Recently I received information confirming that DCAA is applying a full court press on a number of subjects. One is compensation. For small and medium sized businesses this means owner and partner compensation. The DCAA will be looking closer at these costs to make sure they meet the requirements of FAR 31.205-6. The costs to participate and run the business are generally allowable if considered reasonable by the government. The DCAA is using various compensation surveys to validate reasonableness. Government perceptions that a cost is actually a distribution of profits is not allowable. Also bonuses if reasonable are allowable. However, these bonuses must be documented in policy or a plan implying an agreement or actual agreement with the employee or member or partner. Discretionary plans versus performance based plans will not fly. Obviously this all gets a bit complicated for partnerships and LLC’s. My suggestion is (1) document compensation with plans, policies and agreements; (2) bounce your compensation off of at least three compensation surveys that are relevant, unbiased and reputable so you are prepared for DCAA and make adjustments as needed; (3) avoid discretionary compensation practices and (4) develop a strategy for owner and partner compensation.