Wage Determination/Price Adjustment

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

Is this service or construction?  Is it an multiple year or option contract?

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?

(Thank you for your help!)

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)?

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.

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?

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).

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.

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.

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.

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.

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.

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.

Thanks Todd. So I hope we have answered the OP's question.

Thank you all - this was very helpful. I am truly appreciative of the information and this site in general.

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?

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.

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.

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.

"Wild west" is a good comparison.

I'd like to hear from here_2_help on this. What's your take, H2H?

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

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.

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

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.

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.

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.

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.

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?

I get it now.  Thanks.

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?

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.

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.

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.

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.

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.

Carl, I agree with what you have stated.  That is what I have been trying to say in an abbreviated form.

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.

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.

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.

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.

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..

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)?

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.

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

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

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? 

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.

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.

Deleted - Accidental Duplicate Post

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.

Navy_Contracting_4 said:

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.

I see that - I was incorrect in stating "all effort (hour) risk;" however, I'm still of the position that no effort (hour) impacts should be taken into consideration even if it is just a portion of those impacts multiplied by the actual wage differences.  Seems we'll just have to agree to disagree.

Matthew Fleharty said:

I see that - I was incorrect in stating "all effort (hour) risk;" however, I'm still of the position that no effort (hour) impacts should be taken into consideration even if it is just a portion of those impacts multiplied by the actual wage differences.  Seems we'll just have to agree to disagree.

What you're saying is that even though the application of the new WD causes the contractor to pay out $1,100 more than he otherwise would have to, you want to adjust the price by only $1,000 -- is that right?  If so, then we definitely disagree.

Sigh.

Matthew, you are wasting your time. What follows is for you, not Navy_Contracting_4, because I’d be wasting my typing on him.

Matthew, when in doubt, read the contract. Navy's approach is not wrong because it would eliminate risk. It is wrong because it is inconsistent with the language of the price adjustment clause. Here are the key paragraphs from FAR 52.222-43, the price adjustment clause. Note the bold/italicized words.

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.

So--the amount to be adjusted is “[t]he contract price.” The contract price is the price stipulated in the contract for the option period at hand. Right? That is what is to be adjusted. Right?

The amount to be adjusted must, therefore, reflect the number of hours on which that option year price is based, not a new estimate of the number of hours to be incurred by the contractor in the option year. Nothing in the clause says or hints at anything about any such new estimate.

The adjustment is expressly limited to the impact of the actual increase in wages and fringes on “[t]he contract price.” Right? But Navy’s proposal would base the adjustment on the impact of the actual increase in wages and fringes and on a new estimate of the number hours of performance during the option year. But "[t]he contract price" for the option was not based on any such new estimate, so Navy's approach would not be consistent with paragraph (d) of the clause. Moreover, basing the adjustment on the impact of the actual increase in wages and fringes and on a new estimate of hours is expressly precluded by the language in paragraph (e): “Any adjustment will be limited to increases or decreases in the wages and fringe benefits”. So Navy’s approach would not be consistent with paragraph (e) of the clause.

I don’t know why Navy cannot or will not see all of that or understand it. The clause is not ambiguous or otherwise obscure. I suppose he genuinely believes that what he is proposing is correct. But perhaps, in the past, Navy has done what he now says should be done and doesn’t want to admit that it was wrong. Or maybe he has advised others to do what was wrong and doesn’t want to own up. I don’t know. But, whatever the reason, he has not made a sound argument grounded in the language of the clause for adjusting the price to account for an estimated change in the number of hours to be incurred by the contractor in the option year. It appears that he is not amenable to reason in this matter.

So I am convinced that Navy is never going to allow his mind to be changed by reasoned argument based on the plain language of the contract clause.

You’re not trying to save a life or a soul, Matthew. Give up. You could be writing something useful to someone.

Vern Edwards said:

Matthew, when in doubt, read the contract. Navy's approach is not wrong because it would eliminate risk. It is wrong because it is inconsistent with the language of the price adjustment clause. Here are the key paragraphs from FAR 52.222-43, the price adjustment clause. Note the bold/italicized words.

Apologies for drawing you back into this conversation - you and I agree on what the clause states and the process/formula for calculating adjustments.  I suppose my "elimination of risk" argument was related to why the price adjustment requirement was established/exists (i.e. price adjustments are based solely on actual wage increases stipulated by the DoL so that contractors don't have to price in estimates of potential increases or decreases that may or may not occur at magnitudes that may or may not be accurate).  Is that a fair assessment of the policy?

I don't know the basis for the policy, Matthew, but your speculation makes sense to me: The authors of the policy simply wanted to limit the adjustment to the effect of a new wage determination on the original bargain.