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SharpOne11

Subcontractor Wage Adjustment

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I'm trying to find some clear guidance on if a prime can submit payroll for their subcontractor and receive a wage adjustment? Apparently the subcontractor is doing more than 25% of the estimated value of the contract. The contract does not have a subcontracting plan. The clause 52.244-2 is not included.

I've read FAR 22 and clauses, and I guess I'm looking for a better interpretation to clearly answer my question. i know that each employee, contractor or subcontractor shall be paid in accordance with the wages determination attached to the contract, but does that mean we have to pay the prime wages increase for the subcontractor? Notwithstanding that the subcontractor shall be paid IAW with the SCA.

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The Service Contract Act of 1965 clause at FAR 52.222-41 requires that clause to be inserted in every subcontract subject to the Act - see subpara l to that clause. Assuming your subcontractor is doing work subject to the Act then those subcontract workers performing that work are entitled to the wage and fringe benefit adjustments under each new Wage Determination incorporated into the contract. There should not be a problem with you requesting an increase with supporting payroll documentation - because you will have to increase your subcontract price accordingly to pass the increase to the subcontractor to fund the wage adjustments. Just be mindful that neither you nor your sub are entitled to any amount for overhead, G&A, or profit in the wage and fringe benefit adjustment made by the Government (see para (e) in clause 52.222-43 or para (d) in clause 52.222-44, depending on which is in and applies to your contract).

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Hcuffage, 52.222-41 does not provide for a price adjustment. Price adjustments are provided for by 52.222-43 and 52.222-44. Both of these clauses apply to FP, T&M/LH contracts, but neither is a mandatory flow down clause.

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Retreadfed,

I did not suggest that 52.222-41 provides for price adjustment and stated that that clause is the one that flows down. Assumed from the post that the inquirer is dealing with one of the applicable contract types - if he was dealing with a cost type contract there would be no reason to think an adjustment might be in order (my assumption) since costs driven by current wage determinations would be the actual cost incurred and covered by routine administration of invoicing.

I did mention clauses 52.222.43 and 44 because those are the clauses that authorize a contract price adjustment for increased costs due to compliance with the Wage Determination and because it is the prime contract price that is adjusted by the Government - not the subcontract. SharpOne asked the question about the prime contract adjustment.

The 43 and 44 clauses dictate the rights and obligations of the Govenrment and the prime. I don't believe that there was any intent by DOL to allow contractors to skirt the labor law by subcontracting a portion or all of the requirement and then claiming because the 43 and 44 clauses don't flow down that subcontract laborers do not get the increases. I believe labor law entitles those workers to the increases and I am quite certain that in the case of an alleged labor violation investigated by DOL and found valid, that DOL would require the Government contracting agency to withold funds from the prime contract until the violations were resolved.

I believe the prime is entitled to an adjustment and should pass the funds to the subcontractor to effect payment to the workers. In that regard clauses 43 and 44 establish the prime's right to the contract adjustment. The prime has to pass the money to the subs through the terms and conditions of their commercial contracts and hopefully a subcontractor generally engaged in SCA work is smart enough to make sure his contract allows for recovery of that money. And I presumed with my answer that this is the case.

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Hcuffage, the last paragraph in your post makes the point I was driving toward in my post #2. That is whether a subcontractor is entitled to a price adjustment due to a new WD attached to a prime contract is determined by the terms of the subcontract concerning the subs right to such an adjustment. Sharpone11 said he did not know what the subcontract says in this regard. In this case, I don't think it is appropriate for us to speculate on what the subcontract may or may not say. Simply put, we cannot answer Sharpone11's question without such knowledge. Further, whether subcontractor employees are entitled to be paid the wages and fringe benefits called for by the new WD is a different question from whether the subcontractor is entitled to a price adjustment due to the new WD. Moreover, if the prime contractor is under no obligation to adjust the subcontract price due to a new WD, why would the prime contractor be entitled to include any increased wages and fringe benefits the subcontractor must pay its employees in the prime's price adjustment?

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Retreadfed,

I totally disagree with you. The wage increases are required to be paid by the subontractor who does have clause 52.222-41 Service Contract Act, which did flow down.Read subparagraph (c ) (3) to that clause. It does say that the contract is subject to adjustment for wage increases. Thus by flowing it down to the subcontract, the prime is obligated to adjust the subcontract price for wage increases. This is not speculation. It is labor law and covered by contract language and flowdown clause language. This clause both obligates the sub to follow the labor law and be in compliance with the DOL minimum wages and fringes and the prime to adjust the contract price.

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Retreadfed.

I didn't answer all of your question, so let me add that clauses 43 and 44 state that the contract price will be adjusted to reflect applicable increases in wages and fringe benefits to the extent the increase is made to comply with or the decrease is voluntarily made by the Contractor as a result of either the DOL WD applicable on the anniversay date of a multiple year contract or a WD otherwise applied to the contract by operation of law or and amendment to FLSA enacted after award of the contract that affects the minimum wage and becomes applicable to the contract under law. That is whiy the prime is entitled to an adjustment and required to adjust the subcontract price.

