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Wage Determination/Price Adjustment

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6 hours ago, Don Mansfield said:

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.

Guides are just that. They are not binding on anyone. Read the clause. That is what is binding. And think.

FAR 52.222-43 provides for an adjustment based solely on the effect of the new WD on wage rates, fringes, social security, unemployment insurance, and workers compensation insurance. It says nothing about basing adjustments on a revised estimate of hours for the period in question. 

Allowing the contractor to propose a price adjustment based on a revised estimate of labor hours that is, in turn, based upon the contractor's actual labor hour experience during the prior period of performance would amount to partial repricing of the contract without competition. Does that make sense when contracting on a firm-fixed-price basis? Such an adjustment, absent express provision for it in the clause, would be inconsistent with the concept of firm-fixed pricing.

Knowing that an adjustment will have to be made based solely on new wages and fringes, etc., a CO should prepare during contract formation by negotiating schedules of the categories and hours on which the future option prices to be adjusted were based at the time of price agreement. With those schedules in hand, price adjustment is a simple matter of determining the upward or downward changes in category rates from what the contractor paid during the last period to what it must pay during the subsequent period.

The clause is not explicit about the method of calculation, but what clause is? Certainly not the changes clause. It only hints at how to calculate an equitable adjustment. COs must read the SCA price adjustment clause, think it through, and plan accordingly. With an appropriate schedule of categories and hours for each option period, calculating an appropriate adjustment should be pretty straightforward.

If the Navy or the DOL think that the SCA adjustment should be based on a revised estimate of labor hours derived from the contractor's experience in the prior period, then they should seek a revision to FAR Subpart 22.10 to include instructions to that effect and revise FAR 52.222-43 to say so in no uncertain terms, thereby binding the parties.

 

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Basing a price adjustment on the actual hours worked in the previous period has some surface appeal, but presents several problems based on the concept of a firm fixed price contract as Vern stated.  For example, if the contractor proposed 1,000 hours of labor but expended 1,100, I doubt many contracting officers would be willing to base a price adjustment on the 1,100 instead of the 1,000.  To do so would shift a substantial portion of  the cost risk in an FFP contract from the contractor to the government.  Similarly, if the contractor is prevented from working during a portion of the prior period such as by a government shutdown or a stop work order, that would distort the actual hours needed to do the work and could result in an injustice to the contractor.  Finally, in an FFP contract, if the contractor finds a more efficient way of performing the contract so that its cost of performance is less than anticipated, the contractor generally realizes an increase in profit.  If the cost savings are generated by a reduction in the number of hours used, basing the price adjustment on the actual hours from the prior period would deprive the contractor of the profits it earned by generating cost savings.

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1 hour ago, Retreadfed said:

If the cost savings are generated by a reduction in the number of hours used, basing the price adjustment on the actual hours from the prior period would deprive the contractor of the profits it earned by generating cost savings.

I don't understand how this would deprive the contractor of increased profit.  The contractor still gets the fixed price the contract calls for.  If they used less labor hours, they still avoid that expense and otherwise increase their profitability.  The clause only allows adjustment for "the Contractor’s actual increase or decrease in applicable wages and fringe benefits".  The contractor would only get an adjustment on the hours actually worked.  The contractor has not gained anything or lost anything more than they already had.

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The contractor should not get an adjustment "on the hours actually worked." The contractor should get an adjustmenton on the hours on which the contract price is based. That will preserve the contractor's profit or loss position, whatever it might be, and leave the contractor wherever you find it. If the contractor is going to take a loss due to a cost overrun, the new WD should not increase it. If it is going to make more profit through cost savings, the new WD should not reduce it.

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Todd, in regard to your last post, we need to start with the realization that the SCA adjustment is not an equitable adjustment under which a contractor gets a profit adjustment.  Instead, it is a cost adjustment.  The result is that if a new WD increases the contractor's costs, the profit margin will decrease when the SCA adjustment is made.

As concerns, the deprivation of increased profits through efficiencies if the SCA adjustment is based upon actual hours worked, here is how that works if I understand your adjustment methodology.  Let us assume that a contract is priced on the basis of 1,000 hours for a base period of one year and 1,000 for an option period.  The hourly rate is $20 in wages and $2 in profit.  This results in an annual price of $22,000.  If the contractor realizes an efficiency and performs the first year using 900 hours, the contractor still receives the $22,000 price and realizes an additional profit of $2,200 in addition to the anticipated $2,000.

