Many USAID contractors make the assumption that contractors and subcontractors are required to grant their billable personnel allowances and differentials, such as living quarters allowance, education allowance, and danger pay.
This assumption is not unwarranted. Ask any of the major implementing partners if they grant the full suite of allowances to their long-term billable personnel and most likely they’ll say “yes”. But if you read your contract a little more closely, you’ll see that these allowances and differentials are NOT mandatory!
So…where in your contract can you find this information?
All USAID cost reimbursable prime contracts are required to incorporate either in full or by reference AIDAR 752.7028 “Differentials and Allowances”. If we look at the text of the various differentials and allowances that are mentioned in this clause, we see that each of these states that the contractor will be reimbursed for such payments made to their employees that do not exceed that which would be paid to USAID employees in accordance with the Standardized Regulations.
That’s a mouthful! But what this basically means is that if the contractor chooses to grant these allowances to their personnel within the regulation’s limitations, the cost can be billed to the contract. However, the contractor will NOT be penalized by USAID for NOT granting allowances and differentials to their personnel.
Given that these allowances and differentials are not mandatory, you may be asking, why do contractors as a rule, grant their personnel the full suite of allowances and differentials up to the maximum allowed? In many cases, contractors do this because they have misunderstood the regulation. Others do it as they feel it gives them a competitive edge in securing the best and most qualified personnel.
That said, some companies do offer reduced allowances packages. And they may be still compliant with the AIDAR clause on differentials and allowances if they do so.
There is a catch, though: even though contractors are at liberty to set lower ceilings than what are listed in the Department of State Standardized regulations (DSSR) or to omit particular allowances or differentials altogether, contractors should offer allowances and differentials consistently to qualified personnel. Lack of consistency may result in an audit finding, as compensation and benefits practices should follow an established contractor policy, as per the FAR cost principle on Compensation for Personal Services (FAR 31.205-6).
This means contractors would be well-advised to not make case-by-case decisions in determining when to grant an allowance or not. The most common reason contractors attempt to maintain this level of flexibility in offering (or not) allowances, is cost savings. While cost savings are certainly important when it comes to spending taxpayer dollars, lack of a consistent practice or written policy may get your company in hot water with an auditor down the line. Denying an allowance to one employee when it is granted to others, simply on the basis of cost savings, ultimately undermines the cost reasonableness of the benefit and brings it under scrutiny during the times when it IS offered. (Not to mention, the practice does not align with companies’ policies that claim equity in their hiring practices.) As a rule, in order to avoid audit findings, cherry picking on a case-by-case basis should be eliminated as a corporate practice in all areas, not just allowances.
So what solution is there for a company that wishes to be compliant but also have flexibility and achieve cost savings? Having a clearly documented policy that outlines the allowances offered, monetary ceilings/ranges applicable to each allowance, defining who is eligible and under what circumstances, and identifying reasonable exceptions to the rule and how those exceptions may be approved internally.
Is your policy on differentials and allowances inconsistently applied or perhaps even non-existent? Contact us today for help! Akiri has aided a variety of USAID implementing partners in drafting or revising these policies to allow for flexible application and cost savings, all while ensuring compliance.