Recently the American Association of State Highway and Transportation Officials (AASHTO) released its 2021 National Compensation Matrix (NCM). The NCM is a beneficial tool for the architecture and engineering industry, helping firms to demonstrate FAR compliance.
What are the compliance requirements?
Per AASHTO, (actually it’s the FAR), the State Department of Transportations (DOTs) must obtain reasonable assurance that executive compensation costs claimed by engineering consultants are both reasonable and allowable. To meet this requirement, a firm may either use multiple surveys to compute reasonable compensation OR use the NCM.
One of the major elements of a FAR overhead rate is allowable compensation, and for years executive compensation has been a topic of intense discussions and court cases. In fact, the criteria established in the Techplan and Information Systems Armed Services Board of Contract Appeals cases became the gold standard, or at least the acceptable method, for determining reasonable executive compensation in accordance with FAR 31.205-6(b)(2). The Defense Contract Audit Agency (DCAA) continues to use this method. Meanwhile, the Ohio Department of Transportation (ODOT) developed their own compensation matrix based on compensation data in the ERI, PSMJ, and Dietrich salary surveys. Ohio consultants could use the matrix and eliminate most discussions.
There was a movement within AASHTO to modify the ODOT compensation matrix and adapt it for all consultants. Some, including myself, were not in favor of this process because it took away the consultants’ right and responsibility to establish their reasonable compensation and empowered the government to dictate reasonable levels. Specifically, I was concerned about the ability of a consultant to achieve superior levels of compensation. High-performing firms deserve high-performing compensation.
Where We Ended Up
Ultimately, a compensation matrix task force was formed, the NCM was created, and I was thrilled. Why, you ask? As mentioned earlier, a firm’s ability to achieve superior performance was the primary objection of the process. The compensation matrix is different from its source surveys in that the matrix uses gross revenues to compute reasonable compensation, while the surveys mentioned use number of employees. This is significant because firms who are typically the prime on a contract receive a boost because number of employees equates to net revenue, not gross. The result is compensation that is above the median but below the 75th percentile. Firms can still use the old method to achieve the 75th percentile, but there is a risk. When firms have less than average performance, the DOT will require the continued use of the compensation surveys, thus lower compensation.
The whimper of this year’s matrix update is the method by which it was updated. The 2021 matrix is just an update of the 2020 version with an inflation factor. Still, it is an important tool to use since the compensation levels are higher than the 2020 version and DCAA’s method.
Please contact me if you need assistance in leveraging this NCM or other tools to develop your FAR-allowable overhead rates.
Over his 35+ year career, T. Wayne has established himself as a respected thought leader in the architecture and engineering industry. As the founder of T. Wayne Owens & Associates, PC, Wayne honed his skills providing consulting, auditing, and financial management services for firms nationally as well as serving as CFO of an architectural firm. You can frequently find him presenting to national audiences on his favorite industry topics including AE auditing and financial management, the AASHTO Uniform Audit & Accounting Guide, FAR overhead rates, government contracting, and project accounting.