Heads up to architecture and engineering firms: the American Association of State Highway and Transportation Officials has released its 2021 National Compensation Matrix (NCM).
This is significant for architecture and engineering firms because the NCM is a tool that helps them demonstrate compliance with a regulation that has a huge impact on their profitability.
To comply with FAR 31.205-6, A/E firms must demonstrate that claimed compensation costs are reasonable and allowable. To meet this requirement, A/E firms may (1) prepare an executive compensation analysis or (2) use the National Compensation Matrix, a tool that establishes compensation amounts based on gross revenue and executive position. You can download the 2021 National Compensation Matrix here (source: AASHTO website).
Many firms choose to use the NCM tool because preparing an executive compensation analysis can be costly and time consuming. However, it’s worth noting that firms sometimes choose to prepare an analysis if they are claiming superior performance or have significant geographic wage differentials.
How to Use the National Compensation Matrix
A/E firms must identify their executives, maintain job descriptions and then compare the job descriptions to the national compensation matrix.
It’s important to look at actual job duties and responsibilities and not just focus on titles when completing the NCM. Positions included in the NCM are:
- Chairman (non-CEO)
- CEO/President
- Executive Vice President/Chief Operating Officer
- Senior Vice President
- Vice President
- Chief Financial Officer
- Top Engineering Executive
- Human Resources Director
- Director of Business Development
Additionally, when entering compensation into the matrix, it’s important to remove unallowable forms of compensation and compensation related to unallowable activities.
A/E Firm Revenue and the National Compensation Matrix
The predictive value of the NCM is accurate for firms with revenues ranging from $1.5 million to $500 million. For firms with less than $1.5 million in revenue, the tool will utilize $1.5 million as the revenue. Firms with more than $500 million are limited to compensation levels applicable to the $500 million revenue level.
Let’s look at an example:
Firm X earned $10,500,000 in revenue from engineer consulting services in 2020. Firm X has elected to apply the NCM to determine the reasonableness of compensation paid to its five executives. The executives have tracked time spent on activities during the year, including time spent on unallowable activities. All time spent on unallowable activities and unallowable forms of compensation have been excluded. The example below shows these adjustments and the recommended format for demonstrating compliance with the NCM.
Download the sample NCM compliance schedule in Excel here.
Surprised By Your NCM Results?
If you use the NCM tool and the results are not what you expected, consider having a third-party take a look. It may be worth preparing an executive compensation analysis. Gross Mendelsohn can help with that.
Need Help?
If you have any questions, contact us here or call 800.899.4623 for help.
