Government Contracts Monitor

As Pension Costs Rise, DOD Likely To Squeeze Contractors

February 11, 2013

By: Lindsay Simmons

Contractors negotiate labor costs with the Department of Defense (DOD) – as part of the price DOD will pay on a contract – based upon the compensation they pay to their employees.  Since defined benefit pension contributions are a routine part of employee compensation, the amounts a contractor contributes to its employees’ pensions are included in these negotiated labor costs/rates.  As a result, DOD ends up reimbursing a large amount of contractor pension costs.

This, coupled with recent changes in the rules for calculating pension costs, served as a catalyst for Congress to request that GAO take a look at DOD contractor pension costs. To do this, GAO analyzed the defined benefit pension plans of its 10 largest contractors and interviewed certain contractor employees as well as DOD officials.

According to GAO’s recently issued report – based on the defined benefit pension plans for DOD’s 10 largest contractors – pension costs have grown from $500 million to more than $5 billion over the last ten years.  And this trend could continue.  Not surprisingly, as these costs grow, so do the labor costs recoverable under DOD contracts.

In light of GAO’s findings (and current budget constraints), DOD and other Executive agencies are understandably concerned about the impact of pension plan costs on their programs.  It should come as no surprise, therefore, that DOD will be stepping up its oversight on pension costs claimed by contractors. It looks like DOD will focus on understanding how –

• Various factors contribute to pension costs
• Contractors determine their pension costs
• DOD currently ensures its only pays
  “appropriate” contractor pension costs
• Harmonization of Cost Accounting Standards with
  the Pension Plan Protection Act will increase the amounts DOD will pay

GAO’s study includes a recommendation that DOD clarify both the responsibility for and guidance regarding (i) assessing pension cost reasonableness and (ii) assuring consistency in payment of pension costs.  In order to tackle this issue, GAO notes that better trained auditors and contracting officers – personnel who can deal with the intricacies of the applicable rules and regulations regarding pension plan costs – will be key.

The key for contractors:  Be prepared for DOD to take a closer look at your pension costs and to take a harder stance in negotiating that portion of your labor costs it will reimburse.

 

Lindsay Simmons is the attorney responsible for the content of this article.