Bloomberg News

Senators Seek Reduction in Pentagon Pay for Contractors

June 06, 2012

Pentagon reimbursement for compensation of military contractors’ employees would be reduced by 70 percent to $230,700 a person under a plan approved by the Senate Armed Services Committee.

The reduction, from $763,029, is set out in a committee report made public yesterday on the defense authorization measure approved by the panel. Because a bill already passed by the House doesn’t specify a limit, the pay issue would be determined in negotiations on a final version of the annual measure.

Federal law limits how much the government will reimburse contractors, not how much the companies can pay their employees. Defense Department contractors affected by the restriction include Lockheed Martin Corp. (LMT:US), Northrop Grumman Corp. (NOC:US) and General Dynamics Corp. (GD:US)

“At a time when most Americans are seeing little or no increases in their paychecks and budget constraints require the department to find efficiencies, the committee concludes that increases of this magnitude are unsupportable,” the panel said in its report.

The reimbursement rate, based on an Office of Federal Procurement Policy benchmark, increased in April to $763,029, compared with $432,851 when the benchmark was set in 2004.

The Senate committee adopted an amendment by Senator Joe Manchin, a West Virginia Democrat, setting the maximum at $230,700, the annual salary for the vice president and the maximum for federal employees.

“I am determined to make sure that this provision is not watered down as Congress moves forward with the defense bill,” Manchin said yesterday in an e-mail. “It doesn’t make any sense that taxpayers are paying some contractors twice as much as we pay the commander-in-chief.”

Contractors Opposed

The Professional Services Council, which represents about 350 contractors, is “actively opposing” the proposed pay-cap reduction, according to Roger Jordan, vice president of government relations for the Arlington, Virginia-based group.

“The establishment of an arbitrary cap is the wrong approach,” Jordan said in an interview. Reducing the cap to $230,700 would force some contractors to cut pay significantly and would hurt their ability to retain highly skilled employees, he said.

The Aerospace Industries Association was reviewing the provision “and its impact on our ability to compete with Silicon Valley and other high-tech industries to hire and retain the best technical talent,” Cord Sterling, vice president of legislative affairs for the Arlington, Virginia-based trade group, said in an e-mailed statement.

‘More Cost-Efficient’

Scott Amey, general counsel of the Project on Government Oversight in Washington and a supporter of the reduced reimbursement, called it “a way to make the government more cost-efficient.”

“As far as what the taxpayer should be on the hook for, I think the salaries should be on par with what government employees make,” Amey, whose group describes itself as an independent watchdog, said in an interview.

Under current law, the ceiling is set each year at the median compensation level for top executives at publicly held companies with annual sales of more than $50 million. It incorporates the pay of the five highest-paid managers at each home office and each business segment, according to the Office of Federal Procurement Policy.

The cap restricts amounts that can be reimbursed for salaries in so-called cost-type contracts. Under such deals, companies are reimbursed for direct costs they incur, including labor, travel and materials, as well as some indirect costs. The government often uses these agreements for research and development work such as designing a new drone or Lockheed Martin’s F-35 jet, the Defense Department’s most expensive weapons program.

The Senate defense measure is S. 3254. The House-passed version is H.R. 4310.

To contact the reporters on this story: Tony Capaccio in Washington at; Nick Taborek in Washington at

To contact the editor responsible for this story: John Walcott at

The Good Business Issue

Companies Mentioned

  • LMT
    (Lockheed Martin Corp)
    • $196.43 USD
    • 0.66
    • 0.34%
  • NOC
    (Northrop Grumman Corp)
    • $151.76 USD
    • 0.44
    • 0.29%
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