Service Contract Act Negotiation Strategies For Unionized Contractors: Happy Wife, Happy Life

“All happy families are alike; each unhappy family is unhappy in its own way.”
Leo Tolstoy, Anna Karenina

It is well-known that the procuring agencies dislike the application of the Service Contract Act(“SCA”) to their unionized contracts because it offers too many opportunities for the contractor to game the system.  Assuming the SCA is in play, the unionized contractor needs to be mindful of the special circumstances of federal service work as it negotiates a collective bargaining agreement (“CBA”). Those negotiations should not only consider the traditional labor law issues, but also should be done with three things in mind: (1) getting the CBA into the government contract under section 4(c) of the SCA; (2) maximizing the recovery of increased costs and negotiated terms set forth in the CBA in any future price adjustments under the SCA/FLSA price adjustment clause; and (3) discouraging wage busting and price competition by competitors during re-solicitations. See also https://static1.squarespace.com/static/5a6619f32278e7a092c86335/t/5a6668b224a694f20f854049/1516660915294/CBA_and_Union_Negotiation_Strategy.pdf

1. Application of the CBA under the SCA

Under section 4(c) of the SCA, the CBA can become the SCA wage determination (“WD”). But, when there is a CBA in the picture, in order for it to be effective, it must be timely provided to the Contracting Officer.  The FAR provides some specific rules for the timing and notice necessary to administer the section 4(c) requirements in negotiated procurements.  The principal rule is found at FAR 22.1012-3(b) and (c) which state:

(b) For contractual actions other than sealed bidding, a wage determination

or revision based on a new or changed collective bargaining agreement

shall not be effective if notice of the terms of the new or changed collective

bargaining agreement is received by the contracting agency after award

of a successor contract or a modificationas specified in 22.1007(b), provided

that the contract start of performance is within 30 days of the award of the

contract or of the specified modification. If the contract does not specify a

start of performance date which iswithin 30 days of the award of the contract

or of the specified modification, or if contract performance does not

commence within 30 days of the award of the contract or of the specified

modification, any notice of the terms of a new or changed collective bargaining

agreement received by the agency not less than 10 days before

commencement of the work shall be effective for purposes of the successor

contract under section 4(c) of the Act.

(c) The limitations in paragraphs (a) and (b) of this subsection shall apply

only if timely Notices and notifications required in 22.1008–7 and 22.1010

have been given.

This FAR provision thus sets forth at least three possible results. First, assuming the agency failed to give the proper notice of the option year rights to the union and contractor, then there are no timeliness rules for negotiating the CBA. Second, assuming the agency does its job and gives the requisite notice, then ordinarily the contractor and union need to get the CBA in the agency's hands at least 30 days before the award of the new contract. Third, even if the contractor misses the 30-day window, the new CBA may still become effective under section 4(c) of the SCA if the contract performance doesn't commence within 30 days of award of the contract and the parties give the agency notice of the new CBA at least 10 days prior to commencement of the new contract work.

______________________________________________________________________________

2. . Price Adjustments

On re-procurement of unionized contracts, neither the incumbent contractor nor any other offeror is ordinarily entitled to an adjustment in price for wages and fringe benefits payable in the base year of the contract. On the re-procurement, all offerors are supposed to factor the anticipated wages and fringe benefits, as well as the escalation thereon which must be paid during the base year, into their proposed price. These rules apply to both prevailing wage determinations and section 4(c) wage determinations based on CBAs.  Accordingly, if a CBA is negotiated and put into the solicitation as a section 4(c) wage determination (“WD"), it should be added to the solicitation, and all the offerors must then price those wages and benefits into their proposed contract price for the base year.  If the CBA raises the wages or benefits sometime later, but still during the base year performance period, those labor costs too must be priced into the bid.  Since these fixed costs on a fixed price contract are supposed to have been included in the bid, they are not ordinarily subject to a price adjustment.

However, SCA contracts do contain an exception to ordinary fixed price contract rules.  Under the SCA/ FLSA price adjustment clause, the contractor is entitled to an inequitable adjustment (i.e., just extra out of pocket costs and not overhead G&A and profit) on increases in wages or fringe benefits in the option years. Thus, it is important to the contractor to negotiate the CBA and time the increases so that it is entitled to a price adjustment. Ordinarily, absent a change in the contract terms, a fixed price contractor can't get an adjustment for increases granted in the base year of the contract, for example. Those costs are supposed to have been included in the bid. Thus, any negotiated COLA or lump sum signing bonus, new benefit, or increased wages or benefits needs to be timed to come in effect during the option years.

The procuring agencies dislike how the SCA clauses allow the contractor to negotiate wage and fringe benefit increases and then stick the government with the obligation to reimburse the contractor for those costs. There are two ways they can challenge contractors CBA – they can prove they were not negotiated at arm’s length or they can show that the wages and benefits negotiated there in are substantially at variance to those prevailing in the locality.  In the real world, it has proved very difficult to show either exception, and very few contracting agencies even try to do so. 