For the option period, wages will increase $.20 and hour to $20.20.  This results in wages of $20,200 dollars if 1,000 hours is used for the adjustment and an adjusted price of $22,200, leaving the contractor with the same negotiated profit of $2,000.  However, if the contractor maintains the same efficiencies it did in the base year, it will avoid paying $2,020 in wages, thus realizing this amount as additional profit since it will be paid that $2,020 plus the original profit of $2,000.

On the other hand, if the adjustment is based on 900 hours, the anticipated wage costs for the option year would be $18,180.  Because this is less than the $20,000 for the base year, no adjustment is made for increased wages, instead a reduction of $1,820 would be made and the price for the option period would be $20,180.

Have I misinterpreted your position?

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On 5/10/2016 at 5:58 PM, Vern Edwards said:

. . . 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.

Vern,

You say the Navy’s “guidance makes no sense for firm-fixed-price contracts, is not consistent with the terms of FAR 52.222-43.”  Please explain the perceived inconsistency.  

FAR 52.222-43 says, in pertinent part:

Quote

 (d) The contract price . . . 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.  [emphasis added.]

To illustrate, let’s assume the following scenario:

As proposed (the WD specifies $20/hr):

                Year 1                                                    Year 2

1,000 hrs @ $20/hr = $20,000                      1,000 hrs @ $20/hr = $20,000

At end of Year 1 (new WD specifies $21/hr):

                Year 1                                                    Year 2

1,100 hrs @ $20/hr = $22,000 (actual)      1,100 hrs @ $21/hr = $23,100 (projected)

So, I ask what is the contractor’s “actual increase…made to comply with” the new WD?  The answer is $1,100 (1,100 hrs x $1/hr increase), so my adjusted price for Year 2 would be $21,100.

What part of that doesn’t make sense to you, or is inconsistent with the clause?

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I last posted to this thread more than a month ago. I explained my position clearly. I stand by what I said. I'm no longer interested in this thread.

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On 5/12/2016 at 2:31 PM, Retreadfed said:

Todd, in regard to your last post, we need to start with the realization that the SCA adjustment is not an equitable adjustment under which a contractor gets a profit adjustment.  Instead, it is a cost adjustment.  The result is that if a new WD increases the contractor's costs, the profit margin will decrease when the SCA adjustment is made.

As concerns, the deprivation of increased profits through efficiencies if the SCA adjustment is based upon actual hours worked, here is how that works if I understand your adjustment methodology.  Let us assume that a contract is priced on the basis of 1,000 hours for a base period of one year and 1,000 for an option period.  The hourly rate is $20 in wages and $2 in profit.  This results in an annual price of $22,000.  If the contractor realizes an efficiency and performs the first year using 900 hours, the contractor still receives the $22,000 price and realizes an additional profit of $2,200 in addition to the anticipated $2,000.

For the option period, wages will increase $.20 and hour to $20.20.  This results in wages of $20,200 dollars if 1,000 hours is used for the adjustment and an adjusted price of $22,200, leaving the contractor with the same negotiated profit of $2,000.  However, if the contractor maintains the same efficiencies it did in the base year, it will avoid paying $2,020 in wages, thus realizing this amount as additional profit since it will be paid that $2,020 plus the original profit of $2,000.

On the other hand, if the adjustment is based on 900 hours, the anticipated wage costs for the option year would be $18,180.  Because this is less than the $20,000 for the base year, no adjustment is made for increased wages, instead a reduction of $1,820 would be made and the price for the option period would be $20,180.

Have I misinterpreted your position?

Retread,

I'm not sure if you misinterpreted Todd's position, but the adjustment that you discuss would not be in accordance with the clause.  The clause calls for an adjustment 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 a new WD.  In your example when the contractor achieves efficiencies and performs for 900 hours in the base year, and expects to perform for 900 hours in the option period, the incorporation of a new WD with a $0.20/hr increase is going to cause him to incur additional costs of $180 (900 x $0.20) above what he would have if not for the new WD, so I would adjust the contract price to $22,180, preserving the contractor's profit position.  NOTE:  There would never be a price reduction in this circumstance, because the expected decrease in wages would not have been voluntarily made by the contractor as a result of the new WD.

