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I am reviewing proposals received in response to a cost reimbursement solicitation that is subject to the Service Contract Act. I did not include the clause 52.222-43, Fair Labor Standards Act and Service Contract Act – Price Adjustment (Multiple Year and Option Year Contracts) since the contract is not expected to be fixed-price, time-and-materials or labor hour. However, all offerors have excluded escalation on their labor rates I expect because they believe that 52.222-43 applies (even though it is not in the solicitation). My assertion is that the clause does not apply and that they should propose escalation. Am I incorrect?

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I am reviewing proposals received in response to a cost reimbursement solicitation that is subject to the Service Contract Act. I did not include the clause 52.222-43, Fair Labor Standards Act and Service Contract Act – Price Adjustment (Multiple Year and Option Year Contracts) since the contract is not expected to be fixed-price, time-and-materials or labor hour. However, all offerors have excluded escalation on their labor rates I expect because they believe that 52.222-43 applies (even though it is not in the solicitation). My assertion is that the clause does not apply and that they should propose escalation. Am I incorrect?

No, you are correct. Due to the fact that there is no provision in cost-reimbursement contracts for price adjustment on account of annual wage determinations being incorporated into the contract, offerors need to include escalation on their labor rates, to the extent they believe their actual rates in the out-years will be higher than current rates.

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Guest Vern Edwards

The estimated cost of a cost-reimbursement contract, including option costs, should reflect the parties’ most realistic ("best") estimate of what the work will cost. However, in the case of contracts subject to the SCA, the contractor has no reliable way that I know of to forecast changes in SCA wage determinations.

If I were negotiating a cost-reimbursement contract with a 12 month period of performance and annual extension options that will be covered by the SCA, I would instruct the contractor to estimate all cost escalations for all option periods except those expected to be caused by new SCA wage determinations. I would put a clause in the contract providing that the contractor expressly states that the contract estimated costs for the option periods do not include any amounts for prospective changes to SCA wage determinations. The clause would say that the contract estimated cost will be adjusted appropriately for each option year upon receipt of each new SCA wage determination and that any increases (or decreases) will not be counted as cost overruns or underruns for past performance rating purposes. I would make it clear that there will be no fee adjustments based on SCA cost adjustments. I would prepare separate modifications for SCA cost adjustments, in order to segregate them.

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Related issue. Adjusting FP, T&M, LH Subcontracts under Cost-Reimbursement Prime Contract

Situation:

Long-term cost-reimbursement prime contract for major Government program is subject to SCA. Several long-term FP, TM, or LH subcontracts, also subject to SCA, are awarded by the prime contract.

Neither the prime nor the subcontracts contain FAR 52,222-43 or any other instructions for adjusting the subcontracts.

The prime contractor is left to determine procedures for adjusting the subcontracts.

Prime decides to require subs to make new Wage Determinations effective on the date of issuance of the WD, rather than on the anniversary date of the multiple year contract, or at the beginning of a renewal, as contemplated by 52.222-43. Because the rates in the WD are applied over a longer period, prime contractor's costs are increased.

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Comments?

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Guest Vern Edwards

If I were CO I would tell the contractor that it is unreasonable to apply an SCA wage determination before it takes effect under the law. An unreasonable cost is an unallowable cost.

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This is just an overall note on Wage Determinations. It is important to watch in the out years that if there are increases to the WD rates as a result of updates to the printed WD and the offeror/contractor is already paying that adjusted rate of higher then that adjusted rate may not be eligible for an increase to the direct labor rate as a result of changes to the WD.

Example

WD 2012 = Typist is $12 an hour

Contractor is paying the Typist $14 dollars an hour.

WD 2013 = Typist is $13 an hour.

The contractor is still in accordance with the WD. The WD is only a minimum requirement. It is my opinion that in this instance the contractor would not be entitled to an increase in the labor rate as a result of adjustments to the WD.

I had an experience when a contractor tried to argue the opposite but we did not entertain their proposed increase in ceiling as a result of this increase in rates.

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52.222-41 is a mandatory flow down clause and requires the prime and subcontractor to pay their SCA covered employees not less than the wages and fringe benefits required by any WD attached to the contract. It also states that the wages and fringe benefits are "subject to adjustment after 1 year and not less often than once every 2 years, under wage determinations issued by the Wage and Hour Division." It would seem that a reasonable amount for the government to reimburse the prime would be adjustments at the subcontract level that are consistent with adjustments made to wages and fringe benefits as WD's become applicable to the prie contract.

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There is a GAO decision that supports Vern's recommendation to instruct the offerors on how to treat SCA wages for future years in their proposal. http://www.gao.gov/assets/380/373495.pdf

In the digest the decision says:

3. Under procurement for translation services covered by the Service Contract Act (SCA) that required proposals to include realistic prices for option years that allowed for any increases that may affect price, agency did not evaluate proposal prices on an equal basis to account for the real costs to the government, where the awardee’s proposed prices for Spanish linguists did not escalate for the option years and its proposal evidenced the intention of obtaining contract price increases if SCA wage determinations increased the awardee’s salary or benefit obligations for Spanish linguists, and the other offerors’ proposals (and even the awardee’s proposal for positions other than Spanish linguists) included escalating prices for the option years that apparently accounted for possible SCA increases.
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Guest Vern Edwards

Vern. Please explain "take effect under the law" as used in your post.

According to FAR 22.1007:

22.1007 Requirement to obtain wage determinations.

The contracting officer shall obtain wage determinations for the following service contracts:

(a) Each new solicitation and contract in excess of $2,500.

(B) Each contract modification which brings the contract above $2,500 and—

(1) Extends the existing contract pursuant to an option clause or otherwise; or

(2) Changes the scope of the contract whereby labor requirements are affected significantly.

( c) Each multiple year contract in excess of $2,500 upon—

(1) Annual anniversary date if the contract is subject to annual appropriations; or

(2) Biennial anniversary date if the contract is not subject to annual appropriations and its proposed term exceeds 2 years—unless otherwise advised by the Wage and Hour Division.

I believe the your inquiry falls under paragraph ( c)(1) or (2) in the above, in which case the effective date of the WD should be the contract annual or biennial anniversary date. I think that to make the WD effective before that date would be to make it effective before required to do so by law. I believe that would be an unreasonable increase in the cost of performance.

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