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Legal Govt Eagle

Wage Determination/Price Adjustment

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I cannot find any law/case certain that explains to me whether the Govt. has to pay a price adjustment based on a wage determination for labor categories NOT proposed at the time of award. I.e. the contractor added labor categories to do the work...and now wants a price adjustment for those as well. Thoughts?

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Do you consider the added labor categories out of scope of the contract or the original competition?

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Sorry should have given more facts. This is a service contract with a base effort plus IDIQ - Firm Fixed Price. Two year with three one-year options.

I think since it is Fixed Price could we even argue the new labor categories are out of scope?

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Did the contract schedule include a list of employee classifications? If so, was the contract modified to add the categories?

Whether added to the contract or not, are the added categories listed in the original wage determination and in the new one?

If not, were they conformed in accordance with FAR 52.222-41(c)(2)?

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Did not include categories; was not modified. The added categories were either in wage determination or part of Union categories. No conformance.

 

Basically - our contractor proposed categories...then added new ones this past year to do the work but never confirmed that with us and now wants the wage adjustment for those categories as well. Which are either in the wage determination or union agreement.

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Legal, if you read FAR 52.222-41 and 52.222-43, why would the contractor not be permitted to get the price adjustment in regard to the labor categories it did not propose? If it did not get the adjustment, would you also concede that the contractor does not have to pay the wages and fringe benefits called for by the WD for those categories?

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I did read but it doesn't specifically call out my fact pattern... It seems contrary to common sense to have to pay an adjustment to a contractor for them adding labor categories that it did not propose and was not technically approved by the Government but I also see what you are saying (hence my question).

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5 hours ago, Legal Govt Eagle said:

t seems contrary to common sense to have to pay an adjustment to a contractor for them adding labor categories that it did not propose and was not technically approved by the Government

If a contractor employee is working under a contract and is considered a "service employee" as defined at 52.222.41, then that employee must be paid in accordance with the wage determination (including any conformed rates).  If I understand your prior comment correctly, the contract does not include specific labor categories.  Therefore, unless something is in the contract that requires them to use the labor categories they proposed prior to award or to get CO approval prior to making a change, the contractor is free to chose whatever means they want to get the work done so long as it is not prohibited by the contract.  The contractor is required to pay all employees subject to the SCLS in accordance with the wage determination, or request a conformance if a class of employee they are using is not on the wage determination.  Therefore, they would be entitled to an adjustment for those employees (regardless of classification/category) in accordance with 52.222-43.  Is there something in your contract that requires them to use the proposed labor categories?  Just because the proposed something (e.g. specific labor categories or specific means/methods, it doesn't mean they have to stick to it unless their proposal was incorporated into the contract or the contract otherwise required them to use the stated categories or means/methods.

Unless it is necessary and stated in the contract, the Government should not be in the businesses of telling contractor's who they can and cannot use to preform the work required by the contract.

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A long time ago a COTR found a novel method of helping his contractor comply with the SCA. Every time a new wage determination came out, he directed the contractor to demote employees so that their pay didn't have to be increased; therefore, there was no need to mod the contract.

At the end of the day, the contractor had to pay a fairly substantial settlement and the COTR didn't fare very well either.

My apologies if this anecdote was off-topic. For some reason the memory popped into my mind as I was reading this thread.

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Although neither the FAR nor DoL regulations say how to compute price adjustments under FAR 52.222-43, many agencies have issued guidance on this.  The ones with which I am familiar state that the adjustment should be based upon the number of hours that are anticipated to be needed to perform the contract in the coming period.  This would also seem to apply to labor categories as well since hours for unneeded labor categories would not be included in the price adjustment calculation.  Thus, this seems to be a point of negotiation concerning the price adjustment.  If the agency and contractor can agree that the hours relating to the added labor categories are not necessary for performance in the upcoming period, they would not be included in the price adjustment.  On the other hand, if the contractor can convince you that the added labor categories are needed, they should be included in the price adjustment.

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Legal Govt Eagle says that the contract is "fixed price." So we're talking about a price adjustment. But we know nothing else about the contract.

FAR 52.222-43 entitles the contractor to a price adjustment based on changes in wage rates and fringes
.