Bu that doesn’t keep them from pouring over the CBA and checking its terms and timing. Indeed, the timing of the wage or benefit increase can also back fire on the contractor who doesn’t set a base wage and fringe benefit rate in the CBA, and simply asserts an increase in wages or benefits in the option year. See https://www.awrcounsel.com/blog/2018/7/5/who-says-you-cant-fight-city-hall-sectek-v-nara. Contractors need to implement wage and benefit terms immediately when they sign a CBA, even if they simply reiterate the existing wages and benefits and hold the wage and fringe benefit increases therein for the option years, as savvy government contractors try to do.

____________________________________________________________________________  

3. CBA Wages and Benefits Subject to a Price Adjustment

Then there is a question of what constitutes wages and fringe benefits. I had a small role in a case at the ASBCA, for instance, arguing about CBA mandated severance benefits. The Board wisely ruled that severance was wages or fringes. See Arctec Services, ASBCA no. 56444, 11-1 BCA 34,743.  See also Government Contracting Resources, Inc., ASBCA no 59162.  Of course, the contractor only gets a price adjustment if the cost increase relates to wages or fringes. The SCA regulations say that "seniority, grievance procedures, work rules, overtime, etc." are NOT wages or fringes and thus the contractor get no price adjustment for those items. 29 CFR 4.163(a). The "etc." provision might also included expense reimbursements, arctic coats or gloves or other articles of clothing, protective gear and equipment, funds for employee morale such as birthday parties, gifts, and the like. See also 29 C.F.R. 4.172(e)  and (f) with additional examples on items that are not bona fide wages or benefits.

So, for example, contractors should not negotiate a premium double time overtime provision in their CBAs. That will not bind successor contractors and thus allow competitors to underbid the incumbent unionized contractor. Nor should they negotiate a daily overtime provision for work in excess of 8 hours a day. The contractor also will not get any price adjustment for such CBA overtime provisions.

It is prudent for bid capture teams to engage competent counsel to assist them as they analyze a competitor’s CBA in the bidding stage.  Bidding teams should look for costs advantages that can be had due to the naivety of the incumbent contractor. And it behooves the incumbent contractor to get legal assistance, so it understands the SCA intricacies before finalizing a CBA with a union on a government service contract.

____________________________________________________________________________

4.. Re-competition issued under section 4(c) of the SCA

On re-procurement of unionized contracts, neither the incumbent contractor nor any other offeror is ordinarily entitled to an adjustment in price for wages and fringe benefits payable in the base year of the contract. On the re-procurement, all offerors are supposed to factor the anticipated wages and fringe benefits, as well as the escalation thereon which must be paid during the base year, into their proposed price. These rules apply to both prevailing wage determinations and section 4(c) wage determinations based on CBAs.  Accordingly, if a CBA is negotiated and put into the solicitation as a section 4(c) WD, it should be added to the solicitation, and all the offerors must then price those wages and benefits into their proposed contract price for the base year.  If the CBA raises the wages or benefits sometime later, but still during the base year performance period, those labor costs too must be priced into the bid. Since these fixed costs on a fixed price contract are supposed to have been included in the bid, they are not ordinarily subject to a price adjustment.

If a contractor furnishes a CBA to the government in a timely manner, but the Contracting Officer fails to add it to the RFP, the contractor should protest that before the time for submission of proposals.  Otherwise, you could be untimely.  If the Government fails to include the WD even after award, the remedy is not to file a claim under the Contract Disputes Act. The correct forum for relief is the Wage and Hour Division of the US DOL, which can order the Government to include the CBA-based WD retroactivity to the effective date of award or new option year. And in that event, the contractor may be entitled to a full equitable adjustment in price (including overhead, G&A and profit) under the Changes clause.

Finally, in negotiating the CBA, the incumbent contractor is trying to lock in the wages and benefits his competitors have to bid to compete for the work. If these wages and benefits are high, they may discourage other competition. That is because, if the competitors bid on and win the contract, they too will have to recognize the union and pay the demanded wage and benefit rates. Under section 4(c), the incumbent’s CBA becomes the WD and binds the successor contractor. Many competitors are nonunion, and don’t want to invite the union into their business. If one contract gets unionized, the thinking goes, there may be a domino effect. And if that union contract has very high wages far over the prevailing amounts, then this will put upward pressure on generally on the company’s other wage and benefits. So rather than compete, they take a bye on these procurements, and that reduced competition puts a further moat around the incumbent’s line of business.

*  *  *

Given the above, it is not surprising that contracting agencies don’t like the SCA, and particularly don’t like the section 4(c) rules for unionized contracts. It's complicated and often an insider’s game. It is all one big unhappy family triangulation involving the contracting agencies, the US DOL, unions, employees and contractors.