Should USAID Contractor Salary Threshold apply to “consultants”?
Should USAID Contractor Salary Threshold apply to “consultants”?
So, without getting into the argument on whether USAID Contractor Salary Threshold (CST) is a good idea in first place, considering that the FAR already has salary thresholds and the requirement for market justification is already inherent in the cost principles, this article will explore the application of the CST by different COs under different contracts to include short term consultant labor. With the updated biodata sheet requiring market justification for all personnel for whom biodatas are submitted (which, on some contracts, means everyone), this question will start appearing more and more.
ADS 302 126.96.36.199 states that USAID CST sets a maximum rate on salaries under contracts, where the Agency establishes the price or the fixed labor rate for services after considering what the actual staff salaries would be.
USAID ADS 302.3.6.9.3 (a)(3) further elaborates that “The USAID CST does not normally apply to executive level salaries. While USAID technical assistance services contracts typically furnish senior-level professional services, the services rarely involve executive level direct labor. Therefore, costs associated with executive level salaries are typically allocated to a contract through the indirect cost pool, to which CST does not apply. Salaries for individuals providing personal or non-personal services to USAID contractors must be compensated at rates determined by the CO to be fair and reasonable in the competitive market, in accordance with applicable FAR and AIDAR cost principles. Overall compensation to individuals providing these services are subject to the applicable cost principles in FAR 31.205-6 [Compensation for Employees] and FAR 31.205-33 [Compensation for Professional Services and Consultants].”
Non-personal contract means a contract under which the personnel rendering the services are not subject, either by the contract’s terms or by the manner of its administration, to the supervision and control usually prevailing in relationships between the employer and its employees. In other words – consultants and subcontractors.
So even though the specific limitation of the CST applies to “salaried” employees, why does ADS 302 specifically discusses consultant services in an unrelated paragraph, covering executives? And why does it refer to the cost principles covering both personal compensation and professional services compensation?
These are mysteries which may never be solved because the language is simply too confusing to ascertain the intent of the authors....
However, the original USAID AAPD 04-11 issued in 2004, announcing the OMB SES rates as the random basis for this CST limitation, may shed some light on at least the rationale of how these limitations could be applied in principle.
This question is complex, because not all “consultants” are created equal for the purposes of compensation cost principles, allowability and supporting documentation.
I would like to break this down a bit, so that if, in fact, USAID COs demand that we apply the USAID CST to what we, implementers, call “consultants”, it would be for the right type of consultants, who represent “purchased labor” rather than “professional services”.
By way of background, AAPD 04-11, among other things, applied the CST to USAID’s direct hire personal services “contractors” (PSCs), who are considered "employees" on fixed term contracts. PSCs can be various term contracts and normally include some kind of benefits. PSCs are used to augment USAID’s staff without offering permanent employment, but may be converted to direct full-time employees, subject to availability of OE funds and positions.
USAID contractors hire fixed term employees (hired for specific contracts to be posted overseas) and also consultants to augment their work force for contract implementation. USAID contractors also use experts in various professional fields (lawyers, engineers, security, accountants, compliance experts, doctors etc) to provide short term targeted assistance related to their USAID contracts' implementation. These are two different types of labor categories subject to two different standards, in accordance with DCAA Guidelines as well as CAS.
DCAA Cost Principle Guidance (Chapters 59-60) has provided specific guidance to their auditors in how supporting documentation and allowability determination should be performed in support of different types of labor. Specifically, when it comes to short term labor, DCAA lays out two distinct categories:
- Professional Services and Consultants
- Employees and Purchased Labor
Professional and Consultant Service Costs
Professional and consultant service costs represent expenses for services rendered by persons
- who are members of a particular profession or possess a special skill and
- who are not officers or employees of the contractor
Examples include those services acquired by contractors to enhance their legal, economic, financial, or technical position including outside accountants, lawyers, actuaries, and marketing consultants.
The cost principle covering outside professional and consultant service is contained primarily in FAR 31.205-33, Professional and Consultant service costs. The audit team’s assessment of the underlying nature of the claimed costs and not the contractor’s accounting classification determines whether FAR 31.205-33 is applicable. For instance, contractors may record expenses for purchased labor (e.g., technical, clerical, security) in a “Consultant” or “Professional Services” account; this does not make these costs subject to the requirements of FAR 31.205-33. Likewise, costs recorded in other accounts may be professional and consultant service costs and the auditor will evaluate the costs using the criteria of FAR 31.205-33.
FAR 31.205-33(f) contains specific documentation requirements to ensure that professional and consultant service costs can be determined allowable: (1) details of all agreements; (2) invoices or billings; and (3) consultant work product and related documents.
- An agreement that explains what the consultant will be doing for the contractor;
- A copy of the bill for the actual services rendered. This should include sufficient evidence as to the time expended and nature of the services provided to determine what was done in exchange for the payment requested, and that the terms of the agreement were met. This documentation does not need to be included on the actual invoice and can be supported by other evidence provided by the contractor.