Quote

(d) The contract price, contract unit price labor rates, or fixed hourly labor rates will be adjusted to reflect the Contractor’s actual increase or decrease in applicable wages and fringe benefits to the extent that the increase is made to comply with or the decrease is voluntarily made by the Contractor as a result of:

(1) The Department of Labor wage determination applicable on the anniversary date of the multiple year contract, or at the beginning of the renewal option period. For example, the prior year wage determination required a minimum wage rate of $4.00 per hour. The Contractor chose to pay $4.10. The new wage determination increases the minimum rate to $4.50 per hour. Even if the Contractor voluntarily increases the rate to $4.75 per hour, the allowable price adjustment is $.40 per hour;

(2) An increased or decreased wage determination otherwise applied to the contract by operation of law; or

(3) An amendment to the Fair Labor Standards Act of 1938 that is enacted after award of this contract, affects the minimum wage, and becomes applicable to this contract under law.

(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.

 

The parties negotiated a fixed-price for the contract. The price adjustment must be grounded in that price--on the hours and types of labor on which the price is based. The CO must not let the contractor reprice the contract to recover additional costs associated with its own decision to use more hours and/or more expensive workers than originally proposed.

 

Since the parties have a fixed-price for the coming period, that price is to recalculated on the basis of the new wages and fringes. The costs of the added workers are not covered if they were not included in the original price or added by contract mod.

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On ‎5‎/‎7‎/‎2016 at 9:30 PM, Todd Davis said:

 Is there something in your contract that requires them to use the proposed labor categories?  Just because the proposed something (e.g. specific labor categories or specific means/methods, it doesn't mean they have to stick to it unless their proposal was incorporated into the contract or the contract otherwise required them to use the stated categories or means/methods. Therefore, they would be entitled to an adjustment for those employees (regardless of classification/category) in accordance with 52.222-43.

Unless it is necessary and stated in the contract, the Government should not be in the businesses of telling contractor's who they can and cannot use to preform the work required by the contract.

Vern covered this politely in his last post, and I am surprised he did.... By this rationale, a contractor can enter into a FFP arrangement with the Government, for an agreed to price, then switch every labor category on which that FFP was based.  Also, by this rationale, as long as the contractor is conforming to any labor mix within the SCA WDs, they can request a price adjustment to the contract without previous CO review and approval of the deviations. I don't think that's a good business deal for the Govt, do others? Please let me know if I am off here! I'll own up to it.

 

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32 minutes ago, JMG said:

By this rationale, a contractor can enter into a FFP arrangement with the Government, for an agreed to price, then switch every labor category on which that FFP was based.  Also, by this rationale, as long as the contractor is conforming to any labor mix within the SCA WDs, they can request a price adjustment to the contract without previous CO review and approval of the deviations.

I agree with what Vern said. 

This is not an opportunity for the contractor to reprice the contract to compensate it for a decision to use more labor and/or more expensive labor than it originally proposed.  As part of its request the contractor would have to show the labor classifications and estimated hours for accomplishing the work within the original fixed price.  If the cost for those classifications increased due to an increase in the rates required by the wage determination, that increase would be multiplied by the original estimated number of hours.  If the contractor was already using only higher paid classifications (greater than what was required by wage determination for the original classifications), then I don't think they would be due an adjustment.  Also, the contractor would not be able to obtain an adjustment for hours over what was originally proposed (unless the contract was changed to require additional work that would increase the necessary hours.  The challenge can be that a CO won't necessarily know what labor classifications or hours were used to price a contract, unless that information was shared with the Government previously (e.g. stated in the contract, within its proposal, or during negotiations). 

I do need to correct my prior statement regarding a contractor being able to obtain and adjustment for any classification of employee they choose to apply in performance of the contract, based on what I stated in this post.  My main point remains however, that unless the contract requires otherwise, the contractor is free to apply whatever labor classifications they want for whatever hours they want without CO approval.  However, in doing so they may not necessarily be able to obtain an SCLS price adjustment.  It gets down to the detail of what they included in their estimating of the price they proposed.

In case you are not aware of it, the Air Force Labor Advisor's Office has a useful guide on wage adjustments.  You should be able to access it here or call/email them to obtain the latest copy.  http://ww3.safaq.hq.af.mil/factsheets/factsheet.asp?id=12724 

The guide states:

15.0 CONTRACTOR RECLASSIFICATION OF EMPLOYEES

No price adjustment is allowable for voluntary upgrading (promoting) of employees by a

contractor. The cost impact of such promotions must be borne by the contractor- the

promotion, reclassification, etc., was done at the discretion of the contractor. Where upward

reclassifications are alleged to be required by SCA (involuntary), the contractor may be in

violation of SCA (see Section 14).

