It’s an empty bag.

The “winner” of an IDIQ contract has to compete again for each order the Government places under the program and (theoretically, at least) one contractor could win them all. So, the Government sets the ceiling for each of the contracts awarded at the theoretical maximum it could possibly order. And, of course, it really doesn’t know what that maximum might be with any certainty, so it takes the “official program estimate” and adds a little something to it to account for that uncertainly. Sometimes it doubles or even triples it.

Add to that the fact that most such programs usually span five to eight years, and suddenly each “winner’s” likely annual revenue on that contract quite as impressive.
Let’s take the ONE program as an example. The contract ceilings were set at $476 million. That’s probably 2 or 3 times the real estimate of program expenditures. Let’s be generous and call the real number half of that or $238 million. Still not too shabby!

Of course, that’s spread over a five year program. So, that’s really about $48 million a year. That’s still respectable! That could employ as many as 500 people.

Oh wait. There were nine “winners.” So, that has to be split nine ways! That makes the probable annual revenue for each contractor in this program just over $5 million – call that 50 jobs, more or less.
And, of course, there are subcontractor team members that expect their share of the pie. Even the most permissive small business subcontracting plans require more than 20% of that to be flowed down to subs. In most cases it’s more than 30%. In this case, it’s likely that at least $1.5 million of that very theoretical $5 million will be passed through to someone else.

One awardee stated in the press release that there were nineteen members on the team. For those subs, that $1.5 million could be split 18 ways. That computes to about $88k per subcontractor – maybe one person.

That’s why for a lot of companies the phrase most often heard from the CEO following “Congratulations” is “You spent how much on that proposal?”

The point here is not just to pop anyone’s balloon. There’s a very real problem with news stories that create the perception the Government has just spent $476 million nine times when the reality is more like $48 million once – split nine ways. Ditto for the press releases issued by the winners.
To all the winners and their team members on the award of the ONE contracts, congratulations!
But, don’t spend it all in one place.

It actually took significant research to discover that the current cap is actually $693,951. Apparently, $694,000 is just so much more impressive in print.

As originally enacted, the law imposed the cap only on the top five contractor executives. Over time, this has been interpreted to mean the top five executives in each business unit of a multi-segment contractor. This introduced an interesting paradox in very large corporations where the compensation of the number six person (and others) might significantly exceed the cap, but be completely allowable – or at least not capped by law.

Fiscal 2012 saw a number of proposed changes to this provision including one by the White House as part of the President’s deficit reduction proposal to drop the cap to $200,000. This is the amount earned by the most senior federal executives (cabinet secretaries). That proposal never went anywhere, but the Senate included a provision in the National Defense Authorization Act (NDAA) to drop the cap to $400,000, an amount equal to the President’s salary. The House included a provision in its version of the NDAA that left the current benchmark in place, but extended it to all contractor employees instead of just the top five.

In the end, the NDAA bill the President signed on December 31st included the House language. So, the cap remains at the benchmark set each year by OMB, but is now effective for all contractor employees.
And, the saga is not over yet. Senior Government officials are concerned the overdue OMB update of the benchmark may push it over $750,000 and the White House is once again calling for a dramatically lower cap. On January 31st, the acting head of the Office of Federal Procurement Policy (OFPP) posted an entry to the OMB Blog entitled “Ending the Overpayment of Federal Contractor Executives.” In it he called the current executive compensation benchmark “far in excess of what can be justified” and called on Congress to “abolish the outdated statutory formula” and tie the cap to the top salary of the Government executive pay schedule – $200,000.
Legislators from Senator Charles Grassley (R-IO) to Senator Barbara Boxer (D-CA) have echoed this call and in the current Congressional environment, it could happen!

As they say in the advertising business, “Watch this space.”