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The SCA (Now SCLS) Price Adjustment clause provides for adjustment of wages and fringe and the accompanying increases or decreases in social security and unemployment taxes and workers' compensation insurance, but “must not otherwise include any amount for general and administrative costs, overhead, or profit.”

G&A and OH is expected to be affected with the increase in wages. I presume the increase in wages will not absorb any OH but, at the same time, the OH might decrease because of the increase in direct labor, if the OH base is DL.  The questions are:

- How is the vendor supposed to account for any OH not being allocated to the increase in that contract?

-Also, some Contracting Officers in our agency are allowing vendors to maintain the OH and G&A percentage unchanged (as originally proposed) when incorporating new WDs but naturally this way OH and G&A dollars will increase with an increase in wages. Is this the proper method to apply to manage the price adjustments under SCA? If not, what are other agencies managing the adjustments or what is the correct method if other.

Assume the contract is FFP, the vendor does not perform in any cost type contracts and it’s small business so it’s not CAS covered.  

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My limited understanding of mathematics tells me that if wages go up (because of the new wage determination) and other costs stay the same, and if overhead and G&A rates are driven by labor charges, then the overhead and G&A will go down.  

For a FFP contract with a new wage determination, just do the change in wages/fringe driven by the new wage determination -- that's what the clause says, right?  The contractor's internal overhead and G&A rates are irrelevant to this matter.

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3 hours ago, Neurotic said:

some Contracting Officers in our agency are allowing vendors to maintain the OH and G&A percentage unchanged (as originally proposed) when incorporating new WDs

Why does this not result in a cost plus percentage of cost contract?

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14 minutes ago, Retreadfed said:

Why does this not result in a cost plus percentage of cost contract?

It could potentially be cost plus, but not percentage of cost, since the profit amount does not vary regardless. 

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Neurotic,

Just follow FAR 52.222-43.

FAR 52.222-43 and FAR 22.19 are set up so that the PCO will just increase his DL costs, thus letting the newly increased costs accumulate in the overhead base (if contractor uses a DL cost base) and the G&A base without making a change to his contract-level indirect rates.  That way, the contractor’s DCAA or ACO can in turn respond to him and other PCOs increasing DL costs by issuing a new PBR letter or FPRR based on the accumulation of these new, increased costs shown in the contractor’s certified incurred cost submission’s bases, in the year they are incurred.

We are all cogs in the machine here.

Edited by WifWaf
Corrected first paragraph
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6 hours ago, Neurotic said:

It could potentially be cost plus, but not percentage of cost, since the profit amount does not vary regardless. 

The profit doesn't have to be a percentage of cost in a CPPC arrangement. When agencies run afoul of the CPPC prohibition, it's typically because they have agreed to pay for an indirect cost as a percentage of another incurred cost.

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17 hours ago, Neurotic said:

Also, some Contracting Officers in our agency are allowing vendors to maintain the OH and G&A percentage unchanged (as originally proposed) when incorporating new WDs but naturally this way OH and G&A dollars will increase with an increase in wages. Is this the proper method to apply to manage the price adjustments under SCA? If not, what are other agencies managing the adjustments or what is the correct method if other.

You asked: “Is this the proper method to apply to manage the price adjustments under SCA?”

17 hours ago, Neurotic said:

“…must not otherwise include any amount for general and administrative costs, overhead, or profit.”

How much clearer could “must not otherwise include” and “any amount” be?

So, “some Contracting Officers” in your agency are improperly modifying contracts by otherwise including any amounts for OH and G&A , without legal authorization,  in violation of the contract terms. They aren’t authorized to modify those terms. They should stop the practice.

And I agree with Don that it can still be CPPC (illegal-specifically prohibited by law) without including profit.

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18 hours ago, Neurotic said:

G&A and OH is expected to be affected with the increase in wages. I presume the increase in wages will not absorb any OH but, at the same time, the OH might decrease because of the increase in direct labor, if the OH base is DL.  The questions are:

- How is the vendor supposed to account for any OH not being allocated to the increase in that contract?…

The G&A and OH costs to the contractor that it needs to recover should not be affected by the wage increase. It will receive the same amount. How it accounts for the income isnt relevant to the modification.