Example: An employee was classified and paid as an “Accounting Clerk I” in the

previous contract year. The contractor’s adjustment proposal requests the difference

from the previous “Accounting Clerk I” minimum rate actually paid to the current

“Accounting Clerk II” minimum rate, which would promote the employee at Air Force

expense. The contractor is only entitled to the difference between the previous

Accounting Clerk I rate paid and the current rate for the same classification. If the

contractor chooses to classify and pay the employee as an “Accounting Clerk II” this will

establish a new baseline for future adjustments. This rationale also applies to

classifications changed due to a DOL SCA compliance action.

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Vern, in regard to your last post, the Price Adjustment clause tells us how to compute the hourly rate adjustment.  However, it does not tell us what that adjustment is to be multiplied by to compute the price adjustment.  My research indicates that the DOL SCA regulations do not tell us that either.  I also have not been able to find any court or board decision that gives us the answer.  Some agencies, such as the Air Force and Navy have published guides for making the price adjustment, but they are only interpretive guidelines and are not regulations and have no effect beyond the agency that published them.  Which leads to the question as to whether you have found any definitive guidance on how to compute the hours by which the hourly adjustment is to be multiplied to calculate the price adjustment?

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1 hour ago, Retreadfed said:

it does not tell us what that adjustment is to be multiplied by to compute the price adjustment. 

52.222-43 states the "The contract price, contract unit price labor rates, or fixed hourly labor rates will be adjusted to reflect the Contractor’s actual increase or decrease in applicable wages..."   

Calculating an increase in the rate required to be paid alone would be adequate if one is proactively adjusting a unit price labor rate or a fixed hourly labor rate in advance that will be paid for future hours to be actually worked in the future. 

If a proactive (forward) adjustment to the contract price (not a unit price) is made, then actual hours worked of course do not exist yet.  The only way to calculate an adjustment would be for the CO to estimate the number of hours to be worked (based on past hours worked adjusted for any known changes).  If the actual number of hours subsequently worked exceeded the estimate, the contractor would be entitled to an adjustment (so long as hours .  If the actual hours fell short, the Government would be entitled to an adjustment.  This would ensure the contractor only receives adjustment for the actual increase in applicable wages.

However, if one is retroactively making an adjustment for hours worked already worked, the only way to arrive at an adjustment to the contract price (for an actual increase) is to multiply the increase in rate by the actual hours worked.  The actual hours worked reflect "the Contractor's actual increase" in applicable wages called for by the clause. 

While the contractor would have to pay their employees the required rate for all hours worked, the contractor is not entitled in a fixed price contract to receive an adjustment to hours worked that are not part of the price agreed to in the contract.  As has been said already, the contractor is not entitled to compensation for more hours than was priced into the contract.

I don't think that any clause or regulation needs to explicitly state what number to multiply the change in rate by.  It is the number of hours the CO, board or court determine the contractor is entitled to.

 

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16 hours ago, Retreadfed said:

Which leads to the question as to whether you have found any definitive guidance on how to compute the hours by which the hourly adjustment is to be multiplied to calculate the price adjustment?

Retread: I know of a Navy guide that provides as follows:

Quote

Computations Based on Projected or Actual Labor Costs.

Generally, a contractor's price adjustment request is submitted shortly after the contracting officer incorporates the new SCA WD, at the beginning of the new contract period. The computation of the adjustment will be based upon the projected impact of the new SCA WD. The projection uses hours worked by service employees in the prior contract period, factoring in any expected changes to contract scope, workforce, work methods, or technological efficiencies that will occur in the next contract period. This method is known as the Forward Pricing Adjustment Method (FPAM). If the price adjustment request has been significantly delayed (six months or more) by either an approved extension to the required filing date (see FAR 52.222-43(f) or FAR 52.222-44(e)), or by a delay in completing the contract modification, the contractor should use the actual pay and hours worked records from the new contract period as the basis of the computation. This method is known as the Actual Cost Adjustment Method (ACAM). The best method for estimating the actual man-hours that will be used by the contractor in the adjusted period of performance will depend upon the facts and circumstances of the specific contract, but generally the most current information should be used.

