Price Adjustments under SCA

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.

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?

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.

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.

Neurotic said:

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

They should have taken that into account when pricing the original contract.

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.

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?”

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.

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.

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.

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.

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.

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.

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.

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.

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.

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?

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.

WifWaf,

What would make things satisfactory?  Giving the contractor more money for OH and G&A as part of a wage determination modification?

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.

@WifWaf

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.

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."

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.

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.

Vern Edwards said:

To what does your "NO" refer?

Picked the wrong quote.  Intended to pick WiWaf's.

here_2_help said:

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

I apologize for being intemperate. 

If you are looking for answers, begin by admitting that you are ignorant, and teach yourself to write coherent questions.

All learning and knowledge begins with questions. Questions that you ask yourself. Questions that you ask of others.

If you are trying to learn, the most powerful tool in your "toolkit" is the ability to write a good question. And when you write one, don't bury it under a speculative preface.

Again, I apologize. I'm frustrated at the state of our business. It's getting ever worse, and at great cost. Nothing seems to work to fix it, and for some of us old-timers, time is running out.

Maybe it's time for me to check out of here again and check into chat room rehab. I'm getting too old and cranky for this.

Vern Edwards said:

Maybe it's time for me to check out of here again and check into chat room rehab. I'm getting too old for this.

No, it's not. That's not the answer. Your input is far too valuable.

@here_2_helpThat's kind, but it's demonstrably untrue, and I really am old and intemperate. I'm embarrassed.

Sitting here answering a few questions won't fix what's wrong with contracting today. I've tried to contribute by writing, but it has done little good. One of my last surviving mentors feels the same way.

I honestly don't know what to do. The greatest book ever written about government contracting will go into its last edition this year. The three finest and most productive writers of government contracting reference works will produce no more. One has passed. One is ancient. And one is seriously ill. The last periodical publication devoted to practical matters will likely cease publication within a year or two, because it's very difficult to find knowledgeable, capable writers. I have tried to encourage some younger people to write, but to no avail. It's verging on impossible to find quality textbook materials suitable for novice and working level practitioners.  The books still in print are prohibitively costly for individuals. I have been giving some away as gifts at my own expense in the one class I still teach occasionally.

Agencies generally provide poor in-house training. The same is true of the official training institutions, and managerial devotion to their proper maintenance is weak if judged by more than words. There are some centers of excellence, but they are islands.

We have a contracted-out government, so contracting and competence in its execution is extremely important to our nation's well-being. But our leaders are too short-sighted to invest in the kind of education and training we need to field a workforce that can interact effectively with an ever-increasingly complex environment. The FAR is over 2,000 pages. The DFARS is another 1,000. And they are just the tip of the iceberg. We are into the second year of a new presidency and still don't have an OFPP administrator (as far as I know). But even if we did the position has been so undermined as to be practically powerless.

I have long known that things were bad, but, still, I was shocked when I read that NCMA contract management standard that Don posted and realized that it is now the basis for DOD and civilian agency contracting certification. I have been in something of a state of shock ever since. My own peers in terms of age and experience feel much the same.

Thanks for the slap, H2H. I deserved and needed it. It was a sign.

Again, apologies to all.

Vern Edwards said:

Sitting here answering a few questions won't fix what's wrong with contracting today.

You're not Atlas Telemon. You're not required to fix what's wrong with contracting today. Nobody can.

The best most of us can do is to help our colleagues with their individual challenges.

Your writings influence judges. That makes you a Titan, but you still can't fix what's wrong with contracting today. That's an unreasonable aspiration.

I'm not going to respond anymore. You wanna talk further, we both have each other's email addresses and phone numbers.

Everyone:

I've locked this topic, not because of any post in this topic, but because of the reality of the last several posts.

I will be 73 years of age in a few months.  Other regulars are older than I am.   Because I am writing this, it means that the update of the Home Page is being delayed because I am the one who does it.  I will be up late again.

Don't worry about me.  I don't do much around here.  But others do and they all have been contributing to this community for many years.  

I want to thank all the contributors for the efforts they make here  This site, with all of its current flaws, was created in 1998 with one purpose--to help other members of the contracting community by gaining knowledge.  You have done that!

If you believe in something, you cannot quit because we're not done yet.

Thank you.