by Steven L. Lunsford, Associate

Introduction

Life as a federal government contractor recently became a little more difficult. In a Spring 2010 WTHF Building Solutions article, we outlined the reporting requirements facing contractors after the passage of the American Recovery and Reinvestment Act of 2009 (Reinvestment Act). In that article, we discussed how the Reinvestment Act’s reporting requirements applied to those contractors receiving Reinvestment Act funds, and otherwise to only “a small number of contractors and subcontractors who fit the requirements of being large, privately held entities who receive the vast majority of their revenues from federal contracts.” Now, much broader reporting requirements have been implemented in an effort to make available to the public the award of first-tier subcontracts and the executive compensation of federal contractors.

General Requirements

Effective July 8, 2010, a new Federal Acquisition Regulation (FAR) interim rule requires federal contracting officers to include subcontract award and executive compensation reporting provisions in all solicitations and contracts of $25,000 or more (Interim Rule). The preamble to the Interim
Rule warns that the new requirements are “sweeping in their breadth,” and, as such, apply to all businesses, regardless of size or ownership.

The Interim Rule requires a prime contractor to disclose its first-tier subcontract awards valued at $25,000 or more and, where certain thresholds are met, to report the names and total compensation of its five most highly compensated executives and the names and total compensation of each subcontractor’s five most highly compensated executives. There are a few exemptions to the Interim Rule that will be discussed. Generally, however, only classified solicitations and contracts with individuals are exempted from the broad scope of the Interim Rule.

The Interim Rule implemented portions of the Federal Funding Accountability and Transparency Act of 2006 (Accountability Act). The Accountability Act, as amended by the Government Funding Transparency Act of 2008, was enacted to reduce wasteful and unnecessary spending by requiring the United States Office of Management and Budget to establish a free, public website containing the full disclosure of all federal contract award information. The objective of the new Interim Rule is to “empower the American taxpayer with information that may be used to demand greater fiscal discipline.” (Federal Register, Vol. 75, No. 130, July 8, 2010, Rules and Regulations).

Specifically, the Interim Rule mandates that contracting officers include FAR provision 52.204-10 titled, “Reporting Executive Compensation and First-Tier Subcontract Awards,” in most federal contracts exceeding $25,000. The Interim Rule does not provide exemptions for commercial items, commercially available off-the-shelf items, procurements at or below the simplified acquisition threshold, or small businesses of any type. In addition, contracting officers are directed to modify existing indefinite-delivery indefinite-quantity (IDIQ) contracts on a bilateral basis to include the clause for future orders.

First-Tier Subcontract Awards

Pursuant to FAR 52.204-10(c)(1), unless otherwise directed by the contracting officer, prime contractors must report all first-tier subcontracts valued $25,000 or more by the end of the month following the month of award of the first-tier subcontract. The prime contractor must report certain key information, such as the subcontractor identity and subcontract value, at http://www.fsrs.gov. FAR 52.204-10(a) defines a “first-tier subcontract” as a subcontract awarded directly by a contractor to furnish supplies or services (including construction) for performance of a prime contract. The definition of first-tier subcontract excludes, however, supplier agreements with vendors, such as long-term arrangements for materials and supplies that would normally be applied to a contractor’s general and administrative expenses or indirect costs.

There are certain limitations on the prime contractor’s obligation to report first-tier subcontract awards. If the prime contractor had a gross income from all sources in the previous tax year under $300,000, the contractor is not required to report any subcontract awards. Additionally, if a first-tier
subcontractor had gross income in the previous tax year of under $300,000, the prime contractor is under no obligation to report that particular subcontract award. Finally, the reporting of first-tier subcontract awards is being phased in. Accordingly, from October 1, 2010, until February 28, 2011, any newly awarded subcontract must be reported if the prime contract award was $20,000,000 or more. Starting March 1, 2011, any newly awarded subcontract must be reported if the prime contract award was $25,000 or more. Clearly, far more contractors will be affected by the subcontract reporting requirement starting March 1, 2011.

Executive Compensation

FAR 52.204-10 also requires prime contractors to report the names and total compensation of each of the five most highly compensated executives for the contractor’s preceding completed fiscal year. This report must be made at http://www.ccr.gov by the end of the first month following the month of a contract award, and annually thereafter. The clause defines the term “executive” to include officers, managing partners, or any other employees in management positions. Although this definition may seem quite broad, it does not appear to include partners or shareholders who do not have management authority.

“Total compensation” is defined broadly. It includes: salary and bonus; awards of stock and stock options; earnings for services under non-equity incentive plans; change in pension value; above-market earnings on deferred compensation; and other compensation. The compensation report is only required, however, if in the contractor’s preceding fiscal year, the contractor received: (1) 80 percent or more of its annual gross revenues from federal contracts and subcontracts, loans, grants, and cooperative agreements; and (2) $25,000,000 or more in annual gross revenues from those same sources. Additionally, the executive compensation report is not required if the public already has access to information about the compensation of a contractor’s executives through periodic reports filed under 13(a) or 15(d) of the Securities Exchange Act of 1934. To determine if such access to compensation information already exists, a contractor can utilize the following website: http://www.sec.gov/answers/execomp.htm.

Similarly, a prime contractor must report the names and total compensation of each of the five most highly compensated executives for each first-tier subcontractor by the end of the month following award of a subcontract valued at $25,000 or more. As with the exceptions applicable to prime contractor compensation, a prime contractor must only report the compensation of its subcontractor’s executives if, in the subcontractor’s preceding fiscal year, the subcontractor received: (1) 80 percent or more of its annual gross revenues from federal contracts and subcontracts, loans, grants, and cooperative agreements; and (2) $25,000,000 or more in annual gross revenues from those same sources.

Conclusion

In addition to the seemingly endless policies and regulations that a federal government contractor navigates through, contractors must now adhere to new subcontract and executive compensation reporting requirements. It is imperative that those contracting with the federal government know that they bear the burden of complying with the new reporting requirements. If you bear that reporting burden, be sure your subcontracts obligate your subcontractors to furnish the necessary information completely and timely. A cautious approach is especially warranted when considering the Interim Rule’s directive to contracting officers to exercise “appropriate contractual remedies” if a contractor fails to comply with the reporting requirements. Moreover, FAR 52.204-10 makes clear that all reported information will be made public, and that prime contractors have an affirmative obligation to notify its subcontractors that the information will be public.

In response, contractors should develop a system to effectively track subcontract awards, and executive compensation, and obligate their first-tier subcontractors to provide the necessary information timely so as to meet the demands of the new reporting requirements.

The information or opinion provided in this article is the author's own and not necessarily that of Watt, Tieder, Hoffar & Fitzgerald, LLP. The author is solely responsible for the information and opinion that he or she has provided. The information contained herein does not replace seeking specific legal counsel to directly address individual client needs.