Government Contracts Monitor

Timing Is Everything When Considering Service Contract Act Price Adjustments Based on CBAs

July 5, 2016

Although it may seem unusual, when an agency exercises an option on a contract incorporating the Service Contract Act (SCA), the option is considered a successor contract for the purposes of applying the SCA provisions. In other words, the contractor becomes its own successor, which in some cases may entitle it to a contract price adjustment for increased wages and fringe benefits. As the CBCA found in SecTek, Inc., vs. National Archives and Records Administration, CBCA 5084 (June 22, 2016), however, such price adjustments are not automatic. In order to trigger to SCA’s price adjustment provisions based on a collective bargaining agreement (CBA), the contractor must have actually paid its employees higher wages in the base or previous option year in accordance with the CBA in question.

SecTek, Inc. had a fixed price service contract with the National Archives and Records Administration (NARA) to provide unionized security guards. The contract expressly incorporated FAR SCA clauses, 52.222-41 and 52. 222-43. In June of the base year, SecTek and its union signed a new CBA which increased wages and benefits effective September 1, the first day of the anticipated first option period. NARA exercised the option as expected. Then, in hopes of covering the higher wages and benefits, SecTek submitted a claim seeking a price adjustment for these increased costs, totaling $708,436.34. It also sent the CBA to NARA, expecting the agency to incorporate the CBA into the contract as the option year wage determination. The Agency did not grant the price adjustment or modify the wage determination to reflect the higher compensation of SecTek employees. SecTek argued that it was its own successor contractor so that NARA was responsible for the increased costs of performance in accordance with the SCA. NARA, and ultimately the CBCA, disagreed.

Although the CBA was negotiated in the base year of the contract, its terms did not take effect during the base year. The SCA prevents successor contractors from paying an employee under a service contract “less than the wages and fringe benefits the service employee would have received under the predecessor contract, including . . . any prospective increases in wages and fringe benefits provided for in a collective bargaining agreement.” In other words, the SCA requires an employer to pay its employees at least the same wages and fringe benefits as a predecessor contractor. In this case, however, the new CBA took effect after the predecessor contract ended: on day 1 of option period 1, which was also day 1 of the successor contract. SecTek’s only responsibility under the SCA, then, was to pay its employees at least what they had made the previous year (under the previous CBA). And the SCA provisions did not obligate the Government to adjust the price to reflect the increased cost of the wages and benefits under the new CBA.

On August 28, a few days before the option period was to begin -- and after the claim had been denied and the contracting officer (CO) had chosen not to incorporate the new CBA into the contract-- SecTek resubmitted a revised version of the CBA which stated that the new wages and benefits would take effect on August 31, the final day of the base year/predecessor contract. This wasn’t enough, however, because SecTek did not actually make any payments to its employees reflecting the higher compensation. This was critical in the agency’s decision to deny the claim, and the CBCA’s decision to deny the appeal. Had SecTek actually made higher payment to its employees, the claim would likely have been decided very differently.

Obviously, if you hope to obtain a contract price adjustment to cover increased compensation costs under a new CBA, timing is everything. And it’s not the timing of the negotiation that counts; it’s the timing of when the new wages and benefits take effect. If they do not take effect during the current (“predecessor”) contract period (so that contractor employees receive them during at least a portion of the current period), no price adjustment will be available for the “successor” contract (the subsequent option period). Thus, a contractor who commits in a CBA to higher personnel expenses must make sure to set the CBA’s effective date so that those higher expenses are incurred during its current contract period. Otherwise, it will be forced to wait a full year until the next contract option period begins to get a price adjustment.

Carrie Willett is responsible for the contents of this article.