This law is about public policy supporting the labor force and making certain those workers on federal contracts are paid the DOL minimum wages and finges. That is why the contractor gets just a contract price adjustment and not an equitable adjustment (i.e.overhead, G&A, and profit as well).

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HCuffage wrote:

[C]lauses 43 and 44 state that the contract price will be adjusted to reflect applicable increases in wages and fringe benefits to the extent the increase is made to comply with or the decrease is voluntarily made by the Contractor as a result of either the DOL WD applicable on the anniversay date of a multiple year contract or a WD otherwise applied to the contract by operation of law or and amendment to FLSA enacted after award of the contract that affects the minimum wage and becomes applicable to the contract under law. That is whiy the prime is entitled to an adjustment and required to adjust the subcontract price.

Emphasis added.

That's wrong. The price adjustment clauses do not require the prime to adjust subcontract prices. They do not even mention subcontracts. (I don't know why he emphasized the word "will." It indicates nothing but futurity. It does not have the force of "shall" or even of "should." It is not a command.)

FAR 52.222-41, Service Contract Act of 1965 (NOV 2007) is a mandatory flowdown-to-subcontract clause, see paragraph (l). It must be included in subcontracts. It requires that subs pay the SCA wages and fringes, including any updates. The use of that clause, and flowdown to subs, is mandated by the Department of Labor at 29 CFR 4.6, which is merely reflected in FAR 22.1006(a).

The price adjustment clauses at FAR 52.222-43 and -44 entitle the prime to a price adjustment when a new wage determination increases the prime's costs. Those clauses were not written by the Department of Labor and their use is not mandated in 29 CFR. They are not mandatory flowdown clauses. They do not require the prime to adjust subcontract prices.

Subs must pay the SCA wages and fringes, but they are not entitled to a price adjustment from the prime unless the price adjustment clauses, or something like them, are included in their subcontracts.

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Vern,

Your repsonse suggests that a prime contractor may escape increasing a subs contract to cover mandatory wage and fringe benefits if a price adjustment clause is not in the subcontract. This may be technically legally correct but in practice is not likely going to happen. As I suggested, the chances of SCA providers at the subcontract level accepting a subcontract with clause 52.222-41, which requires them to comply with the SCA, included and not be savvy enough to make sure a mechanism for price increase is included are very slim. But even if that happens, that sub will quickly get savvy and fail to pay the increase (he's not going to eat it out of pocket) and when his employees complain to DOL, the Federal contracting agency will be required to withhold monies from the prime's contract until the wage violations are resolved. I am sure a that point, the prime will feel "required" to adjust the subcontract price.

Worse, the sub's employess can engage in strikes making the situation for the prime very tenuous. No prime wants to deal with either strikes of DOL wihtholding if it can be avoided.

Now if the prime pays the sub for wage increases and that payment increases the prime's costs because of the new wage determination ,he is thereby entitled to a price adjustment to his prime contract through either the 43 and 44 clause, whichever is in his contract. Do you realistcally think that a prime will pay a sub this increase out of his own pocket and not come back to the Government? Do you think that is what is intended by the FAR? At some point common sense has to prevail.

While its on the table, I'll point out that a request for adjustment is due within a certain time after a new WD is incorporated. While subcontract workers may not be complaining to DOL or striking at that point, such actions will certainly get the prime's attention down the road and put ample pressure on the prime to treat the subcontractor fairly in regards to wage increases.

And that was the initial question - can the prime get an increase for wage increases paid by the sub, to paraphrase. In my years of experience, no savvy prime contractor ever played a "gotcha' game with a sub over wage increases - no skin off the prime's nose - the Government pays the bill. And DOL does not play games in this area. I am not sure whether there is any case law out there, but I cannot believe either the COFC or an Administrative Board of Appeals would ever rule that the 43 and 44 clause only apply to increases paid on the prime's direct payroll. That would be nonsensical to me, because how else would the funds for the subcontractor wage increases flow from the Government to the prime to get to a sub? And that is the intent - the Government pays for all wage increases and only has privity of contract with the prime - not the sub. Rather than stand on a legally tecnically correct answer to the poser of the question, I think he needs the practical answer.

As for the word "will," I clearly attributed that to the 43 and 44 clauses. which more specifically say that " The contract price...will be adjusted to reflect the Contractor's actual increase..." The subject of the verb "will" is the party to the contract - Government. Government will and Contractor shall, It is a command to the Government in the contractual relationship between the Government and prime.

I will stipulate that my chosen language may have confused some, but back to the poster's question, I believe a prime can submit for a wage increase based on subcontractor costs. If not, why would any service contractor ever subcontract any part of an SCA requirement?

I never said clauses 43 and 44 flow down. I did say 52.222-41 does.

