Government Contracts Monitor

New Rule Requires Contractors to Report Executive Compensation and Subcontractor Information

July 23, 2010

Effective July 8, 2010, a new interim rule requires contractors to report information about subcontract awards and the names and – of particular note – the salaries of the 5 highest-paid prime and subcontractor executives. The subcontract award information will be made publicly available at USASpending.gov, and the contractor executive compensation information will be posted to the Central Contractor Registration (CCR) website.

The new rule extends the stringent compensation and subcontractor reporting requirements applied to American Reinvestment and Recovery Act (ARRA) funded contracts to all federal contracts entered into after July 8 and over $25,000, except classified contracts and contracts with individuals. The rule applies to all businesses regardless of size or ownership. It also applies to commercial item contracts, including for “commercially available off-the-shelf” (COTS) items. Additionally, contracting officers must include the requirements on future orders under existing ID/IQ contracts if valued at $25,000 or more.

Executive Compensation Reporting

The new rule requires contractors to report the “total compensation” of its 5 highest-paid executives, as well as the 5 highest-paid executives of its first-tier subcontractors. In this context, “executives” means officers, managing partners, or any other employees in management positions. “Total compensation” includes salary and bonuses; awards of stock, stock options, and stock appreciation rights; earnings for services under non-equity incentive plans; change in pension value; above-market earning on deferred compensation; and any other compensation.

However, this reporting requirement only applies to companies that (1) earned more than $300,000 in gross annual income in the previous tax year; (2) received 80% or more of their annual gross revenues from Federal contracts, loans, grants, and cooperative agreements; and (3) received $25 million or more in annual gross revenues from Federal contracts, loans, grants, and cooperative agreements. Also, a company does not need to re-report if it has already reported its compensation information to the Securities and Exchange Commission (SEC).

Subcontractor Reporting

To minimize the burden on Federal agencies and contractors, the reporting program for subcontract information will be implemented in phases:

From now until September 30, 2010, any newly awarded subcontract must be reported if the prime contract award amount is $20 million or more.
From October 1, 2010 until February 28, 2011, any newly awarded subcontract must be reported if the prime contract award amount is $550,000 or more.
Starting March 1, 2010, any newly awarded subcontract must be reported if the prime contract award amount is $25,000 or more.

The new rule requires contractors to report the following information concerning first-tier subcontractors by the end of the month following the month of award of the first-tier subcontract:

Unique identifier number (DUNS Number) for the subcontractor receiving the award and for the subcontractor’s parent company (if it has one)
Name of the subcontractor
Amount of the subcontract award
Date of the subcontract award
A description of the products or services (including construction) being provided under the subcontract, including the overall purpose and expected outcomes or results of the subcontract
Subcontract number assigned by the contractor
Subcontractor’s physical address including street address, city, state, and country. Also include the 9 digit zip code and congressional district
Subcontractor’s primary performance location including street address, city, state and country. Also include the 9 digit zip code and congressional district
The prime contract number and order number, if applicable
Awarding agency name and code
Funding agency name and code
Government contracting office code
Treasury account symbol (TAS) as reported in FPDS
The applicable North American Industry Classification System code (NAICS)

If a contractor had a gross income of less than $300,000 from all sources in the previous tax year, it does not need to report its subcontract information. Additionally, if a subcontractor had a gross income of less than $300,000, the contractor does not need to report the information pertaining to that subcontractor.

Analysis

Depending on how covered contractors track and maintain contractor and subcontractor information, these reporting requirements may impose a significant additional administrative burden. Contractors will need to establish extra internal mechanisms for collecting, organizing, and promptly reporting information from subcontractors. This may prove to be particularly difficult for contractors utilizing multiple subcontractors. However, more troubling – particularly for closely-held companies – is the requirement for contractors to disclose executive compensation.

The Government is accepting comments on the rule until September 7. Information about submitting a comment can be found here.

Drafted by: Katie Calogero, Summer Associate