of using advance agreements is the best means of doing this. (Posted: December, 2011)