On July 26, 2012, the Federal Acquisition Regulatory Council finalized a major rule requiring contractors to not only report information related to their first tier subcontracts and the executive compensation of their employees, but also to report information related to the executive compensation of their covered subcontractors.
The rule requires each prime contractor (as a part of its annual registration requirement in the Central Contractor Registration (CCR) database) to report the names and total compensation of its five most highly compensated executives for the preceding completed fiscal year. Prime contractors also are required to disclose the names and total compensation of the five most highly compensated executives of each of their first-tier subcontractors on an annual basis. Finally, the rule requires prime contractors to, on a rolling basis, report subcontract award information for all subcontractors working on prime contracts of $25,000 or more.
The final rule, which has existed in interim form since July 2010, has its origins in the Federal Funding Accountability Act of 2006 (“FFATA”), the purpose of which was to reduce “wasteful and unnecessary spending” through the full and open disclosure of federal award and contractor executive compensation information. The rule’s coverage is quite broad; its executive compensation disclosure requirements, for example, apply to the compensation information of any individuals who manage the contractor entity. This includes officers, executives, and other individuals who perform management functions for the contractor – those who lack a formal title.
Despite strenuous objections from the contracting community, there are very few exceptions to the rule. Indefinite delivery, indefinite quantity (“IDIQ”) contracts are covered, and contracting officers are required to modify existing IDIQ contracts in order to ensure compliance with the rule. Furthermore, there is no exception in the rule for commercial item contracts, nor is there any exception for contracts performed entirely outside the United States or performed by foreign contractors.
Additionally, the rule’s authors have soundly rejected all proposals that subcontractors be permitted to report their own executive compensation directly to the Government (and in so doing to bypass their prime contractors). The authors stress that “[t]he Federal Government has no privity of contract with subcontractors and is therefore reluctant to establish communication channels that could potentially be construed as creating a contractual relationship.”
Notably, however, only certain kinds of subcontractors are covered under the final rule. Unlike the interim rule, the final rule now makes clear that the concept of a first-tier subcontractor is not meant to cover suppliers with long term agreements to supply materials for multiple contracts. The authors of the rule have determined that such long-term agreements are “outside the scope of the core functions of a contractor’s contract with the Government.”
For many companies, the obligations set forth in this final rule may seem familiar. For example, publicly-traded companies are already required to periodically disclose executive compensation information under the Securities Exchange Act of 1934 or Section 6104 of the Internal Revenue Code of 1986. Yet it is very important to note that disclosure under those laws is no substitute for separate disclosure under this rule; there is no exception to the rule for companies whose executive compensation information is already disclosed elsewhere.
There are, however, two exceptions that may provide contractors with some relief. First, prime contractors that (a) do not receive 80 percent or more of their annual gross revenues from federal sources; (b) do not have $25,000,000 or more in annual gross revenues from federal sources are not required to report executive compensation; and (c) have not already reported under the Securities Exchange Act of 1934 or Section 6104 of the Internal Revenue Code are not covered by the executive compensation disclosure requirement. And second, a contractor or subcontractor that in the previous tax year had total gross income of less than $300,000 is not required to report subcontractor award information.
In the discussion section of the final rule, the rule’s authors acknowledge the great burden that this rule will place on contractors and subcontractors – particularly small, privately-held businesses. The rule’s authors also acknowledge the strategic risks of disclosure under the rule – including the risk that disclosure of executive compensation can make a company vulnerable to poaching by its competitors. In order to stay ahead, contractors should take steps now to prepare for the costs and complexities of compliance with this rule.