Government Contractors who pay employee bonuses benefit by following a few key principles outlined in the Federal Acquisition Regulation (FAR).  FAR compliance ensures that bonuses will be allowable and included in overhead rates.  Your company overhead rate can change significantly if your company fails to follow FAR guidelines.

Bonus amounts paid to employees should be compliant with FAR 31.205-6(f) Bonuses and incentive compensation:

(1) Bonuses, and incentive compensation are allowable provided the—

(i) Awards are paid or accrued under an agreement entered into in good faith between the contractor and the employees before the services are rendered or pursuant to an established plan or policy followed by the contractor so consistently as to imply, in effect, an agreement to make such payment; and

(ii) Basis for the award is supported.

For Government Contractors, FAR guidelines prescribe a written bonus plan as critical.  At a minimum, the plan should document the purpose of the plan, eligibility criteria, plan objectives, performance objectives, form of payment and distribution schedule.

The purpose of your employee bonus plan should promote the long-term growth and performance of the company, increasing shareholder value through bonus awards to employees.  A bonus plan which ties strategic company objectives to employee performance encompasses both individual and company success in a win-win scenario.

A written bonus plan should outline employee eligibility.  Some companies enable all employees hired prior to the beginning of the plan period as eligible, others determine all employees at the Director level or above are eligible.   Eligibility criteria is company specific and generally determined by company executives.  The plan should be well documented and communicated with eligible employees.  A written communication distributed to each employee at the beginning of the plan year or shortly thereafter creates an auditable document.  For example, an annual bonus statement listing performance objectives may reflect an annual or quarterly revenue goal for each period along with the bonus plan target for each.

Best practice dictates bonus plan performance objectives are measurable.  Performance objectives may be created based upon company-wide objectives or objectives that are related to the performance of the individual employee (for example, company overall profit or one contract profit for which an employee oversees). Performance objectives may be based on one or more, or a combination of performance criteria, including items such as total earnings, earnings growth, return on investment, return on sales, revenue, revenue growth, expenses, gross margin, operating profit, net earnings, profit margin, new product factors, business efficiency measures, utilization metrics, cash flow, inventory items, financial ratios, working capital metrics or other balance sheet measurements (such as days sales outstanding), customer satisfaction/Contractor Performance Assessment Reporting (CPARS), or any other specific and quantifiable measurements.

Finally, the distribution form of payment and schedule should be defined in the company’s bonus plan.  This may be cash distributions on an annual or quarterly basis or some other company specific determination.

A written bonus plan which outlines items in accordance with the FAR creates a solid framework for allowability for Government contractors.  Knowing these requirements is the first step towards implementation!

If you have questions related to your company’s bonus plan or any other Government compliance item, govIRG is here to help.  We are passionate about the success of our clients!