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Vern,

Your repsonse suggests that a prime contractor may escape increasing a subs contract to cover mandatory wage and fringe benefits if a price adjustment clause is not in the subcontract. This may be technically legally correct... .

What I said was correct. Period. The "technically legally" business of yours is just jive. And you don't know what you're talking about with regard to "will." In FAR shall and must are the words of command. (And verbs don't have a subject. If they're transitive they have an object.) See the FAR Drafting Guide entry for shall/must/should/will/may:

Shall/must/should/will/may.

(a) Use the terms "shall" and "must" to indicate an obligation to act. In the FAR "shall" and "must" have the same meaning. "Must" is the preferred term to use in FAR text other than provisions and clauses.

(B) Use the term "should" to indicate an expected course of action or policy to be followed unless inappropriate for a particular circumstance.

( c) Use "will" to indicate an anticipated future action or result.

(d) Use "may" to indicate a discretionary action.

https://www.acquisit...e.htm#chapter5f

In the clauses -43 and -44 will is used to indicate a contingent futurity: something will happen if something else is the case. For a discussion of that use of will see the entry "Words of Authority" in Garner, Garner's Dictionary of Legal Usage 3d at 954.

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None of this answers SharpOne's question which was "...if a prime can submit payroll for their subcontractor and receive a wage adjustment?.." If your position is that clauses 43 and 44 only apply to prime contract direct payroll costs, and therefore he cannot, then we absolutely disagree. Whether or not there is a specific clause in the subcontract requiring the prime to adjust the subs contract price for this is immaterial to this question. The labor law intends that all workers, prime and sub, are paid the minimum wages and fringe benefits which are adjusted when a new wage adjustment is incorporated. When that happens, the "futurity" is here. A new WD is issued and incorporated into the contract. So the "anticipated future action" expressed by the word "will" in paragraph (d) to clause 52.222-43 is that the contract price is adjusted in an amount commensurate with the increase incurred for all workers, prime and sub and should now be taken. Assume for discussion sake that the subcontract does have a clause requiring the prime to increase the sub's contract price for this. When the prime submits his request for a contract price adjustment, he can and should submit for all costs to him, including subcontract impact costs, related to compliance with the SCA. Who takes that now due "anticpated future action" of increasing the contract price? The Government. Whose contract price do they increase? The prime's.

SharpOne does not identify him or herself as a prime wondering if he can submit a request to the Government for a wage increase based on the sub's increased payroll costs or if he or she is a Government CO with such a request from a prime. I am guessing the latter because he says " Apparently the subcontractor is doing more than 25% of the estimated value of the contract." If SharpOne was the prime in the situation, I would expect he would know for sure how much work the sub is doing. It does not matter whether the sub is doing more than 25% of the work, less than 25%, or some significantly greater % in either direction. All subcontractor increases to wages are governed by the SCA and related WDs. My advice to SharpOne is that if you want to deal in good faith with this prime, you allow the requested wage increase provided it complies with the rules set forth in 52.222-43 for making the adjustment. If he is unfamiliar or inexperienced in processing the adjustment, DOL offers a reference on SCA compliance that you should be able to recover from their website - sorry I do not have a handy link reference.

In my experience I have had to withold monies from a prime's contracgt for wage increases not paid to subcontract workers under the SCA. In that case it was not because there was no clause requiring the prime to adjust the sub's contract price. It was because the sub submitted his request for an increase to the prime but would not provide payroll documentation. The prime refused to change the subs contract. The sub did not give the increases to his workers telling them he couldn't pay because the prime did not give him the money and serveral of them found their way to the DOL to register a complaint. Shortly after the withholding started, the prime and sub resolved their differences, and the workers got paid. Once proof of payment to the sub employees was provided to DOL, I was allowed to release the witheld monies to the prime. And when the prime finally submitted his request for a contract price adjustment, his documentation of payrolls included his and the subs.

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If your position is that clauses 43 and 44 only apply to prime contract direct payroll costs, and therefore he cannot, then we absolutely disagree.

You said:

[C]lauses 43 and 44 state that the contract price will be adjusted to reflect applicable increases in wages and fringe benefits to the extent the increase is made to comply with or the decrease is voluntarily made by the Contractor as a result of either the DOL WD applicable on the anniversay date of a multiple year contract or a WD otherwise applied to the contract by operation of law or and amendment to FLSA enacted after award of the contract that affects the minimum wage and becomes applicable to the contract under law. That is whiy ​[sic] the prime is entitled to an adjustment and required to adjust the subcontract price.

My only position is that your last sentence is wrong, Period. Game over. Clauses 43 and 44 do not require a prime to adjust a subcontract price. The word subcontract does not even appear in those clauses. A prime is required to adjust the subcontract price when the subcontract requires the prime to adjust the subcontract price, just like Retread told you in Post #5.

