Are R&D Contracts Covered By the SCA -- Generally Yes.
“Starving research and development is a little like eating your seed corn.”
—Mitt Romney
A client asks if its Department of Defense (“DOD”) research and development (“R&D”) contract might be exempted from the Service Contract Act (“SCA”). They cite us to a DoD statutory provision (10 U.S.C 2330(c)(2)) essentially stating that services related to research and development are not included within the term “contract services” for the purposes of that section of the law.
Whatever the status of the client’s R&D contract, the mere fact they are for research services is not going to exempt them from the SCA. A R&D contract can be a covered contract for SCA purposes. Notwithstanding the DOD statute, only the U.S. Department of Labor (“DOL”) can define the coverage of the wage and hour laws. DOD’s laws and rules are not controlling as to the definition of services under the labor standards laws. The SCA exists in its own bubble, and that statute does not expressly exempt R&D contracts, nor does the DOL SCA regulation provide an automatic “get out of jail free” card. Assuming no other exemption applies, the SCA applies to R&D contracts. DOL’s position is that the SCA is the catch basin of the labor standards laws, and any contract not for construction or supply work is ordinarily characterized as services.
We know this is the case because DOL says it is and because the Board of Service Contract Appeals (the highest tribunal to rule on these matters ordinarily) wrote a 1993 decision, National Cancer Institute, BSCA No. 93-10, (BSCA Dec. 30, 1993), stating emphatically that “There is no exemption from SCA requirements for research or development contracts…”. The Board wrote of the proposed regulations that suggested a blanket exemption but dispensed with the idea because the regulation never made it to the final rule. See 48 Fed. Reg. 49,751 (Oct. 27, 1983). Specifically, the Board opined as follows:
There is no exemption from SCA requirements for research or development contracts and -- to the extent that PRI's contract is seen as one for AIDS and cancer research and development of treatments and cures -- no exemption from the general rule of SCA coverage for federal service contracts is available. The Administrator correctly argues that a specific exemption for research and development contracts was considered and rejected by the Department after notice and comment in rule making procedures; which led to adoption of the regulations at 29 C.F.R. Part 4. As the Department stated in adopting the final SCA regulations:
R&D [research and development] contracts have always been considered subject to SCA when they are principally for the furnishing of a service (such as collection and analysis of information or testing), provided that there is more than a minor use of service employees in performing the contract services.
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In deciding whether R&D contracts are subject to SCA, the question must be whether they are contracts, "the principal purpose of which is to furnish services * * * through the use of service employees." If R&D contracts meet this test, they are covered by the Act. DOD [Department of Defense] has suggested that although an R&D contractor engages in collection and analysis of technical and scientific information and the conduct of sophisticated tests, the principal purpose of R&D contracts is to buy a product, i.e., the information obtained. To the contrary, it is our view that the principal purpose of such contracts is the service of collection and analysis of information, testing, etc. although the information obtained is generally manifested in a report. See Descomp Inc. v. Sampson, 577 F.Supp. 254, 261 (D.Del. 1974).
48 Fed. Reg. 49751 (Oct. 27, 1983). The Department of Labor reached the conclusion that the rulemaking record did not provide an adequate basis to support an exemption for research and development contracts.
National Cancer Institute, BSCA No. 93-10, (BSCA Dec. 30, 1993) (found here: https://www.oalj.dol.gov/PUBLIC/DBA_SCA/DECISIONS/ARB_DECISIONS/SCA/93SC010.HTM?_ga=2.133969998.1117138675.1608056690-1106005708.1602180930 at pages 5-6).
Accordingly, the bottom line is that DOL is on record of claiming jurisdiction over R&D contracts under the SCA.
Of course, this assumes the work is not principally for exempt professional services (i.e., 80% to 90%) with only incidental nonexempt services, and that no other statutory or regulatory exemption applies. Contracts deemed principally for professional services may yet be exempt. And contracts with the principal purpose of delivering a product or good may also be exempt. Finally, certain so-called Government Owned, Contractor Operated (“GOCO”) contractors may have a prime contractor exemption. But it remains the case that the mere fact that the contractor is performing a R&D contract does not automatically and blanketly exempt it from the SCA.