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21 hours ago, Navy_Contracting_4 said:

Vern,

You say the Navy’s “guidance makes no sense for firm-fixed-price contracts, is not consistent with the terms of FAR 52.222-43.”  Please explain the perceived inconsistency.  

FAR 52.222-43 says, in pertinent part:

To illustrate, let’s assume the following scenario:

As proposed (the WD specifies $20/hr):

                Year 1                                                    Year 2

1,000 hrs @ $20/hr = $20,000                      1,000 hrs @ $20/hr = $20,000

At end of Year 1 (new WD specifies $21/hr):

                Year 1                                                    Year 2

1,100 hrs @ $20/hr = $22,000 (actual)      1,100 hrs @ $21/hr = $23,100 (projected)

So, I ask what is the contractor’s “actual increase…made to comply with” the new WD?  The answer is $1,100 (1,100 hrs x $1/hr increase), so my adjusted price for Year 2 would be $21,100.

What part of that doesn’t make sense to you, or is inconsistent with the clause?

Navy,

Your adjustment includes more than the actual cost increase necessary to comply with the new WD. It includes increased cost due to inefficiency, underestimation, or a combination of both. That cost is not attributable to the new WD.

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Navy, you have a unique interpretation of 52.222-43.  In the example you gave to Vern, it is likely that the contractor would have suffered a loss on the contract in year 1.  In an FFP contract, the risk of a loss is on the contractor.  However, in your example, you reward the contractor for its inefficiencies and permit the contractor to recover a portion of its loss ($100) in year 2.  If you stick with the hours proposed for year 2, the contractor only gets a $1,000 price adjustment.  This maintains the incentive an FFP contract is supposed to provide a contractor to find efficiencies in performing the contract.

To me, not only would your approach be inconsistent with the concepts underlying an FFP contract, it also seems inconsistent with the language of 52.222-43.  If you read the entire clause closely, it equates actual increases or decreases in applicable wages and fringe benefits to the changes in the hourly rate in wages and fringe benefits, not the total amount the contractor expended on wages and fringe benefits in the previous year and the amount it estimates it will expend for wages and fringe benefits in the coming year.  In this regard, the total amount for wages and fringe benefits to be paid in the coming year could only be estimates not actuals.  What is an actual increase in wages and fringe benefits for the coming year is the increase in the hourly rates for the coming year.

This is bolstered by the example given in paragraph (d) of the clause.  In the example, total costs are not included, but only the hourly increase to show how to compute the actual hourly increase that is to be used in computing the adjustment.  In that example, the adjustment is based on the difference between the wages and fringe benefits called for by the two WD's which are the only actual amounts that can be determined at the time the adjustment is being made.

Finally, paragraph (e) of the clause states that the price adjustment is to include "increases or decreases in wages and fringe benefits as described in paragraph (d) ."  The increases or decreases in actual costs described in (d) are increases or decreases in the hourly rate in wages and fringe benefits.

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Just a thought that might help......

The adjustment allowed by FAR 52.222-43 is just that an "adjustment" due to increase/decrease in wage/fringe rate and is "limited" per 52.222-43 to solely the same, it is not an equitable adjustment.

So using Navy's example let me try and clarify this discussion -

Putting my feet in the shoes of the Contractor my proposal for adjustment would look something like this-

I am paying WD required $20 per hour to my crew, see attached payroll to demonstrate.   For my proposal to complete the forthcoming Year 2 work I used the same $20 per hour and estimated 1000 of hours of work for Year 2 for $20,000 in labor costs directly attributable to wage and fringe benefits.  With the new WD I am requesting an increase adjustment of $1,000 for the $1 per hour increase in required wage, plus 7% social security and .25% State of Mars unemployment tax for a grand total of $1725 based on the WD raising the required hourly rate from $20 to $21 for the Year 2 performance period.

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On 6/17/2016 at 1:24 PM, Don Mansfield said:

Navy,

Your adjustment includes more than the actual cost increase necessary to comply with the new WD. It includes increased cost due to inefficiency, underestimation, or a combination of both. That cost is not attributable to the new WD.

Don,

I don't understand.  Please explain. The contractor is still going to lose the same $2,000 in Year 2 as he did in Year 1.

Int he absence of a new WD, the contractor would expend $22,000, losing $2,000 again, but now the new WD causes the contractor to have to expend $23,100.  I think he should still lose the same $2,000 he would have, but not the additional $100 that is due not to his inefficiencies or poor estimating, but due solely to the new wage requirement.