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Again, and hopefully I am clearer this time... I interpreted the question asked as whether the prime could get an increase to his prime contract for wage increases to be incurred by the subcontractor in complying with a new DOL wage determination, not whether the prime had to make an adjustment to the sub's contract and on what basis/authority. Retreadfed introduced the question about what the subcontract says about adjusting the subcontract price due to wage increases in his first response to Sharpone. I don't believe Sharpone was asking about making an adjustment to the subcontract price - maybe he could clarify whether that is so. I never said clauses 43 and 44 flow down - I pointed out that they governed the prime contract price adjustment. The excerpt from my earlier post is here with bolded text for emphasis:

"I did mention clauses 52.222.43 and 44 because those are the clauses that authorize a contract price adjustment for increased costs due to compliance with the Wage Determination and because it is the prime contract price that is adjusted by the Government - not the subcontract. SharpOne asked the question about the prime contract adjustment."

When I made that post I was intepreting that Sharpone is a prime asking the question but then in a later post after rereading the original question I realized it was more likely that Sharpone was asking the question about adjusting the prime contract price as a Government CO because of the way the comment about how much work the sub was doing was phrased.

In answering the question as I thought it was posed, my answer was, and is, that I believe 52.222-43 can be interpreted to allow an adjustment to the prime contract for all wage increases paid at both the prime and subcontractor levels.

I did suggest that the practicality is that there is, more likely than not, a mechanism in the subcontract to adjust that price but also said whether there was or not is immaterial to Sharpone's question as I believe it was posed. But obviously Retreadfed and you believe SharpOne was aksing about whether he has to adjust the subcontract price, not whether the prime can get an adjustment to his contract base on subcontractor incurred costs. Again, maybe SharpOne can confirm that.

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You are wrong about what I believe. SharpOne's very badly written question asked whether the government has to compensate the prime for increases that the sub made in its labor costs.

i know that each employee, contractor or subcontractor shall be paid in accordance with the wages determination attached to the contract, but does that mean we have to pay the prime wages increase for the subcontractor?

Retread wanted to know if the subcontract required the prime to compensate the sub, perhaps thinking that the government would not have to compensate the prime if the prime did not compensate the sub.

In Post #9 you said that 52.222-43 and 52.222-44 require the prime to compensate the sub.

That is why the prime is entitled to an adjustment and required to adjust the subcontract price.

The 43 and 44 clauses do not require the prime to adjust the subcontract price. That is the only point I wanted to make. The sentence that you wrote is wrong in that regard. Did you not mean to say that? Is it just badly written?

As for SharpOne's question, Retread appears to make the reasonable assumption that the prime might not adjust the subcontract price if if the subcontract does not require that it do so. Who knows why? Who cares? That's between the prime and the sub. Maybe they were both clueless when they made their bargain. The government doesn't care whether the prime compensates the sub. Why should it? The sub is on the hook for wage increases through operation of 52.222-41, which is a mandatory slowdown clause. The sub has to look out for itself.

Does the government have to compensate the prime for compensation that it gives the sub for wage increases? FAR 52.222-43 and 52.222-44 do not explicitly say so. 52.222-43( c) says that the prime will be compensated for "the Contractor's" increases to "wages and fringe benefits." It does not mention any increases in subcontract price or subcontractor's increases to wages and fringes. 52.222-44( c) says that the prime will be compensated for increases "by the Contractor" in wages and fringe benefits. It says nothing about increases by subcontractors or to subcontract prices.

I think the reasonable interpretation is that the prime's adjustment will include adjustments that It makes to subcontracts for wage increases made by the subcontractors, but I can't get to that interpretation through the language in the clauses themselves. As far as I can tell the issue has never been litigated, which might mean that most people agree with that interpretation, so there are no disputes. But I can see how SharpOne would wonder.

I think the right answer to SharpOne is:

The clauses do not explicitly require the government to compensate the prime for increases made by subs, but that is probably the common understanding and the right thing to do. The government does not have to compensate the prime for subcontract increases unless the prime has compensated or must compensate the sub. Check agency policy and practice, ask your senior colleagues, and, if necessary, seek guidance from your superiors and counsel.

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My posts were generally based on the concepts expressed in this sentence from Vern's Post #16: "The government does not have to compensate the prime for subcontract increases unless the prime has compensated or must compensate the sub." Sharpone11 was not very clear as to what situation (s)he is actually facing, but three possible scenarios come to mind. For all three let us assume that the prime and subcontracts are not cost reimbursement contracts.

First, the subcontract has no price adjustment clause in it and the prime has not adjusted the subcontract price to reflect increased wages and fringe benefits the sub is required to pay due to a new WD being incorporated into the subcontract. In this case, I do not believe the prime would be entitled to an adjustment because it has incurred no increased costs.

Second, the subcontract does include a price adjustment provision similar to the -43 or -44 clause and the prime has adjusted the subcontract price in accordance with that clause. In this case, the prime would be entitled to an adjustment because it has incurred increased costs caused by the new WD.