I'm pretty sure that you knew about that guidance when you asked me if I had found any. ^_^

In any case, that guidance makes no sense for firm-fixed-price contracts, is not consistent with the terms of FAR 52.222-43, and I would not follow it. The guide says:

Quote

This guidance is not all-inclusive. It does not relieve the reader of the requirement to carefully review the solicitation or contract, or to follow appropriate law and regulations such as the Federal Acquisition Regulation (FAR), FAR supplements, and Department of Labor regulations related to these issues.

FAR 52.222-43 says to adjust "the contract price" (or unit price labor rates, or fixed hourly rates) based on changes to wages and fringe benefits and their effects on social security, unemployment insurance, and workers' comp. The clause expressly limits the adjustment to the impact of the new WD. The clause does not say to reprice the contract based on actual labor hours used during the period prior to the option period for which the adjustment is to be made or based on a new estimate of hours for the option period. The new WD could have no impact on the types of workers or the number of hours required to perform, and so no adjustment should be applied on the basis of any change in categories or hours required to perform, up or down. You adjust the price that you already have based on the changes in wages and fringes, etc. You don't negotiate a new price based on new hours. The SCA price adjustment is not an equitable adjustment as required by the changes clause and other clauses requiring "equitable adjustment."

When I managed contracts subject to the SCA and SCA price adjustment, I would require prospective contractors to submit with their proposals a schedule of labor categories and labor hours used to develop their option prices and to be used to price FLSA/SCA price adjustments. If there was a contract mod during any performance period the contractor and I would determine what effect any equitable adjustment had on the categories and hours required to perform in any subsequent option period and modify the adjustment schedule accordingly. When a new WD arrived for the first or any subsequent option periods, and the contractor submitted its proposal for an adjustment, I would check to see (a) what wages and fringes, etc., the contractor had actually paid, (b) whether the new WD had increased or decreased those wages and  fringes, etc., and (c) adjust accordingly based on the categories and hours stated in the schedule previously submitted and agreed upon. The adjustment would be the sum of the schedule hours x the applicable deltas in the rates, fringes, etc. If the contractor was going to lose money due to a change in hours, it would still lose money. If it was going to make more money due to labor efficiencies, it would keep it. To do anything else would be inconsistent with firm-fixed pricing.

Was I doing it properly? No one ever submitted a claim. I am not aware of any contradictory board or court interpretation of the clause.

FAR 52.222-43 is confusing. I wrote about this problem in the October 2006 edition of The Nash & Cibinic Report: "Price Adjustments Under the Service Contract Act: A New Take on an Old Problem." In that article I commented as follows:

Quote

The negotiation of Service Contract Act price adjustments is an annual ritual for many COs and their contractors, yet the wording of the “Price Adjustment” clause is confusing to some, and its proper interpretation has been the subject of other litigation in the recent past, see JDD, Inc., ASBCA 55282, 2006 WL 2130428 (July 13, 2006), and Guardian Moving & Storage Co. v. Hayden, 421 F.3d 1268 (Fed. Cir. 2005), 47 GC ¶ 363. I can recall the problems that my staff had with an earlier version of the clause when I managed a contracting office for the Air Force in the late 1970s and early 1980s.

My own experience with the clause is that different COs interpret it in different ways. This is confirmed by the Air Force policy guidance quoted by the ASBCA. Differing interpretations are not surprising, because the rules governing Service Contract Act price adjustments can be difficult to understand in the context of specific facts. Official guidance is sparse and what little guidance exists is often confusing. 

I think my take on the clause makes sense. I see no sense in an SCA adjustment to a firm-fixed price than includes an adjustment based on hours actually worked or a new estimate of hours.

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Vern, I completely agree that 52.222-43 and the DOL regulations concerning price adjustments are confusing.  The lack of uniform guidance in the FAR or DOL regulations has resulted in price adjustments being done in a "wild west" manner.  I have seen various contracting offices use three different methods of computing the adjustment, an adjustment based on the hours initially proposed by the contractor and accepted by the government in pricing the contract, the number of hours actually worked in the previous period, and an estimate of hours to be worked in the coming period.  In fact, I had one occasion where different contracting officers in the same contracting office used different methods.  My own view is consistent with your conclusion stated in your last post.

