I am often asked about deferring compensation especially in start up situations. This cost can be allowable if it meets all the requirements of FAR 31.205-6 (k) which incorporates CAS 415, Deferred Compensation. Keep in mind under cost reimbursable contracts and in situations where the Progress Payments clause is invoked billable direct costs must be paid in the normal course of business, usually within a business cycle. For deferred compensation to be allowable the FAR and CAS criteria must be met. There are special rules for unique circumstances and what if scenarios. If your company uses deferred compensation suggest the program be reviewed in light of these requirements. Also recommend that the awards be reduced to a written agreement.

A brief description of the main requirements is provided below. It is not meant to be a complete discussion on the subject but to list the main requirements. Please contact me for details if needed.

1) There is a requirement to make the future payment(s) which the contractor cannot unilaterally avoid.

(2) The deferred compensation award is to be satisfied by a future payment of money, other assets, or shares of stock of the contractor.

(3) The amount of the future payment can be measured with reasonable accuracy.

(4) The recipient of the award is known.

(5) If the terms of the award require that certain events must occur before an employee is entitled to receive the benefits, there is a reasonable probability that such events will occur.

(6) For stock options, there must be a reasonable probability that the options ultimately will be exercised.