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This is my first post, but I've read with interest a number of threads discussing similar issues. I'm excited to hear your feedback on this.

I understand that 52.222-43 requires the contractor to warrant that wage escalations in the proposal do not include an allowance for adjustments that would automatically be made under -43 to compensate for revised Wage Determinations.

1. My general question is: under this FAR, when would I be allowed to escalate wages, and when would I be allowed to submit a proposal with flat wages?

I'm thinking the answer turns on whether or not the wages proposed are at the minimum allowed under the Wage Determinations.

For example, if I submit a proposal where my fully burdened wages are based on minimum wages under WDs, then I could submit flat rates for option years, and rely on the automatic adjustment scheme in -43 to increase wages if/as they rise due to DOL revisions to WDs.

If I submit a proposal where filling a position will require a premium over the minimum allowed under DOL WDs, then I would need to escalate wages if I anticipate it becoming more expensive to fill the position each year. If I do not escalate wages in my proposal, and my base year wages are above any new revisions to the WDs, then -43 doesn't provide me with an automatic adjustment each year.

Does this conform to your views on the way -43 operates?

A few follow-up questions.

2a. If I submit flat wages for the option years, and rely on -43 to compensate for rising labor costs, could an agency have any basis for rejecting my proposal on "realism"? Is it unrealistic to rely on revisions to WDs for price adjustments necessary to fill positions? Maybe I need to note that reliance in the bid to be clear?

2b. If the answer to 2a is "yes", then do you interpret -43 differently? For example, would it be allowable to base my fully burdened rates on the minimum wages allowed under DOL WDs, and still escalate wages, knowing that since I'm already at minimum wages, they would need to be revised each year? Such escalations would seem to include an allowance for the adjustments provided for in -43, but maybe we could warrant that our escalations aren't based on expected changes in the WDs, per se, but instead, we promise the escalations are based on "realism" or some other need to escalate wages, like for general retention purposes, for performance incentives, etc.? It seems to me that even if I have alternative explanations for my wage escalations, if I'm already working from the minimum wages allowed under WDs, my escalations are necessarily including some allowance for revisions to the WDs, and would therefore contravene the purpose of -43, or perhaps violate it altogether.

3. If I am above the minimum WDs amount, and I do not escalate, I imagine there could be a basis for rejecting my proposal based on realism. But if it weren't rejected for realism, would I have an alternative means for adjusting wages annually on renewals? Would equitable or economic price adjustments only be available if specifically allowed in the contract, or in your experience, does this depend on the Contract Officer, to be determined on a case-by-case basis?

Thank you in advance for your contributions. I've read a number of different interpretations of -43. Some departments seem to believe this doesn't allow for any wage escalations at all (although it clearly does) and some departments seem to think it's unrealistic to not escalate wages (even though FAR -43 provides an automatic scheme for adjusting wages).

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Its my understanding that FAR 52.222-43 is for Fixed Price Contracting and not Cost Type Contracts. Cost Realism is generally not an evaluation criteria for Fixed Price Contracting. Often the Government will include FAR 15.404-1 (B) Price Analysis and © cost analysis but not (d) cost realism. Most, if any cost analysis is performed to determine if any mistakes may have been made interpreting the SOW/PWS. We generally ask for the labor rate build up when having offerors propose on FFP LOE Fully Loaded Rates (Non GSA Type) so we have the basis for price adjustments when Options are awarded. We also look at the skill mix and labor rates for Exempt Employees to ascertain what type of empoyee they intend to fill these positions with. While Cost Realism is not a criteria, we do some Price Realism in that costs that are out of whack, may be reported to the Technical/Management Committess for information purposes. The only time we see escalation in FFP Services is in GSA where they have a GSA Clause for escalation. We are considering wriing our own clause to accomplish the same purpose.

If I have provided misleading information to "Contract Crusher" please feel free to tear my response apair because I am here to learn also.

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Its my understanding that FAR 52.222-43 is for Fixed Price Contracting and not Cost Type Contracts. Cost Realism is generally not an evaluation criteria for Fixed Price Contracting. Often the Government will include FAR 15.404-1 ( B) Price Analysis and © cost analysis but not (d) cost realism.

Yes, this is my understanding as well. Nevertheless, some agencies may include, in a multi-year FFP service contract reviewed for best value, both FAR -43 and realism FARs. Could a bid be rejected under a "realism" analysis, simply because the failure to escalate wage rates was determined to present a risk for fulfillment?

FWIW, the 2010 Navy Desk Guide to SCA price adjustments says this re wage escalations (note the curious suggestion that wage rates could be escalated simply "for realism"):

4.13 Escalation of wage rates.
The clause contemplates adjustment of the wage rates, but does
not
allow both an adjustment under the clause
and
escalation of option period pricing for the
same
SCA labor rates and hours. The clause states in part “The Contractor warrants that the prices in this contract do not include any allowance for any contingency to cover increased costs for which adjustment is provided under this clause.”

