Wage Determination Fact Finding
In ASBCA Case No. 61040, 61101, Sonoran Technology appeals their claim for an equitable adjustment due to an increase in the Service Contract Act Wage Determination after contract award. The solicitation that controlled this contract award included a SCA wage determination and a Collective Bargaining Agreement (CBA). The bidders were required to use the current SCA wage determination (at the time of the bid) in the formulation of their proposals submitted to the Government. For future increases in SCA wages and/or benefits, the FAR and the contract have provisions/clauses which cover a contract price change for a wage determination for a multi-year contract. The issue here whether a new wage determination, incorporated into the contract, prompted a responsibility for the government to adjust the contract price to compensate Sonoran for a corollary increase in its state gross receipts taxes.
Wage Determination FAR Clauses
Specifically, the uptick in direct labor rates caused Sonoran’s state gross receipts tax liability to increase, which is what they are trying to recover. When a new wage determination is released, the changes will be incorporated into the existing contract to account for the increase or decrease in the base labor rates. Sonoran is asserting that the increase in rates and contract price should also include the increase in state gross taxes, while the Government asserts these taxes are not a part of the FAR nor were they meant to be a part of the FAR. They contend that Sonoran should have addressed this possibility, by implication (as a contingency) priced within their proposal submission for this work effort. For this particular case, there are three relevant FAR clauses:
- FAR 52.222-41, SERVICE CONTRACT ACT OF 1965 (Nov 2007);
- This clause emphasizes that each employee must receive, at a minimum, the monetary wages within each area’s wage determination. These employees must also receive the fringe benefits (“H&W”) in accordance with the fringe benefits determined by the Secretary of Labor.
- FAR 52.222-43, FAIR LABOR STANDARDS ACT AND SERVICE CONTRACT ACT- PRICE ADJUSTMENT (MULTIPLE YEAR AND OPTION CONTRACTS) (SEP 2009);
- This clause addressed the timing of the change to the contract that will account for the change in price. With a multi-year award contract, the change will be made either on the anniversary date of a multiple year contract, or the beginning of each renewal option period.
- FAR 52.243-1, CHANGES-FIXED-PRICE (AUG 1987), ALTERNATE I (APR 1984) (R4, tab 2 at 58-59).
- This clause establishes the implications associated with a change in the wage determination. The Contracting Officer is responsible for making an equitable adjustment to the contract price.
In this case, the government issued contract Modification No. P00007, increasing the contract price to compensate for Sonoran's higher direct labor costs. The modification did not include any additional compensation for the increase in Sonoran's state gross receipts tax liability, nor amounts for indirect labor costs. Sonoran argues that they can recover under the SCA Price Adjustment Clause (FAR 52.222-43) or the Changes Clause (FAR 52.243-1).
SCA Price Adjustment Clause
Simply, the clause covers the following if a new DOL wage determination changes the contractor’s costs:
“Any adjustment will be limited to increases or decreases in wages and fringe benefits as described in paragraph (d) of this clause, and the accompanying increases or decreases in social security and unemployment taxes and workers' compensation insurance, but shall not otherwise include any amount for general and administrative costs, overhead, or profit.”
The decision relies heavily on the specific taxes that are expressly written in the clause. They use the All Star/SAB Pacific, JV., ASBCA No. 50856, 98-2 BCA ii 29,958, aff'd on recons., 99-1BCAii30,214 case to decide this case. “The SCA Price Adjustment clause is specific about what costs may be included in a price adjustment…” It mentions some taxes (social security and unemployment taxes) but not others. The principle of construction, expressio unius est exclusio alterius, instructs that “where one or more objects in a class are specifically named, we construe the contract to exclude an object of that class that is not named.” By this finding, state excise taxes are not to be included as a part of the price adjustment.
Another argument that Sonoran tried to make was that the solicitation itself did not allow for contingencies to be priced. But this is not the case. The solicitation only hindered the contractor from proposing escalation, but it didn’t forbid pricing other contingencies. It was Sonoran’s responsibility to develop their proposal in a manner that covered them from this scenario before award.
The Changes Clause
Here, Sonoran argues that the Changes clause requires the government to pay an equitable adjustment for the costs incurred by the contractor, to include gross receipts tax expense as a result of the incorporation of a new wage determination into the contract. Unfortunately for Sonoran, the changes clause does not expressly explain how to compute an equitable adjustment claim; that computation resides in the SCA Price Adjustment clause. Because the SCA Price Adjustment clause governs here, as noted above, Sonoran is not entitled to an equitable adjustment.
Takeaway
One might feel that pricing for a solicitation where non-exempt employees are involved is relatively easy. After all, the DOL wage determination gives you the minimum an employee must receive; all you have to do is apply indirect rates to the base labor rates. Wrong. Contractors need to think about the big picture. You need to consider the possibility of rate changes, and how those changes will ultimately impact your bottom line. The clauses related to these changes have been strictly applied based on the language within them. Be sure to include your own transitional costs within your proposal to the government; This is the best strategy to ultimately recover future cost increases not explicitly covered by the SCA price adjustment clause.
Side note. On August 1, 2017, the DOL (Department of Labor) issued its updated SCA wages and updated its “H&W” rates, which now reflect a dual-rate, which partially considers the impact of that Executive Order which mandated paid sick leave (effective in contracts executed on or after January 1, 2017). The DOL memo is available here: https://www.wdol.gov/aam/AAM225.pdf.
How Redstone Can Help
We at Redstone Government Consulting are experienced and equipped to assist you with (or prepare for you) incurred cost proposals. Let our team of professionals prepare you for audits and keep you up to date with changing DOL and DCAA regulations. We can serve as your contracts billing specialist in fulfilling all other regulatory requirements during the life cycle of your government contract.