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Vern,

This is a bit out of my wheelhouse. Let me see if I can restate the situation and then move forward from there.

Contractor A submits a proposal for a fixed-price contract. In that proposal are categories subject to SCA wage determinations. The contractor proposed labor costs that apply the wage determinations to the labor categories covered by DOL. The contractor and government agree on a price, which may or may not have included labor costs that were costed at the appropriate SCA wage rates. (I say that because they could have settled on a bottom-line price to resolve negotiation differences.)

If that's correct -- and if it's not correct then anything else I'm about to say will be nonsensical -- then the contractor is obligated to perform the contract and deliver the product at the agreed-upon price, unless there is a contract clause (such as 52.222-43) that establishes conditions for a price adjustment.

After contract award, two things happen: (1) the contractor finds that in order to perform it needs a different labor mix than originally proposed, including new labor categories not originally proposed but subject to the SCA, and (2) the DOL issues a new wage determination impacting some (or all) of the proposed labor rates plus the new labor rates needed to perform the work. Now the contractor has to propose a contract price adjustment IAW 52.222-43.

If I were that contractor, I would identify all impacted labor hours "to go" from the effective date of the wage adjustment. I would perform an Estimate to Complete (ETC) and Estimate at Completion (EAC) using the two sets of labor rates -- the original non-adjusted rates ("EAC 1") and the newly adjusted rates ("EAC 2"). I would compare the EAC 1 to the original contract price to identify any at-completion profit or loss. I would compare EAC 1 to EAC 2 to show the impact from the new wage determination to my projected actual labor costs. I would submit an REA for the difference between EAC 1 and EAC 2, as adjusted for any loss on the contract identified from comparing EAC 1 to the original contract price.

Hours incurred before the effective date of the wage adjustment would be included in both EACs, but as unadjusted actuals. The adjustment would impact the Estimate TO Complete (and hence the Estimate at Completion) but not the actuals already booked. (For those who may not know, the formula for calculating an EAC is Actual Costs + ETC = EAC.) My approach would include the impact of the new wage determination on all "to go" contract labor hours, whether originally proposed or not.

Not sure if that makes sense because (again) not my specialty. But that's how I would approach it. If I'm way off base, please take the time to correct me so I'll learn something today!

H2H

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DOL has a "Price Adjustment Calculator Tool" on the WDOL Web site. The User Guide says (p. 9):

Quote

Forward pricing In most circumstances price adjustments are and should be based upon a “forward pricing” methodology for which the man-hours that will be used in the new period of performance must be estimated. Since SCA price adjustments are almost always based upon moving to a new period of performance such as a new option period or sometimes a more limited contract extension (referred to in FAR 52.222-43/44, 32 as “the renewal option period”), the number of man-hours used by the contractor in the prior period of performance is the best indicator of what should be used for the new period of performance and this becomes the correct “multiplier”. The number of man-hours estimated in the contractor’s original contract proposal is less accurate than actual hours expended in the previous period of performance. When this forward pricing method is used, the contractor’s payroll data for the most recently completed period of performance should support the estimated man-hours that will be used as the multiplier. For further guidance on this method, refer to the Desk Guide for Service Contract Price Adjustments, 4.2 Computations Based on Projected or Actual Labor Costs.

The Desk Guide referenced is the Navy guide that Vern quoted from.

I don't know the right answer, but I thought it was interesting that DoL's guidance on the use of PACT seems to adopt the method from the Navy guide.

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4 hours ago, Retreadfed said:

The lack of uniform guidance in the FAR or DOL regulations has resulted in price adjustments being done in a "wild west" manner. 

I also agree the "wild west" analogy is appropriate.  Having said that, while some may prefer to have clear guidance on how to handle certain issues in a regulation, not having the specific guidance may not be a bad thing.  The CO then has some discretion on how to handle the situation, so long as it is consistent with the clause, regulation, and pertinent case law.  I don't know how others feel, but sometimes I feel like we have too much regulation and less discretion, but other times I find it would be helpful to have greater clarity in a regulation.  I guess that is why COs are paid big $$, to educate themselves and exercise good judgment, absent specific guidance in a regulation :)

 

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