Therefore, if for cost realism or any other purpose the contractor has included such contingency in its awarded contract price, the elements of that escalation must be known and carefully considered during any analysis and payment of adjustments under the clause. First, a determination as to whether
any
entitlement whatsoever is owed under the clause. If yes, then a distinction must be made regarding how much of the escalation is attributable to SCA-covered labor cost as compared to the other types of escalation increases such as those for supplies, materials, equipment, etc.

It is highly recommended that details about escalation methods and rates be gathered and understood,
during the competitive phase of the procurement.
Otherwise, calculating the exact amount of the price adjustment entitlement may be difficult and contentious.

Escalation for factors other than SCA-required wage and fringe benefit rates, such as equipment, materials, supplies or non-SCA-required labor rates are outside the scope of the clause and as such may or may not be included in the final awarded pricing without affect on entitlement under the clause.

Any thoughts about the "for cost realism" language? It seems contrary to the purpose and language of FAR -43 to allow contractors to escalate wages above the minimums provided for under DOL WDs under the guise of "cost realism", when such wage escalations would necessarily cover, at least in part, the automatic adjustments for revised WDs under FAR -43.

Moreover, if contract officers are requiring wage escalations "for realism" aren't they undermining the purpose of FAR -43 altogether? From 74 FR 40460:

This change will achieve consistency
throughout the Government acquisition
community and resolve potential
inequities where the clauses have not
been applied. It will achieve an
equitable result for contractors and will
also allow the Government to avoid use
of other means of adjusting contract unit
price labor rates which may be more
costly to the Government. Other means
of adjusting contract labor rates, such as
allowing for wage/benefit escalation,
equitable adjustment or economic price
adjustment, would likely include profit,
overhead, and general and
administrative expenses. The FAR
clauses at 52.222–43 and 52.222–44
explicitly exclude these additional
costs. . . .
While there may
be other means permitted to adjust fixed
labor rates on time-and-materials or
labor-hour contracts, those other means
do not achieve the consistent results
that use of the Service Contract Act
price adjustment clause(s) will achieve.

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I agree, We only see Labor escalation on non-exempt employees in Cost Type Contracts where cost realism gets evaluated.

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I understand that 52.222-43 requires the contractor to warrant that wage escalations in the proposal do not include an allowance for adjustments that would automatically be made under -43 to compensate for revised Wage Determinations.

1. My general question is: under this FAR, when would I be allowed to escalate wages, and when would I be allowed to submit a proposal with flat wages?

I'm thinking the answer turns on whether or not the wages proposed are at the minimum allowed under the Wage Determinations.

For example, if I submit a proposal where my fully burdened wages are based on minimum wages under WDs, then I could submit flat rates for option years, and rely on the automatic adjustment scheme in -43 to increase wages if/as they rise due to DOL revisions to WDs.

If I submit a proposal where filling a position will require a premium over the minimum allowed under DOL WDs, then I would need to escalate wages if I anticipate it becoming more expensive to fill the position each year. If I do not escalate wages in my proposal, and my base year wages are above any new revisions to the WDs, then -43 doesn't provide me with an automatic adjustment each year.

Does this conform to your views on the way -43 operates?

Yes.

A few follow-up questions.

2a. If I submit flat wages for the option years, and rely on -43 to compensate for rising labor costs, could an agency have any basis for rejecting my proposal on "realism"? Is it unrealistic to rely on revisions to WDs for price adjustments necessary to fill positions? Maybe I need to note that reliance in the bid to be clear?

No, unless your reliance on -43 implies that you’re bidding the WD minimums, and the actual situation is that filling some positions will require a premium over the minimums. In that case, your proposal could be downgraded based on “realism,” assuming that this was addressed in the stated evaluation factors. I doubt I would “reject” a proposal in this situation, unless the lack of realism was such that it reflected a clear lack of understanding of what was required to do the job.

Noting your reliance in the bid would not be necessary, but I can’t imagine how it could hurt .

2b. If the answer to 2a is "yes", then do you interpret -43 differently? For example, would it be allowable to base my fully burdened rates on the minimum wages allowed under DOL WDs, and still escalate wages, knowing that since I'm already at minimum wages, they would need to be revised each year? Such escalations would seem to include an allowance for the adjustments provided for in -43, but maybe we could warrant that our escalations aren't based on expected changes in the WDs, per se, but instead, we promise the escalations are based on "realism" or some other need to escalate wages, like for general retention purposes, for performance incentives, etc.? It seems to me that even if I have alternative explanations for my wage escalations, if I'm already working from the minimum wages allowed under WDs, my escalations are necessarily including some allowance for revisions to the WDs, and would therefore contravene the purpose of -43, or perhaps violate it altogether.

My answer to 2a wasn’t “yes,” and I agree that inclusion of wage escalation when your rates are based on the WD minimums would not allow you to honestly warrant “that the prices . . . do not include any allowance for any contingency to cover increased costs for which adjustment is provided under” -43.