Edited by Navy_Contracting_4
to add explanation

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1 hour ago, Navy_Contracting_4 said:

Don,

I don't understand.  Please explain. The contractor is still going to lose the same $2,000 in Year 2 as he did in Year 1.

I think that in your example you are pricing the adjustment as if it were an equitable adjustment, where the contractor's profit/loss position should not be affected by the adjustment. In that case, we would consider the total cost impact on the contractor and allow for profit/fee. However, the scope of an adjustment due to a new WD is limited to additional costs made to comply with the new WD. As such, I think it would be unusual that the contractor would be in the same profit/loss position after such an adjustment.

When you made the adjustment in your example, you adjusted the proposed hours upward by 100 for year 2. Those 100 additional hours are not attributable to an increase in the required wages. They are attributable to labor inefficiency experienced in Year 1, underestimation, or both. I agree with Retreadfed's rationale in his June 17 post.

Lastly, under your proposed method, the size of the adjustment is inversely proportional to the profit/loss in the earlier period. That is, the contractor is rewarded with a bigger adjustment in Year 2 for expending more labor hours in Year 1 and punished with a smaller adjustment in Year 2 for expending fewer labor hours in Year 1. 

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On 7/8/2016 at 6:21 PM, Don Mansfield said:

I think that in your example you are pricing the adjustment as if it were an equitable adjustment, where the contractor's profit/loss position should not be affected by the adjustment. In that case, we would consider the total cost impact on the contractor and allow for profit/fee. However, the scope of an adjustment due to a new WD is limited to additional costs made to comply with the new WD. As such, I think it would be unusual that the contractor would be in the same profit/loss position after such an adjustment.

When you made the adjustment in your example, you adjusted the proposed hours upward by 100 for year 2. Those 100 additional hours are not attributable to an increase in the required wages. They are attributable to labor inefficiency experienced in Year 1, underestimation, or both. I agree with Retreadfed's rationale in his June 17 post.

Lastly, under your proposed method, the size of the adjustment is inversely proportional to the profit/loss in the earlier period. That is, the contractor is rewarded with a bigger adjustment in Year 2 for expending more labor hours in Year 1 and punished with a smaller adjustment in Year 2 for expending fewer labor hours in Year 1. 

DON-

My example is definitely NOT an equitable adjustment, in which the contractor would get an adjustment to account for overhead, G&A and profit.  My example deals only with the labor related costs.  In my example, I consider the impact of the WD on the contractor's labor-related costs.  I compare his projected costs without the new WD-required wage rate ($22,000) with his costs with the new WD-required wage rate ($23,100) and the result ($1,100) is "the Contractor's actual increase.... in wages and fringe benefits...made to comply with" the new WD.  I don't understand why you think it's fair to reduce his profit even more than it's already being reduced by his inefficiency or poor estimating.

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20 hours ago, Navy_Contracting_4 said:

DON-

My example is definitely NOT an equitable adjustment, in which the contractor would get an adjustment to account for overhead, G&A and profit.  My example deals only with the labor related costs.  In my example, I consider the impact of the WD on the contractor's labor-related costs.  I compare his projected costs without the new WD-required wage rate ($22,000) with his costs with the new WD-required wage rate ($23,100) and the result ($1,100) is "the Contractor's actual increase.... in wages and fringe benefits...made to comply with" the new WD.  I don't understand why you think it's fair to reduce his profit even more than it's already being reduced by his inefficiency or poor estimating.

Navy,

Yes, I acknowledge that you are not pricing an equitable adjustment in your example. However, you seem to believe that certain principles that apply to the pricing of equitable adjustments apply to price adjustments under FAR 52.222-43. Specifically, you seem to believe that (1) actual labor hours in the prior period should be used to estimate the cost impact in future periods and (2) the adjustment should preserve the contractor's profit/loss position. If this is what you believe, why do you believe this (other than because you think it yields a fair result)?

As far as "fairness", keep in mind that a contractor who used less hours than estimated in the prior period would potentially earn additional profit if original estimates of labor hours, instead of actual labor hours, were used to estimate the cost impact in future periods. As such, I don't see any fairness issue.