Third, the subcontract does not contain a price adjustment clause, but the prime contractor voluntarily grants the subcontractor a price increase due to the increased wages and fringe benefits the subcontractor is required to pay its SCA covered employees. While others may have a different perspective, I do not believe the prime would be entitled to an adjustment due to this voluntary act because the subcontract price increase was not a contractual obligation of the prime.

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Vern,

In post 16 you wrote:

-------------------------

In Post #9 you said that 52.222-43 'and 52.222-44 require the prime to compensate the sub.

Quote

That is why the prime is entitled to an adjustment and required to adjust the subcontract price.

The 43 and 44 clauses do not require the prime to adjust the subcontract price. That is the only point I wanted to make. The sentence that you wrote is wrong in that regard. Did you not mean to say that? Is it just badly written?

--------------------------------------------

I see now the reasoning you are using to make that connection but, no, I did not mean to infer from the language of my sentence that the 43 and 44 clauses require either by express or implied language that the prime contractor must adjust the subcontract price. So, in that regard, yes, I did write what I meant to say very badly. And I see now I should have laid out reasoning for why I believe the prime contractor is required to adjust the subcontract price if he is entitled to and receives an adjustment to his prime contract based on subcontract increase in wages and fringes to subcontract employees. And that reasoning goes directly to your comment later in your post about Retreadfed perhaps thinking that the government would not have to compensate the prime if the prime did not compensate the sub. My reasoning, for which I will use a contract for recurring severable services with a base period and option years to explain, is:

If the prime presents a request to the CO for a contract price adjustment under the 43 clause, after receiving a new wage determination effective for the first option year, his theory of recovery (in abbreviated form for this discussion) presumably has to be:

· The contract requires me and my sub to comply with the SCA per clause 52.222-41 which is in my contract and which I included in the subcontract;

· The Government provided a new wage determination (WD) on (date) to be applicable for option year one;

· My sub and I have examined the new WD and determined it will cause an increase in wages and fringes that we will have to pay;

· Contract clause 52.222-43 established that the contract price will be adjusted to reflect these increases;

· The Government is required to adjust my contract price in the amount of ___ (my proposed adjustment calculations are attached).

Please note by the language of clause 43 that the contractor must notify the CO within 30 days of receiving the new wage determination, so the modification to incorporate the wage increase into the prime contract is typically done within 60 days of the start of the option period.

The language of clause 43 says that the contract price will be adjusted to the extent the increase is made to comply with the WD. If the interpretation is that subcontract increases can be included in the prime’s adjustment, then the expectation for me as a CO is that the increases are made (cost incurred). The prime does not incur these costs if he does not increase the subcontract price and pass the funds related to the subcontract increases to the subcontractor. My reasoning is that he is required to both make the increases to his own employees and increase the subcontract price to make the increases at that level in order meet the terms of the clause 43 for eligibility for adjustment to the extent that adjustment is related to subcontract wage and fringe increases. If the prime wants the CO to apply the broader interpretation of the 43 clause to include subcontractor increases, then he must meet the broader interpretation and application of test to see if the “increase is made.” It is in this sense and under these circumstances that I believe the prime is required to adjust the subcontract price, whether or not the subcontract has specific language for an increase.

If the prime requests an adjustment that includes subcontractor increase but has no intention of increasing the subcontract price then he has not dealt and negotiated with the government in good faith and has used deceptive dealings to gain an unjust enrichment. If I found that to be the case as a CO, I would not hesitate to pull those funds back on a unilateral mod and force him to dispute the deductive modification. .

If I feel a prime has purposefully tried to hoodwink me by asking for the increase related to the sub in order to gain an unjust enrichment, then his ethics and integrity in business dealings is now called into question and I begin to wonder if he is any longer a responsible contractor as defined in FAR Part 9. That may cause me to consider other actions.

You also wrote:

_______________

As for SharpOne's question, Retread appears to make the reasonable assumption that the prime might not adjust the subcontract price if if the subcontract does not require that it do so. Who knows why? Who cares? That's between the prime and the sub. Maybe they were both clueless when they made their bargain. The government doesn't care whether the prime compensates the sub. Why should it? The sub is on the hook for wage increases through operation of 52.222-41, which is a mandatory slowdown clause. The sub has to look out for itself.

___________

True. However, as a CO I will have to deal with the consequences if the sub does not get an adjustment and those consequences may include purposeful failure or consequential inability to pay the employees proper wages and fringes resulting in wage violations. That may lead to strikes, complaints to DOL, withholdings, etc. A CO may want to be proactive in discouraging those situations from evolving. A proactive step might be making it clear to the prime who requests a prime contract adjustment for increased wage payments at the subcontract level that, if granted, he is expected to pass the appropriate increase on the sub. COs who have this concern might consider writing that condition in to the wage increase modification.

