For U.S. contractors in Iraq, a legion of issues.

Imagine you are a contractor working on a project for the federal government. More specifically, imagine that the contract requires your company to perform work in Iraq. Maybe your company provides construction services for the many roads and buildings under repair. Maybe your company provides translators to assist military personnel interacting with the Iraqi population. Or maybe your company designed a weapon system currently in use, and your people in Iraq are overseeing and/or maintaining the system. No matter what the job, the work schedule probably looks something like this: your personnel work 10-hour days, seven days a week for eight straight weeks. They then take two weeks off. At night, your personnel are confronted with machine gun and mortar fire into their base camps.

Given these circumstances, you might find it difficult to lure qualified personnel to work in Iraq. One way to address this problem would be to offer your workers higher wages, sign-on bonuses, completion bonuses and other incentives related to the project.

However, if you did this, you could very well run into a buzz saw created by the Defense Contract Audit Agency, the group charged with auditing contracts engaged in by the Department of Defense. Audit guidance issued this spring by the DCAA is putting the squeeze on federal contractors, and greatly reducing their ability to continue placing qualified workers "in country."

Issued on April 12, the DCAA memorandum seems innocuous enough. The guidance informs field auditors that DCAA conducted a survey of government contractors working abroad, and based on the responses, developed guidelines for field auditors to use when determining whether compensation rates are "reasonable." A quick read through the guidance, however, reveals exactly how onerous this may be.

To begin with, the guidance places the burden of proving "reasonableness" squarely on the contractor. The DCAA has set standard compensation rates based on the survey results, and now requires contractors to justify paying their employees anything above these rates. Since the overwhelming majority of contracts were signed prior to issuance of the audit guidance, many government contractors now find themselves contractually bound to their workers on the one hand and in a precarious position vis-a-vis government auditors on the other

Commonsense Approach?

How are auditors to determine whether a particular compensation rate is reasonable? The guidance urges field auditors to take several factors into account, including conformity with compensation practices of other firms a) of the same size; b) in the same industry; and c) in the same geographic area. Again, this may seem like a commonsense approach, but government contractors working in Iraq could quickly identify its faults.

For example, how should auditors address a company that does not have any competitors of the same size or working in the same industry? The larger contractors working in Iraq have distinct specialties, which would thereby eliminate at least one if not two of the criteria outlined above. In such an instance, the DCAA field auditor is presented with a case of first impression, and may likely conclude that the contractor has failed to "prove" the reasonableness of its compensation practices.

The third criteria outlined above presents additional problems. Being a war zone, Iraq is checkered with "hot spots" and "green zones." To simply conclude that every contractor working within a broad geographic area faces the same risk to personnel is absurd.

A company providing communications support in Baghdad likely faces far fewer risks than contractors working in Fallujah, yet this guidance would place the onus on the contractor with personnel in Fallujah to demonstrate why a higher pay rate is appropriate. The auditors may agree, or they might not.

The guidance zeros in on hardship pay differentials, and instructs field auditors that the differential for Iraq is 25 percent of an employee's base pay, calculated on a 40-hour workweek. This assumes two points that contractors would challenge: 1) that field personnel are working 40 hours a week; and 2) they are in danger only during their 40-hour workweek. As mentioned, many contractors are working their personnel 10-hour days, seven days a week; at night, workers often enjoy light shows provided by machine gun and mortar fire into their camps.

While most would agree with the need for DCAA to police Department of Defense contracts to ensure the government is not being improperly billed for work, this guidance seems ill-conceived. It fails to account for the realities faced by civilians working in a highly dangerous environment, and could force government contractors to reconsider exactly how they will meet their contractual obligations going forward.

Mark Prysock ([e-mail]) is Director of Tax and Economic Policy and Chief Counsel for FEI. He also serves as liaison to FEI's Committee on Government Business (CGB).