 

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1 hour ago, Don Mansfield said:

Navy,

Yes, I acknowledge that you are not pricing an equitable adjustment in your example. However, you seem to believe that certain principles that apply to the pricing of equitable adjustments apply to price adjustments under FAR 52.222-43. Specifically, you seem to believe that (1) actual labor hours in the prior period should be used to estimate the cost impact in future periods and (2) the adjustment should preserve the contractor's profit/loss position. If this is what you believe, why do you believe this (other than because you think it yields a fair result)?

As far as "fairness", keep in mind that a contractor who used less hours than estimated in the prior period would potentially earn additional profit if original estimates of labor hours, instead of actual labor hours, were used to estimate the cost impact in future periods. As such, I don't see any fairness issue.

 

DON-

I don't necessarily believe you have to use the actual labor hours in the prior period to estimate the cost impact in future periods; if you have reason to believe that the contractor encountered a one-time snag in the first year that he'll avoid in year 2, then, by all means only adjust for the hours you believe the contractor will actually incur in year 2.  My point is that you should make an adjustment for the hours that you expect will be incurred, regardless of what may have been proposed at some earlier point in time.  Say, for example, the contractor needed 1100 hours to complete the work in year 1, but in the process, discovers some great innovation that will allow him to complete the year 2 work in 800 hours.  In that case, I'd argue that "the Contractor's actual increase.... in wages and fringe benefits...made to comply with" the new WD would be $800. In my example, for the sake of simplicity, I assumed that the contractor would need the same number of hours for year 2 as he incurred in year 1, but that's not always the case..

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Navy,

I get what you're saying--you would use the most current estimates of labor hours instead of the original proposal estimates. However, I still think you believe that the adjustment should preserve the contractor's profit/loss position. If this is what you believe, why do you believe this (other than because you think it yields a fair result)?

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On 7/13/2016 at 4:31 PM, Don Mansfield said:

Navy,

I get what you're saying--you would use the most current estimates of labor hours instead of the original proposal estimates. However, I still think you believe that the adjustment should preserve the contractor's profit/loss position. If this is what you believe, why do you believe this (other than because you think it yields a fair result)?

Don,

Maintaining the contractor's profit/loss position is not a principle I espouse.  It was merely an observation I made to counter people's possible objection that my adjustment method might somehow help the contractor get some kind of windfall.

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So if the contractor used less hours, on a FFP, he would happily refund his additional margin to the government, right? :huh:

Sometimes the absurdity inherent in a given scenario is best illustrated by the absurdity apparent in its inverse scenario.

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3 hours ago, REA'n Maker said:

So if the contractor used less hours, on a FFP, he would happily refund his additional margin to the government, right? :huh:

Sometimes the absurdity inherent in a given scenario is best illustrated by the absurdity apparent in its inverse scenario.

Absolutely not.  No one has suggested that the contractor should refund any of his additional margin, however, I think it would be improper to adjust the price for hours that the contractor is not expected to incur.

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On July 14, 2016 at 3:17 PM, Navy_Contracting_4 said:

Maintaining the contractor's profit/loss position is not a principle I espouse.  It was merely an observation I made to counter people's possible objection that my adjustment method might somehow help the contractor get some kind of windfall.

Your adjustment method based on hours is inappropriate because pricing in year to year adjustments to hours would remove all effort (hour) risk from the contractor - that's certainly not what the parties sign up to when they execute FFP service contracts.

The adjustment is not designed to maintain profit/loss positions year to year, but rather to remove Government mandated wage minimums (to the extent that they actual impact the contract) from the risk equation.  

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On 7/29/2016 at 11:45 PM, Matthew Fleharty said:

Your adjustment method based on hours is inappropriate because pricing in year to year adjustments to hours would remove all effort (hour) risk from the contractor - that's certainly not what the parties sign up to when they execute FFP service contracts.

The adjustment is not designed to maintain profit/loss positions year to year, but rather to remove Government mandated wage minimums (to the extent that they actual impact the contract) from the risk equation.  

You fail to understand that that's precisely what this method does.  It dopes merely "remove the Government mandated wage minimums (to the extent that they actually impact the contract) from the risk equation."  It definitely does NOT "remove all effort (hour) risk from the contractor."  It does NOT price in year to year adjustments to hours.  In my example, pricing in a year to year adjustment to hours would result in adjusting the price to $23,100, but the method I describe results in an adjustment to only $21,100.

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