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Don Mansfield

SCA Price Adjustment

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FAR 52.222-43, Fair Labor Standards Act and Service Contract Labor Standards--Price Adjustment (Multiple Year and Option Contracts), states the following in 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.

Paragraph ( e ) limits said adjustment as follows:

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.

Thus, the clause does not provide for adjustment in G&A, overhead, and profit. As such, the "warrant" in paragraph ( b ) does not apply to G&A, overhead, or profit.

Question: Do you think it would be in violation of anything for an offeror to include contingencies in its proposed contract prices for increased G&A and/or overhead costs attributable to future wage determination increases?

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No, I do not.

My understanding is that, if the prevailing wage increases during contract performance, then the contractor is generally entitled to an equitable adjustment for the increased wages. Yes, those increased wages would tend to absorb more indirect costs, including overhead and G&A expenses. However, those same increased wages would also tend to increase the allocation base for those indirect cost pools. Hence, the overall indirect cost rates might actually decrease as a result of paying a higher prevailing wage. Excluding those cost elements from consideration avoids having the contractor perform a fairly complex cost impact analysis that would show the impact to the contract of absorbing relatively more indirect expenses at relatively lower overall absorption rates. It also avoids the offset argument, wherein the instant contract might attract more indirect costs, but the contractor's other contracts actually see cost decreases from lower absorption.

On the other hand, if the clause did mandate such a cost impact analysis, I might have more consulting work, so there's that to consider ....

Hope this helps!

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H2H, the clause doesn't provide for an "equitable adjustment", only a cost adjustment for changes in wages and associated taxes, fringes and insurance. I would agree that proposers are not violating anything by including contingencies for possible G&A and overhead increases or decreases attributable to wage rate adjustments.

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Joel, forgive me. Are you saying that the basis of the adjustment is something other than equity?

H2H

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You just got to love wording like this; "any allowance for any contingency". So to answer your question, yes this would be a violation. Strictly speaking it's an allowance for contingency to cover increased costs for which adjustment is provided under the clause. Although, perhaps that's not what was intended.

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You just got to love wording like this; "any allowance for any contingency". So to answer your question, yes this would be a violation. Strictly speaking it's an allowance for contingency to cover increased costs for which adjustment is provided under the clause. Although, perhaps that's not what was intended.

TAP, no it wouldn't be a violation to price option years to reflect G&A, Overhead or profit changes because no adjustment for those elements is provided under paragraphs (d ) and (e) of clause 52.222-43.

(e) 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.

H2H, the reason that I said that the clause doesn't provide for an" equitable adjustment" is that the adjustment specifically excludes "profit" (as well as overhead/G&A). The clause only provides for labor cost adjustments that are caused by differences in the SCA labor rates. See discussion of profit as part of an equitable adjustment on pages 737-738 in Administration of Government Contracts, Fouth Edition by Cibinic, Nash and Nagle:

Profit has generally been included as an integral part of the term "equitable adjustment," United States v. Callahan Walker Constr. Co., 317 U.S. 56 (1942) (contractor entitled to "reasonable and custumary allowance for profit" on extra work)...The rationale for inclusion of profit was explained in New York Shipbuilding Co., ASBCA 16164, 76-2 BCA ¶ 16534, at 57,427: "Without the payment of a profit which is fair under the circumstances, the Government would be getting something for nothing and the contractor would not truly be made whole."

Thus, there are clauses which only provide for various cost adjustments and there are clauses which provide for equitable adjustments. The clause 52.222-43 also excludes an adjustment for associated G&A and/or overhead on the labor cost adjustment.

Therefore, since the clause doesn't provide for an adjustment for profit, overhead/G&A on the labor adjustments, I don't think that paragraph ( b ) of the clause prohibits the inclusion of any allowance for any contingency for those items in the original contract price for option periods.

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Joel,
I understand that no adjustment is provided for the G&A, Overhead or profit elements under paragraphs (d) and (e) of clause 52.222-43, and that's not what I am saying. It's understood that the adjustment is provided under the clause to reflect the Contractor’s actual increase or decrease in applicable wages and fringe benefits, social security, unemployment taxes and workers’ compensation in order to comply with a new wage determination. But if a contractor includes contingency for G&A, Overhead or profit for a potential increase in wages and fringe benefits that may or may not happen, then it is to cover increased costs (G&A, Overhead or profit associated with a potential increase in wages and fringe benefits) for which adjustment is provided under the clause.

I don't think that was intended and I don't think it is right, but as written it could be interpreted it that way.

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I don't interpret it that way at all, TAP. I think it is clear but aint a lawyer or a paralegal.

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Tap, I don't agree with your interpretation. The contractor's warranty does not apply to costs associated with costs that entitle a contractor to a price adjustment. The warranty clearly applies only to costs that entitle a contractor to a price adjustment.

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