Government Contractor Compensation

Government Contractor Compensation Has Rules the Commercial Sector Never Sees

Commercial companies set pay based on market competitiveness and internal equity. Government contractors do that too, but they also answer to DCAA auditors who evaluate whether compensation costs are reasonable and allowable under FAR cost principles. They must comply with Service Contract Labor Standards (SCLS, still commonly referred to as the SCA) wage determinations that set minimum pay floors for covered employees. And they operate in a regulatory environment where the rules have shifted meaningfully since January 2025.

These requirements carry real consequences. Compensation costs that DCAA determines are unreasonable can be disallowed, meaning the contractor absorbs the expense without reimbursement. SCLS violations carry penalty assessments and contract termination risk.

The Barksdale Group builds compensation infrastructure specifically designed for government contractors. We bring direct experience managing DCAA compliance, SCLS administration, and pay equity analysis as Interim Compensation Director for a 1,700-employee Veritas Capital-backed defense contractor. This is not advisory from the outside. It is practitioner knowledge from the inside.

What GovCon Compensation Consulting Covers

DCAA-Defensible Salary Structures. We build salary structures anchored to published compensation surveys (Mercer, Western Management Group, Radford, ERI) using regression-based methodology with full documentation. Every design decision is traceable: survey matching rationale, aging factors, blending methodology, regression model parameters, and the logic chain from market data to grade midpoints. When DCAA requests your compensation plan and supporting documentation, the audit trail is already built.

We go beyond base salary. DCAA evaluates total compensation for reasonableness, which means your bonus plans, benefits, and deferred compensation arrangements need to be documented and defensible as well. We review the full compensation package against FAR 31.205-6 standards and identify elements that may face allowability challenges.

For a mid-size defense services firm, we rebuilt a salary structure using four survey sources, documented 85+ unique job matches with quality ratings, produced a regression-based grade model with 16 grades, and delivered the full documentation package in a format that directly addressed the data points DCAA auditors typically request.

FAR 31.205-6 Compliance Review. We evaluate your compensation practices against each relevant subsection:

FAR 31.205-6(p): The Compensation Cap. The compensation cap is more nuanced than many contractors realize, because the applicable rule depends on when your contracts were awarded:

• Contracts awarded on or after June 24, 2014: The cap applies to compensation costs for all contractor employees, not just executives. The benchmark amount is published annually by the OFPP Administrator and adjusted using the Employment Cost Index.
• Contracts awarded before June 24, 2014 (still in performance): A different cap structure applies, generally limited to the five most highly compensated employees in management positions, with a separate benchmark amount.
• Blended caps: Contractors with a mix of pre-2014 and post-2014 contracts may use a weighted average composite cap under an advance agreement with DCMA.

We model your compensation against the applicable cap(s), identify cost disallowance risk, and design structures that maximize allowable recovery while remaining competitive for talent.

Service Contract Labor Standards (SCLS/SCA) Integration. SCLS compliance cannot be bolted on as a side process. Covered employees must receive prevailing wages and fringe benefits specified in the applicable Wage Determination, and those requirements need to be embedded in your salary structure.

We integrate SCLS wage determination rates as classification-specific floors within your salary structure. This ensures covered employees always meet or exceed the minimums while your market-based ranges provide room for progression above those floors. We handle the complexity of employees who split time between covered and non-covered contracts, employees who work across multiple wage determination areas, and the annual wage determination updates that require structure adjustments.

Common SCLS compliance mistakes we see: applying the wrong Wage Determination, failing to update structures when Wage Determinations change, not tracking fringe benefit monetary equivalents accurately, and treating SCLS compliance as a payroll function rather than a compensation design function.

Pay Equity Analysis for Government Contractors. Proactive pay equity analysis remains sound practice for government contractors regardless of the current federal enforcement posture.

The regulatory landscape shifted in January 2025, when Executive Order 14173 revoked EO 11246. The traditional framework requiring race- and sex-based affirmative action plans and the associated compensation analysis program is no longer in effect. OFCCP retains enforcement authority under Section 503 of the Rehabilitation Act (disability) and VEVRAA (veterans).

That said, Title VII of the Civil Rights Act, the Equal Pay Act, and a growing number of state-level pay equity and pay transparency statutes remain fully operative. Proactive statistical pay equity analysis protects contractors against litigation risk, supports state compliance obligations, and is what sophisticated acquirers and investors expect to see during due diligence.

Clearance-Level Differential Modeling. Cleared defense contractors face a unique labor market. Employees holding TS/SCI clearances command premiums over their uncleared equivalents that vary by geography, clearance level, and polygraph requirements. We build clearance differential models that quantify the market premium for each clearance level and integrate those premiums into your salary structure so cleared positions are priced competitively without ad hoc adjustments.

Our GovCon Experience

This practice is built on direct operational experience:

• Served as Interim Compensation Director for a ~1,700-employee Veritas Capital-backed defense contractor
• Managed DCAA compensation compliance and SCLS administration as daily operational responsibilities
• Led a 520-employee M&A integration (Rite-Solutions acquisition, EDGE sector formation) including job mapping, grade harmonization, and pay alignment across different contractor cultures
• Built compensation infrastructure across all 12 workstreams of a Total Rewards diagnostic
• Developed geographic pay zone analysis including advocacy for market-based zone reclassification
• Managed a survey portfolio including Mercer, Western Management, HR Alliance, and Radford data

Who This Is For

• Defense contractors and government services firms that need DCAA-defensible compensation infrastructure
• PE-backed government contractors undergoing rapid growth or M&A integration that need compliant compensation systems built quickly
• GovCon firms preparing for or responding to DCAA compensation audits
• Companies transitioning from commercial to government contracting that need to understand and comply with FAR compensation requirements
• Small to mid-size contractors (200-2,000 employees) that lack dedicated compensation staff to manage compliance

What You Get

• DCAA-defensible salary structure with full documentation package (survey matches, aging, regression, design rationale)
• FAR 31.205-6 compliance assessment covering all relevant compensation cost allowability provisions
• Compensation cap analysis with contract-award-date-specific modeling and disallowance risk quantification
• SCLS integration model with wage determination floors embedded in your salary structure
• Pay equity analysis using regression methodology, with remediation modeling and documentation
• Clearance differential model with market-based premiums by clearance level and geography
• Compensation plan documentation meeting DCAA formal plan requirements
• Annual maintenance framework so your team can update structures and maintain compliance independently