And you wrote:

_______________

I think the reasonable interpretation is that the prime's adjustment will include adjustments that It makes to subcontracts for wage increases made by the subcontractors, but I can't get to that interpretation through the language in the clauses themselves. As far as I can tell the issue has never been litigated, which might mean that most people agree with that interpretation, so there are no disputes. But I can see how SharpOne would wonder

___________

We agree on that. I think the lack of litigation is testament to a prevalence of agreement on that interpration.

Lastly, you wrote:

______________

I think the right answer to SharpOne is:

The clauses do not explicitly require the government to compensate the prime for increases made by subs, but that is probably the common understanding and the right thing to do. The government does not have to compensate the prime for subcontract increases unless the prime has compensated or must compensate the sub. Check agency policy and practice, ask your senior colleagues, and, if necessary, seek guidance from your superiors and counsel.

__________________

I think your first sentence here adds a lot by pointing out that the clauses do not explicitly require this compensation and your last bit of advice also – that advice should probably go with most responses to questions in this forum. I have a different slant on your second sentence. I think it is worth pointing out that in the normal course of these actions the Government adjusts the prime contract before the prime adjusts the sub. So COs may want to be on the lookout to ensure the sub follows through with that action.

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Retreadfed,

You posted:

My posts were generally based on the concepts expressed in this sentence from Vern's Post #16: "The government does not have to compensate the prime for subcontract increases unless the prime has compensated or must compensate the sub." Sharpone11 was not very clear as to what situation (s)he is actually facing, but three possible scenarios come to mind. For all three let us assume that the prime and subcontracts are not cost reimbursement contracts.

First, the subcontract has no price adjustment clause in it and the prime has not adjusted the subcontract price to reflect increased wages and fringe benefits the sub is required to pay due to a new WD being incorporated into the subcontract. In this case, I do not believe the prime would be entitled to an adjustment because it has incurred no increased costs.

Second, the subcontract does include a price adjustment provision similar to the -43 or -44 clause and the prime has adjusted the subcontract price in accordance with that clause. In this case, the prime would be entitled to an adjustment because it has incurred increased costs caused by the new WD.

Third, the subcontract does not contain a price adjustment clause, but the prime contractor voluntarily grants the subcontractor a price increase due to the increased wages and fringe benefits the subcontractor is required to pay its SCA covered employees. While others may have a different perspective, I do not believe the prime would be entitled to an adjustment due to this voluntary act because the subcontract price increase was not a contractual obligation of the prime.

I have a different take. In all three situations our presumption should also be that clause 52.222-41 is in the prime contract and has flowed down to the subcontracts - because if the prime contract is an SCA contract then this clause is required. Instead of focusing on whether there is an express term in the subcontract on adjusting the price for a wage determination, I think the focus should be on whether wages and fringes were required to be adjusted with the assumption that if so, they were (don't want to complicate the discussion with what if increases are not paid to employees). The next consideration is whether to adjust the primes contract for wage increase paid by the sub at the subcontract level - and this is the perspective from which I was trying to slant my posts.

I tried to clarify in my post # 17 that while I acknowledge there is no express term in the 43 or 44 clauses that they flow down and require the prime by their express language to adjust the subcontract price, I believe a line of reasoning can be advanced that in order for a prime to meet ther terms of clause 43 (express language that the wage increase are made) and get an adjustment at the prime contract level that he must incur the cost (make the wage increase at the subcontract level) through adjusting the subcontract price and therefore one can conclude that the prime is "required" to increase the subcontract price for wage increases made at that level. So I think we are saying the same thing on that point, but I don't think we can reduce things to if you adjust the subcontract you get an adjustment.

As I said in post 17, the prime's adjustment is typically made before the prime would consider adjusting the subcontract price. I think our approach as government COs should be if the prime and subcontracts include the SCA clause (41) then each must pay required wage and fringe increases. In accordance with the spirit and intent of the 43 clause, rather than the letter of the clasue (I think everyone agrees that the express language of that clause does not specifically cover the subcontract) that the primes contract should be adjusted for wage increases paid at both the prime and sub level and if that is so, then the prime is expected to adjust the subcontract price and we take actions in support of that expectation. In other words, I would say in all three of your scenarioes that the prime should get an adjustment for increases at the sub level because they were required to be made (and presumably were). But we should also be duly diligent in our jobs and not allow the prime to be unjustly enriched by pocketing the increase for the sub level wage increases, thereby wasting taxpayer dollars and contributing to the possibility the sub employess do not actually get paid.

I think this should be the approach because it is the right thing to do, to use Vern's words. Part of the reason I believe it is the right thing to do is I consider the spirit and intent of the 43 clause - contractors (prime and sub) are required to comply with wage determinations and if they do, the Government will adjust the contract price accordingly, i.e. the government is expected to fund the wage increases, all of the wage increases - not just those at the prime level. It's the right thing to do because we are supporting the labor laws, treating the contractors fairly, and practicing effective contract administration. We don't let this seeming hole in the contract regulation and clauses create barriers to effective conduct of public business performed by contract by not letting the money flow to fund all of the wage increases by hanging ourselves up on the letter of the contract. That's my perspective on the issue.

