Many government services contracts require compliance with the Service Contract Act. That means, among other things, that employers must pay at least the minimum wages dictated by a wage determination–whether one issued by DOL or a collective bargaining agreement.
But what happens when a new wage determination ups the required minimum wages while performance is ongoing? Contractors normally can’t build in prospective wage hikes into their prices. (That is prohibited by FAR 52.222-43(b) and similar clauses.) So, how does a contractor recoup its higher, unanticipated out-of-pocket costs? Let’s discuss.
Which wage determination applies?
Initially, the wage determination attached to a contract dictates the minimum wages and fringe benefits for each service worker classification. But DOL updates wage determinations periodically and an employer and union may occasionally negotiate a new collective bargaining agreement. Do those ever become part of the contract?
They could. For multiple year contracts, the wage determination effective on the contract’s anniversary date becomes the new wage determination. The same applies for contracts with option years: the wage determination effective at the option period start supplants the initial wage determination.
As one would expect, new wage determinations usually bring higher wages and/or fringe benefits. That translates into higher labor costs.
Actual costs increases are recoverable.
Under FAR 52.222-43(d), a contractor can recover its actual cost increase for having to comply with a new determination. The term actual is key because higher wage doesn’t necessarily raise a contractor’s cost.
For example, let’s suppose that an initial wage determination stipulates a $18.50/hour wage for an accounting clerk. But market forces demand that the contractor pay the clerk $19.50/hour (after all, wage determinations only impose a wage floor). If new wage determination raises the hourly wage to $19.25, the contractor could not recover. Why? Because it hasn’t suffered an actual increase: it voluntarily paid its employee more than the minimum wage. The new wage determination requires no change from the contractor: its cost experience before an after the change are the same.
By contrast, if the contractor initially pays its accounting clerk $18.50, then a new minimum wage of $19.25 would trigger a cost increase. Unlike the first case, the contractor must pay more, to the tune of .$75/hour. That cost is recoverable.
The key is an actual cost increase. If a wage determination forces higher wages and fringe benefits; it’s recoverable. If the wage determination doesn’t force an actual increase, then the Government pays zilch.
I’d also note that the clause operates in the reverse: for cost decreases too. But this happens so infrequently (who’s ever heard of decreasing minimum wages?) we don’t need to dwell on it here.
Notice of Actual Cost Increase
If a new wage determination raises a contractor’s actual costs, it must notify the contracting officer within 30 days. The notice should state the change in hourly rates and the total amount claimed; it should also attach supporting data, such as a payroll records. Once the parties agree to the modification, the contracting officer modifies the contract.
What if a contractor misses the 30-day notice period? Is it hopelessly out of luck? Probably not. Normally, the Government is still on the hook for the actual cost increase unless (1) the contract specifically advises that the contractor loses its recovery rights if the notice is late, or (2) the Government can show that it is prejudiced by the late notice.
No recovery for actual cost increases in the base year.
As a last word of caution: there typically is no right to recover actual costs incurred in the base year of a multiple year contract. So, for example, if a contractor negotiates a new CBA midway into the base year, it cannot recover new costs accrued during the balance of the base year. Sure, the contractor may have to pay more; but the Government’s reimbursement obligation doesn’t kick in until that new wage determination supersedes the previous one on the contract’s anniversary date or the option exercise date.
If you questions about price adjustments under the Service Contract Act or otherwise, give us a call or shoot us an email.