The contract should be able to (“absorb”? I forget the accounting term) the SAME share of overall amount of overall OH and G&A Expenses/costs that were allocated to the contract as it would have.
 

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Another way to look at it is to ask what if an SCA wage adjustment resulted in a net decrease in direct costs? The contract’s indirect OH and G&A amounts or (likely) actual indirect costs would not be reduced.

For mods under other clauses that provide for equitable adjustments, a net decrease in direct costs would generally include a credit for allocated, indirect costs - which reduce absorption of those indirect costs, regardless of whether or not they were reduced by the mod.

So, in my opinion, you need not worry how the contractor/vendor accounts for fixed OH costs not being absorbed due to reduced (or increased) income.

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21 hours ago, Neurotic said:

I presume the increase in wages will not absorb any OH

You are confusing allocation of costs and recovery of costs.  The contractor's actual OH and G&A will be allocated to the contract, but the contractor may or may not recover those actual costs.

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24 minutes ago, Retreadfed said:

You are confusing allocation of costs and recovery of costs.  The contractor's actual OH and G&A will be allocated to the contract, but the contractor may or may not recover those actual costs.

You may be right. I'm thinking about how would the vendor recover OH and G&A when wages are adjusted. Seems like based on the other responses they just don't. 

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43 minutes ago, Neurotic said:

You may be right. I'm thinking about how would the vendor recover OH and G&A when wages are adjusted. Seems like based on the other responses they just don't. 

Some use a DL hours base for their SCA work’s overhead, for this very reason.

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1 hour ago, Neurotic said:

I'm thinking about how would the vendor recover OH and G&A when wages are adjusted. Seems like based on the other responses they just don't. 

When the contractor prices the option years in its proposal, it includes OH, G&A and profit in those prices.  When an option is exercised, the price may be adjusted based on the factors identified in 52.222-43.  OH, G&A and profit are still included in the price, but they are not adjusted.  Nothing prohibits a contractor from escalating indirect costs for the option years in its proposal.  

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On 3/17/2022 at 12:01 PM, Neurotic said:

You may be right. I'm thinking about how would the vendor recover OH and G&A when wages are adjusted. Seems like based on the other responses they just don't. 

We're talking about a firm-fixed-price contract, not subject to CAS, right?

OH and G&A rates are irrelevant.  The contractor "recover[s]" every single penny of the overhead costs and G&A costs that it included in its price.

Let's look at an example:

BEFORE SCA MOD:

  • Wages:  $100,000
  • Overhead:  $10,000
  • G&A:  $10,000
  • Profit:  $12,000
  • Contract Price:  $132,000

AFTER SCA MOD:

  • Wages:  $110,000 (changed)
  • Overhead:  $10,000
  • G&A:   $10,000
  • Profit:  $12,000
  • Contract Price:  $142,000 (changed)

Every single penny of whatever was covered by the OH, G&A, and profit portions of the contract is still there.  Percentage rates are wholly irrelevant to SCA mods for FFP contracts.

 

On 3/16/2022 at 1:41 PM, Neurotic said:

G&A and OH is expected to be affected with the increase in wages.

I disagree with this statement.  In a FFP contract, a change in a SCA wage determination does not change any actual or projected costs for rent, electricity bill, corporate jet operations, the company Fourth of July picnic, or anything else included in OH or G&A pools.  Overhead and G&A cost projections and rates that may been developed pre-award for negotiation purposes are wholly irrelevant after award, at least as far as SCA wage determinations are concerned, and a company recovers every single penny of the portion of its contract price that was based on those projections and rates.

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In short, an increase in direct labor costs caused by an increase in wages and fringe benefits does not cause an increase in the indirect costs that are allocated as overhead and G&A. That's why the price adjustment clause does not provide for an increase in overhead and G&A.

Nothing is provided for profit because the government simply does not want to pay more profit because of an increase in wages and fringes.