Also, don't forget the 43 clause allows the government to assert a claim under that clause for decreases in wages. So, if we can assert a claim against the prime for a price reduction for wage decreases made at the subcontract level and adjust the prime contract downward accordingly forcing the prime to suffer a price decrease (regardless of whether a specific price adjustment clause exists in the subcontract), why should the prime not be entitled to a price increase when the wages are increased at the subcontract level, whether on not a specific clause exists in the subcontract for an adjustment to the subcontract price.

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Acknowledging that the questions posted by SharpOne are confusing but reading through the rest of the posts it seems that two points are missed in the continuing discussion. They are:

1. Definition of "Contractor" found at FAR 22.1001. It would seem that as the definition applies to the whole of subpart 22.10, that this definition carries to clauses of the Subpart and that the word "Contractor" in both 52.222-43 and -44 could be read to include “a subcontractor at any tier whose subcontract is subject to the Act” because 52.222-41 is clear that the Act applies to subcontractors at any tier.

2. Privity. The general rule of privity is viewed as preventing a claim by a subcontractor direct to the Government. One could wonder in this particular case whether SCA and FAR Subpart 22.10 are a place where there is a crack and privity as a legal concept is not applicable and the subcontractor could simply go direct to the Government with a request/claim for increase costs due to a required SCA wage adjustment?

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2. Privity. The general rule of privity is viewed as preventing a claim by a subcontractor direct to the Government. One could wonder in this particular case whether SCA and FAR Subpart 22.10 are a place where there is a crack and privity as a legal concept is not applicable and the subcontractor could simply go direct to the Government with a request/claim for increase costs due to a required SCA wage adjustment?

Thought I should throw this semi-recent CBCA into the fire (2054):

The Motion to Dismiss because of privity :

https://www.google.c...v30q6DW2B0k3IjA

The final settlement- https://www.google.c...XNkudQ2WlS9upZg

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Note that the CBCA decision is based upon the fact that each party to the CTA had its own contract with the government. From what we have been told, there is no indication any of the facts in Lockheed Martin are present in Sharpone's case.

For the leading case on whether subcontractors can have privity of contract with the government or file a claim directly with the government see http://openjurist.org/713/f2d/1541/united-states-v-johnson-controls-inc.

As a final point, see FAR 44.203(B)(3) and the following sentence from 44.203© "The [subcontract] may not attempt to obligate the contracting officer or the appeals board to decide questions that do not arise between the Government and the prime contractor ."

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Retread – I acknowledge that it is very rare that the Government will allow a subcontractor request for equitable adjustment and/or claim through the Contract Disputes Act process. I probably was wrong to ponder the matter in the generalities of this forum however I am not 100% convinced that such a request/claim could not be raised.

In my experience and in my limited abilities of research compared to those with more robust tools I cannot pinpoint case law specific to the questions raised in this thread even in consideration of the confusing first questions. I do submit that there are two related matters to the privity issue.

Jurisdiction under Contract Disputes Act (CDA) for any subcontractor claim and DOL jurisdiction where the CBCA and COFC defers primary jurisdiction to DOL with regard to matters regarding SCA . Of sorts I think HC raised this point in relating the experience of DOL forcing (my words) a prime and sub to get their act together to pay sub employees properly. Could be that is why there is no on point CBCA or COFC case as DOL simply makes it happen? Like many circumstances in Federal contracts the matter of privity “depends” on specific facts and I raised the matter for consideration only no matter how rare bypassing privity might be with regard to actions under the CDA.

PS – I will close out my discussion of privity by passing along a couple of reference docs that folks might want to read. The first I had in my files and I have provided a link of where to find on the web and the other I found just today in trying to find something more up to date.

http://scholarship.law.wm.edu/wmlr/vol10/iss1/7

http://www.jamsadr.com/files/Uploads/Documents/Articles/Nagle-Prime-Contractor-Winter-2011.pdf

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I would like to try to sort this out a little.

SharpOne's question was whether a prime could be reimbursed under the Service Contract Act (SCA) price adjustment clauses, 52.222-43 and 52.222-44, based on increases to subcontract wages and fringes. He did not ask whether a sub was entitled to a price adjustment. However, Retread and I believe that the prime would not be entitled to a price adjustment based on increases to sub prices unless the prime were liable for adjustment of the subcontract price. We think that whether the prime must adjust the subcontract price depends on what the subcontract says.

The SCA clause, 52.222-41 is written and prescribed by the Department of Labor (DOL) at 29 CFR 4.6, and is implemented in turn by FAR. It is a mandatory flowdown clause by its own terms. The price adjustment clauses are not DOL clauses and are not mandatory slowdown clauses.

