Commercial Exempt Service Contract Act Work: Now you see it; now you don't
“Tomorrow was created yesterday.......And by the day before yesterday, too. TO IGNORE HISTORY IS TO IGNORE THE WOLF AT THE DOOR.”
― John le Carré, A Most Wanted Man
In October of 1994, Congress passed the Federal Acquisition Streamlining Act (“FASA”), which was among the most significant pieces of legislation affecting Federal procurement. A principal thrust of FASA was to reform Government contracting by encouraging the use of commercial practices in the acquisition of commercial items. FASA exempted commercial items from most procurement-related laws and regulations, and, while leaving some discretion to the regulators, or mandated only a few mandatory contract clauses, although that number has grown in the intervening years. Because the Service Contract Act (“SCA”) was not among the required flow downs mentioned explicitly in FASA, FASA gave rise to the implication that SCA might not apply to the acquisition of commercial services.
Based on this implied authority, the FAR council initially promulgated an expansive commercial exemption for subcontracts. The clause was slipped into the FAR at the last minute without the usual notice and comment rulemaking opportunities. It was a coup d’état of sorts. That regulation listed the mandatory flow down laws that were required to be incorporated into a commercial subcontract, and the SCA was not among them.
However, DOL objected strenuously. According to DOL, because SCA unambiguously vests the authority to issue exemptions in the Secretary of Labor and, moreover, FASA did not explicitly eliminate SCA from applying to commercial item purchases, the SCA still applies to DOL commercial subcontracts. An inter-agency battle between DOL and the procuring agencies ensued. Intermittently over the ensuing six years, DOL haggled with the Office of Federal Procurement Policy and the FAR Council over a reduced scope of an SCA exemption, if any, for commercial item acquisition.
Finally, on July 26, 2000, both DOL and the FAR Council issued interim regulations, 65 Fed. Reg. 45,903 and 45,943, exempting a defined group of activities from SCA, but imposing certain conditions. Final regulations were issued on January 18, 2001, 66 Fed. Reg. 5,328, and became effective on March 19, 2001. Up till then, there had been a broad commercial exemption for FAR prime contracts (but not subcontracts), and agencies like the General Services Administration (“GSA”) had used that opening to exempt most schedule contracting from the SCA. But in 2001 that broad exemption essentially collapsed on itself. While the final regulations departed somewhat from the interim regulations, DOL succeeded in imposing a narrowly definition of commercially exempt contracts and imposing much stricter conditions on the reach of the SCA exemption.
In addition to the preexisting exemptions for certain services in connection with ADPE, office equipment, and scientific equipment, a limited group of new, potentially exempt services was enumerated in 29 C.F.R. 4.123(e)(2)(i):
Prime contracts or subcontracts principally for the following services where the services under the contract or subcontract meet all of the criteria set forth in paragraph (e)(2)(ii) of this section and are not excluded by paragraph (e)(2)(iii):
(A) Automobile or other vehicle (e.g., aircraft) maintenance services (other than contracts to operate a Government motor pool or similar facility);
(B) Financial services involving the issuance and servicing of cards (including credit cards, debit cards, purchase cards, smart cards, and similar card services);
(C) Contracts with hotels/motels for conferences, including lodging and/or meals which are part of the contract for the conference (which shall not include ongoing contracts for lodging on an as needed or continuing basis);
(D) Maintenance, calibration, repair and/or installation (where the installation is not subject to the Davis-Bacon Act, as provided in §4.116(c)(2)) services for all types of equipment where the services are obtained from the manufacturer or supplier of the equipment under a contract awarded on a sole source basis;
(E) Transportation by common carrier of persons by air, motor vehicle, rail, or marine vessel on regularly scheduled routes or via standard commercial services (not including charter services);
(F) Real estate services, including real property appraisal services, related to housing federal agencies or disposing of real property owned by the Federal Government; and
(G) Relocation services, including services of real estate brokers and appraisers, to assist federal employees or military personnel in buying and selling homes (which shall not include actual moving or storage of household goods and related services).
See also FAR 22.1003-4(d).
Although similar in some respects to the conditions on previously exempt contracts, the commercial item exemption imposes five significant conditions. First, the commercial services must be sold regularly to non-Government customers. Second, the prime contractor subcontract must be awarded either sole source or pursuant to a competition in which price is not the dominant criterion for award. Third, the contractor must furnish the services at prices based on established catalog or market prices. Fourth, each service employee “will spend only a small portion of his or her time” on the Government contract (defined as less than 20 percent of annualize hours worked). And fifth, the contractor uses the same compensation plan (wages and fringe benefits) for both Government and commercial work.
The one expansion in the regulation, was to extend the commercial exemption to subcontracts too. However, the prime contractor must certify to the contracting officer that it meets these criteria for exemption. If a prime contractor seeks to award a commercial exempt subcontract, it must certify that the subcontractor has met these conditions.
The net impact of this change to the commercial exemption was to vastly limit its application. Very few government contracts are for commercial work as defined in this test. It applies only to a few limited fields of work. And even in those fields, if the contractor has a workforce dedicated to government service contracts, then it is not eligible for the commercial exemption. Very few prime contracts are commercial exempt from the SCA. Perhaps more subcontracts qualify for the commercial exemption, but even there it is a limited universe.
Nonetheless, for a while, GSA dragged it heals in complying with the DOL regulations. Even though out the early 2000’s GSA continued to insist it scheduled contracts were commercially exempt from the SCA. GSA thus did not include the SCA clause or wage determination in such scheduled contracts unless they were so plainly for services, and not otherwise exempt, that it would make you blush at the thought of not applying the law. Accordingly, there was considerable evasion of the SCA requirements, particularly on task orders issued under schedule contracts.
The advent of the Obama Administration and the rise of organized labor interests at DOL finally changed the situation. On January 15, 2009, the FAR was amended to reflect DOL’s 2001 rules. See 74 Fed. Reg. 2,724. Only then did we begin to see the movement of the schedule contracts into the world of the SCA. That movement has been fitful, and marked by continuing agency noncompliance, and is not without considerable confusion. GSA has changed its mind about how to implement the SCA wage determinations, focusing on initially on Mass Modifications that added all wage determination to many schedule contracts. However, GSA has recently said it was reverting to its prior practice of making the task order agency get wage determinations and comply with the SCA. However, chaotic it has been, there is no doubt the reach of the SCA has expanded much further into government service contracting here in the modern era. Not much work is deemed SCA commercial exempt anymore.