- The price reasonableness analysis or soles source justification and cost analysis must support the reasonableness of the paid rates. At the very least, the qualifications of the individual or concern rendering the service and the customary fee charged, especially on non-Government contracts must be evaluated and
- Explanation of what the consultant accomplished for the fees paid – this could be information on the invoice, a drawing, a power point presentation, or some other evidence of the service provided. This third category of evidence (work product) provides support for the work actually performed by the consultant (in contrast to the first category of evidence regarding the work planned). Although a work product usually satisfies this requirement, other evidence may also suffice. If the contractor provides sufficient evidence demonstrating the nature and scope of the actual work performed, the FAR 31.205-33(f)(3) requirements are met even if the actual work product (for example, an attorney’s written advice to the contractor) is not provided. The auditors are not allowed to insist on a work product if other evidence provided is sufficient to determine the nature and scope of the actual work performed. consultant work product and related documents.
FAR 31.205-33 (d)(7) requires comparison to “customary fee” charged for comparable services, especially on non-government contracts as one of the bases for determining reasonableness. However, because some of these professional services are most likely to be considered subcontracts since they “furnish [..] services for performance of a prime contract or subcontract” (See FAR 44.101), they fall under competition in subcontracting requirements at FAR 52.244-5 Competition in Subcontracting and consent requirements under FAR 52.244-2 Consent to Subcontract clauses. Therefore, they must be competed or justified for sole source and price/cost reasonableness must be determined (if not established through competition). The consent for such services, even if provided by individuals, may be needed unless the subcontract is fixed price and below the Small Acquisition Threshold.
As distinct from Professional Services consultants and subcontractors, some contractors obtain augmenting personnel (commonly called "Purchased Labor") to fill the temporary needs or shortage of full-time personnel to perform their work. Short Term Consultants, who are hired by USAID contractors to perform deliverable-based short term scopes of work, in line with the type of work that the contractor's full time employees normally do directly, would fall under this category.
Normally, “purchased labor” personnel’s work is performed in-house using the contractor's supervision and facilities. Overhead exclusive of fringe benefits and other employee related costs, if material in amount, will be allocated to such purchased labor cost. Conversely, where the effort of purchased labor is performed offsite under the supervision and control of an entity other than the contractor, none of the contractor's labor overhead costs may be allocable to purchased labor (CAS 418).
Allowability of the costs of purchased labor and acceptance or rejection of the contractor's treatment of purchased labor will be based on the following during audit:
- the causal and beneficial relationship of indirect expenses and purchased labor, and
- the nature of the employer/consultant relationship using the Internal Revenue Service’s arms-length tests.
In making this assessment, the auditor will
a. Review the contractor's policy, with emphasis on the criteria used in determining whether personnel should be obtained from outside sources instead of by direct hire.
b. Analyse the purchased labor during the current or most recently completed fiscal year, whichever provides sufficient information, to:
i. Determine the number of purchased labor personnel and the duration of their engagement.
ii. Compare the number of employees on the contractor's payroll (in each classification of purchased labor involved) with the number of equivalent personnel obtained from outside sources.
iii. Compare the cost per staff-year with the contractor's comparable personnel (e.g. personnel who are subject to FAR 31.205-6 Compensation for Personal Services as basis of allowability)
iv. Evaluate the contractor's reasons for resorting to the practice. This is particularly important where the engagement extends beyond one year.
v. Determine whether the contractor's practices are equitable with respect to the utilization of purchased labor on Government contracts as compared to commercial work, and on fixed-price contracts as compared to cost type contracts; and whether the accounting treatments of the costs of such personnel and contractor personnel performing the same kind of work, including allocation of related overhead expenses, are equitable.
c. Examine prior years' records to determine if the practice shows an increasing or decreasing trend
The analysis required by cost principles and DCAA guidance in determining the allowability of compensation for short term “consultants” considers the following:
a. For "Purchased Labor" consultants - contractor’s regular employee compensation, i.e. competitive market based salaries based on FAR 31.205-6 (billable up to USAID Contractor Salary Threshold) and
b. For Professional Services consultants - “customary” fees and rates, often established by competition or some other benchmark comparison of commercially available information (for example, lawyer fees, published surveyor rates etc)
It would stand to reason that the evaluation of consulting rates by USAID COs should also focus on:
a. For Purchased Labor consultant categories - comparable salaries paid by contractor for full time employees up to USAID CST + an allowance for fringe benefits (including social costs like FICA & Social Security).
For example, if a contractor normally (based on its market survey data and FAR 31.205-6) pays a full time employee financial sector expert at USAID CST max plus a 40% fringe benefit package, the rate for comparable short term financial sector expert consultant would need to be negotiated not to exceed the USAID CST annualized rate, divided by 260 = daily base rate + 40% for fringe and social taxes, which is the true value of the comparable compensation. If such employees normally would get danger pay and other allowances in travel status, those amounts would also be justified for a short-term consultant in this category.
b. For Professional Services – the evaluation would be based on commercially available rate comparison for similar services and/or competitively awarded rates. No USAID CST applies.
This post originally appeared on LinkedIn on September 27th 2019