Disputes concerning the labor standards in the SCA clause are not handled under the Contract Disputes Act and the Disputes clause, 52.233-1. They are handled by the Department of Labor (DOL) under the SCA clause. See FAR 22.1026. The price adjustment clauses are not labor standards, and disputes concerning price adjustments are handled under the Disputes clause and not by DOL. See Telesec Library Services, ASBCA No. 42968, 92-1 BCA 24650. DOL has no say about whether or not a prime or a sub is entitled to a price adjustment unless there is a dispute about the underlying labor standard.

The price adjustment clauses make no explicit mention of subcontracts or subcontractors. But the definition of contractor in FAR 22.1001 defines that word as also meaning subcontractor. That definition applies to the interpretation of contracts that contain the Definitions clause at 52.202-1, which is not a mandatory flowdown clause. I think that definition is the prime's route to a price adjustment for increases to subcontractor employee wages and fringes if the prime compensates or owes compensation to the sub. However, the prime might be able to get an adjustment from the government even if it does not have to adjust the subcontract price.

The purpose of the SCA price adjustment clauses is to prevent contractors from including contingencies in their option prices that might turn out to be excessive and not in the government's best interests and to protect them from cost risk if they do not include contingencies. But nothing prevents a prime and a sub from using options without price adjustment clauses. Why would a sub agree to such a thing? Well, for instance, if the SCA wage determination is based on a collective bargaining agreement the parties might know in advance what the adjustments will be in the outyears and so be able to dispense with any price adjustment clause in the subcontract. In that case, the prime should be able to recover its increased subcontract costs in an option year even without a subcontract price adjustment.

But what about compensation to subs? The price adjustment clauses might entitle the prime to an adjustment for increases to subcontract wages and fringes if the prime owes compensation to the sub, but they do not say that a prime must adjust a subcontract for such increases, which means that the prime owes no duty to the government to adjust subcontract prices due to increases in wages and fringes.

Can subs seek a price adjustment from the government? In order to seek such a price adjustment directly the sub must establish privity. But there is no reason why a prime could not sponsor a sub's claim under the Contract Disputes Act and pursuant to the Disputes clause as long as the prime is liable to the sub for any due adjustment and could seek compensation from the government for the adjustment to the sub. Using that procedure, the sub can pursue the claim in the prime's name without the prime's active participation. See the discussion of this in Administration of Government Contracts 4th 1250-52. Presumably, in order for the prime to show that it can charge the cost of the claim to the government or make a claim based on the sub's recovery it must show that it was contractually bound to pay the sub. I presume that in order to do that it would have to show that a subcontract clause required the prime to pay the sub.

Without the prime's obligation to the sub a successful prime-sponsored subcontractor claim seems unlikely. However, there may be what two authors referred to as "common law" routes to recovery. See Cannon and Clifford, "Recovering the Costs of DOL Wage Increases Under the Service Contract Act," Hofstra Labor & Employment Law Journal, Spring 1998, 15 Hofstra Lab. & Emp. L.J. 491, 15 HOFLELJ 491:

The Price Adjustment clause is not the only means of recovery for a contractor that has incurred increased contract costs as a result of a DoL wage determination... As an alternative, contractors faced with increased labor costs can pursue various common law remedies, such as contract change, superior knowledge, mutual mistake and equitable estoppel. These common law remedies can often provide a contractor with the same adjustment in the contract price as the Price Adjustment Clause. Moreover, remedies under these common law theories can extend to wage determinations affecting a contract's base year as well as its option years. Thus, even if a wage determination revises the wages in the base year of a contract, the contractor can proceed under the Changes Clause to recoup any increased costs. Furthermore, the contractor may recover its indirect as well as its direct costs.

Footnotes containing citations omitted. (I'm not endorsing those assertions, I'm just reporting them.)

So, for example, suppose that the subcontract includes no price adjustment clause and DOL increases the SCA wage determination more than anticipated. The prime could recover from the government up to its increased costs under the subcontract, since the increases are built in. Can the sub recover the excess from the prime? Since the SCA clause put in the subcontract by the prime requires the sub to pay the higher wages, and since the change in the wage determination requires the sub to pay more than it anticipated, the sub might able to take a common law approach to seeking recovery from the prime without a price adjustment clause, in which case the prime could sponsor the sub's claim for an adjustment.

I don't think that many primes would try to cheat a sub by denying it a due adjustment. And I don't think many primes would seek adjustment from the government based on increases in subcontract costs and then refuse to pass it on to the sub. But I think that there will be cases in which the prime genuinely disputes the sub's entitlement to a requested adjustment or some part of it and might refuse to agree on the basis of that dispute, thinking that if it gives the adjustment to the sub it could not recover it from the government. In such a case a prime might be willing to let the sub pursue the matter with the government through its sponsorship of a claim.

This is pretty interesting stuff, but my knowledge of the subject is exhausted at this point and I don't care enough about it to pursue the matter further. So have at it and enjoy yourselves.

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