3. If I am above the minimum WDs amount, and I do not escalate, I imagine there could be a basis for rejecting my proposal based on realism. But if it weren't rejected for realism, would I have an alternative means for adjusting wages annually on renewals? Would equitable or economic price adjustments only be available if specifically allowed in the contract, or in your experience, does this depend on the Contract Officer, to be determined on a case-by-case basis?

Thank you in advance for your contributions. I've read a number of different interpretations of -43. Some departments seem to believe this doesn't allow for any wage escalations at all (although it clearly does) and some departments seem to think it's unrealistic to not escalate wages (even though FAR -43 provides an automatic scheme for adjusting wages).

I imagine in this scenario, you could be downgraded for realism, since the only means for price adjustment is -43, and in this case, you’re saying that -43 wouldn’t provide any adjustment, since you’re already above the minimums. I think adjustment would be available only if it’s specifically provided for in the contract.

The opinions expressed herein are only my own, and do not represent any official position of the Navy, or of any other individual Navy contracting officer.

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Yes.

No, unless your reliance on -43 implies that you’re bidding the WD minimums, and the actual situation is that filling some positions will require a premium over the minimums. In that case, your proposal could be downgraded based on “realism,” assuming that this was addressed in the stated evaluation factors. I doubt I would “reject” a proposal in this situation, unless the lack of realism was such that it reflected a clear lack of understanding of what was required to do the job.

Noting your reliance in the bid would not be necessary, but I can’t imagine how it could hurt .

My answer to 2a wasn’t “yes,” and I agree that inclusion of wage escalation when your rates are based on the WD minimums would not allow you to honestly warrant “that the prices . . . do not include any allowance for any contingency to cover increased costs for which adjustment is provided under” -43.

I imagine in this scenario, you could be downgraded for realism, since the only means for price adjustment is -43, and in this case, you’re saying that -43 wouldn’t provide any adjustment, since you’re already above the minimums. I think adjustment would be available only if it’s specifically provided for in the contract.

The opinions expressed herein are only my own, and do not represent any official position of the Navy, or of any other individual Navy contracting officer.

Thank you for your thoughtful response. I think we agree on how -43 should be intepreted, and I have concluded, as you noted, that clarifying any reliance on minimum WDs and/or -43/SCA adjustments within the proposal will hopefully minimize ambiguity and the opportunity for misunderstanding.

FWIW, the DAU advances an interpretation of -43 that is very much like the one you and I propose (See Section 7.3.1 of Vol. 3 of its Contract Pricing Reference Guide):

If the contract is a multi-year contract or includes an option to extend the contract, remember that the Fair Labor Standards Act and Service Contract Act -- Price Adjustment (Multiple Year and Option Contracts) clause provides for price increases based on changes in the wage determination or minimum wage. Affected labor rates are based on the wage determination or minimum wage that is current on the contract anniversary or the beginning of each renewal option period.
  • The offeror cannot project a labor rate increase and also benefit from an additional adjustment due to a change in a related wage determination or the minimum wage. By submitting an offer under a solicitation that includes the above clause, the offeror certifies that the offer does not include any allowance for any contingency covered by the clause.
  • The offeror can project labor rate increases that are not the covered by the clause. For example, if the offeror's labor rate is $7.25 and the wage determination is $7.00, the labor rate would not be affected by an increase in the wage determination from $7.00 to $7.05. If the offeror projects an increase in the $7.25 labor rate to $7.30 after one year, that must be separately estimated. Still, remember that wage determinations are based on the prevailing wage in the locality, the collective bargaining agreement negotiated by the contractor under any predecessor contract (FAR 22.1008-3), or the minimum wage set forth in the Fair Labor Standards Act.

Unfortunately, the Air Force and Army have more restrictive interpretations advanced in their guides. For example, Section 4.2 of the FLSA & SCA Air Force Price Adjustment Guide states:

4.2 Assumptions with Respect to Contract Pricing

Both FLSA/SCA price adjustment clauses state, at paragraph ‘(
B)
’,
"The Contractor warrants that the prices in this contract do not include any allowance for any contingency to cover increased costs for which adjustment is provided under this clause."
Thus, contract price should
not
have included amounts for known or projected increases in wage rates, fringe benefits, or allowable accompanying costs that may become effective
after the base period of the contract
.

I couldn't find an updated FORSCOM handbook, but this older Wifcon thread references what is most likely an out of date interpretation of -43. But until I find a more recent version of the Army's policy with respect to -43 (the "FORSCOM Publications" link on their webpage isn't resolving for me), I'm operating under the assumption that they maintain the same rigid interpretation of -43 that's copied and pasted into that older Wifcon thread, i.e., that no wage escalations are allowed at all, even where DL rates above the minimum WDs is required!

Thanks again for your help.

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