2022 National Compensation Matrix: Another Year, Another Whimper

National Compensation Matrix

The American Association of State Highway and Transportation Officials (AASHTO) recently released its 2022 National Compensation Matrix (NCM). A valuable tool for the architecture and engineering (AE) industry, the NCM helps AE firms to demonstrate FAR compliance.

Last year after the 2021 Matrix was issued, we published a blog in which we referred to the release as a “whimper” because it was simply an update of the 2020 version. The NCM has been updated every three years using survey data, with the interim updates made using an escalation factor. Our previous commentary is still relevant today because AASHTO has updated the 2020 version for its second year using an escalation factor. First, let’s consider what has led to this point in time.

The Background

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 a consultant’s ability to achieve superior levels of compensation. High-performing firms deserve high-performing compensation.

Still a Whimper

Why do I consider this year’s release another whimper? The biggest issue is using an escalation factor based upon data from the Bureau of Labor Statistics to determine allowable compensation. The Bureau of Labor Statistics uses their Occupational Employment Statistics sample methodology to estimate the escalation factors.

With the quest for new employees at an all-time high, I feel that the current AE market may exceed the estimates being relied upon. Thus, the allowable compensation will be lower than what the actual market has established.

What is the Solution?

Well, I think we start with the Federal Acquisition Regulation. Determining reasonableness states in part: “…the burden of proof shall be upon the contractor to establish that such cost is reasonable”. My original issue with the compensation matrix was my belief that the government does not have a right to dictate reasonable compensation levels. However, as the process has evolved, the matrix has turned out to be a valuable tool. That is, valuable in years when the actual survey data is used. In the interim years, firms should be encouraged to at least look at survey data to determine their reasonable compensation levels.

I have not checked, but now that I am typing this, I think I will check with state DOTs as to their opinion of mixing the matrix for survey data. If DOTs are reading this blog, please let me know your opinion. Originally it was frowned upon to mix the compensation matrix with surveys in different years. There was a fear that the firm would use the matrix in bad years and their own analysis in good years. Maybe it is time to revisit this practice.

If you have questions on how to leverage this year’s NCM or would like to discuss how to develop your FAR-allowable overhead rates, please reach out to me.

T. Wayne Owens, CPA, CGMA, CDA