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This thread makes sense from a PCO perspective only.  From an ACO or contractor perspective, the answer given is rather unsatisfactory.  @Neurotic, are you asking questions from the perspective of a PCO/analyst, an ACO/analyst, or a contractor?

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On 3/16/2022 at 1:33 PM, ji20874 said:

My limited understanding of mathematics tells me that if wages go up (because of the new wage determination) and other costs stay the same, and if overhead and G&A rates are driven by labor charges, then the overhead and G&A will go down.  

The rates will go down if the base is labor dollars.

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3 hours ago, WifWaf said:

the answer given is rather unsatisfactory

This referred to the question:

On 3/16/2022 at 1:41 PM, Neurotic said:

How is the vendor supposed to account for any OH not being allocated to the increase in that contract?

A poorly worded question to be sure, but still we could just as well make something of this OP and reword it: “How should a contractor ensure a causal/beneficial relationship between the ‘costs for rent, electricity bill, corporate jet operations, the company Fourth of July picnic, or anything else included in OH or G&A pools’ and a fluctuating direct labor base, subject to PCO wage determinations and sovereign acts of minimum wage increases?”

This would serve to broaden perspectives of P/ACOs to their industry counterparts’ in this Contract Administration (a two-way street) forum.

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@WifWaf

3 hours ago, WifWaf said:

How should a contractor ensure a causal/beneficial relationship between the ‘costs for rent, electricity bill, corporate jet operations, the company Fourth of July picnic, or anything else included in OH or G&A pools’ and a fluctuating direct labor base, subject to PCO wage determinations and sovereign acts of minimum wage increases?

That's nonsense.

You are delving into a matter that is clearly over your head. Price adjustment based on Service Contract Act wage determinations was a well-settled matter more than 40 years ago. The OP is just clueless, as are you.

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9 hours ago, Vern Edwards said:

@WifWaf

That's nonsense.

You are delving into a matter that is clearly over your head. Price adjustment based on Service Contract Act wage determinations was a well-settled matter more than 40 years ago. The OP is just clueless, as are you.

NO the OP should just read the clause.  The OP posted part of the language  the clause (its never been stated but it looks it is 52.222-43).   It might help to post the whole portion of the clause.   Emphasis added.  Its an "amount" of what the per hour change is for labor rate and fringe not what I will call a mathematical exercise of what happens to the contactors G&A, OH and Profit.   T  

(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 of1938 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."

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2 hours ago, C Culham said:

NO the OP should just read the clause.

To what does your "NO" refer? Are you saying they are not clueless? Well, au contraire! If they haven't read the clause they are clueless.

Paragraph (e) of that clause has been word-for-word the same for more than 30 years, except that 30 years ago the reference to "(d)" was to "(c)".

If you are working on service contracts covered by the SCLS and do not understand the clause and how overhead and G&A work you are clueless and in over your head when talking about the price adjustment.

The clause creates no significant practical issues or issues of accounting.

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I'm going to address the tone of this thread, and not the content. I'm not looking for a response; feel free to move on.

People are frequently in over their head. People are frequently clueless in the eyes of more experienced people. That's just reality.

My boss asks me hard questions all the time. Quite often I have no clue about the right answer. But because I have 30 years of experience, I know where to look for answers. More importantly, I am comfortable telling my boss "I don't know" and suggesting that Legal be called. (I'm not allowed to call Legal. Long story.) My point is that not everybody has my level of comfort in admitting ignorance.

Speaking generally, we are failing at training the next generation on what to do when they are given a question or a task for which they are unqualified to tackle. We don't give them options. The truth is that very few people are comfortable admitting ignorance on a topic that may not be within their subject matter expertise. We can debate why that might be but I'm convinced it's the truth. Clint Eastwood's Dirty Harry character said: "A man's got to know his limitations," but that's a very hard thing to learn.

So, given that people (generally) are reluctant to admit ignorance on a topic, what is next for them?

People come to WIFCON because it's what's next for them when they need help. Calling them clueless is not helpful. Telling them to read a specific contract clause, or to look of a particular legal decision, is helpful.

 

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