One for Me; and One for Me: Getting Paid for SCA Vacation Benefit Increases in Option Year

One of the quirks of bidding on fixed price U.S. Government service contracts is that contractors may be entitled to a price adjustment for increased wages and fringe benefits. It is an exception to the usual fixed priced bidding rules. Thus, any bid capture team has to consider the impact of the Service Contract Act (“SCA”) on  proposal costs.  Essentially, the offeror is supposed to hold wages and fringe benefits constant after the base period of performance (usually one year or less) and not escalate those costs in their option year prices. In turn, the successful offeror will get a price adjustment under FAR 52.222-43 or -44. Exactly what costs are subject to an adjustment has been the focus of different litigations. This blog will focus on just one element of the adjustment – vacation benefits for newly hired workers who have not worked for the predecessor contractor or the offeror.

In Service Ventures, Inc., 89-1 BCA ¶21,264, on reconsideration, 89-1 BCA ¶ 21,438 (1988), aff’d, U.S. v. Service Ventures, Inc., 899 F.2d 1 (Fed. Cir. 1990), the contractor sought a price adjustment for the step up f such newly hired workers to two week of vacation benefits.  The wage determination required the contractor, as is commonly the case, to furnish two weeks of vacation benefits after one year of service. That meant the newly hired workers only accrued a vacation benefit in the course of the first option year when they accumulated one year of service. They got no paid leave benefit during the base term of the contract. The Armed Service Board of Contract Appeals initially ruled that because the SCA first required the contractor to increase vacation fringe benefits in an option year, the contractor was entitled to a contract price adjustment for the increase in vacation pay.

The Government had argued that the SCA clause only provided for an increase if the contractor was compelled to increase the rates as a result of a change in the applicable wage determination. The requirement for two weeks of vacation pay after one year of service had remained unchanged in the option year wage determination. The dissenting judge, accordingly, would not have allowed an adjustment since vacation pay had not increased or changed as a result of the wage determination.

The majority, however, believed that since no paid vacation was required to be given to employees until one year of service, that the exercise of the option year therefore imposed an additional labor increase on the contractor. No payment was directed, though, for the 15 employees who were, because of the length of service with the predecessor contractor, already entitled to vacation during the basic year.

The ASBCA decision was affirmed by the Federal Circuit relying in part on Government Contractors, Inc., ASBCA No. 24112, 80-1 BCA ¶14,281 (1980), aff’d on reconsid., 80-1 BCA ¶14,454. See also Williams Services, Inc., ASBCA No. 41121, 91-1 BCA ¶23,486, where the ASBCA again held that a service contractor was entitled to an ‘increase “in price reflecting vacation pay accrued during the base year and required by the option year Wage Determination. The contractor there did not consider vacation pay in its initial proposal because the RFP did not provide for entry of such data, and there were no incumbent contractor employees when the proposal was submitted.

In contrast, in Gricoski Detective Agency, GSBCA No. 95,564, 90-3 BCA ¶23,131, the Board held that a contractor was not entitled to equitable adjustment for vacation benefits for holdover employees for the option year because the wage determination for both the initial year of the contract and the option year provided for the vacation benefits. The Board distinguished the case from U.S. v. Service Ventures, Inc., because in Gricoski the contractor was permitted to include expenses for vacation benefits for the option year in its bid price, whereas the contractor in Service Ventures did not have the opportunity to do so. Indeed, the standard SCA Price Adjustment clause contain a so-called warranty provision where the offeror promises that they have not included costs subject to an SCA price adjustment in their option year proposal costs.  

Subparagraph (a) of the SCA Price Adjustment clause explicitly extends entitlement to an adjustment for contracts subject to CBA. An important element of the adjustment allowed under the clause was clarified in Lear Siegler Services, Inc. v. Rumsfeld, 457 F.3d 1262 (Fed. Cir. 2006), in which the court ruled that the SCA Price Adjustment clause covered the contractor’s increased cost of health benefits coverage, even though the health benefits did not, per se, change in the CBA. This was because the CBA in that case contained a defined benefit which had to be provided by the employer to its employees regardless of cost. While the benefits never changed, the contractor’s cost of providing health benefits was growing at double digit pace. The court reversed the ASBCA, which had granted summary judgment in favor of the Air Force in Lear Siegler Services, Inc., ASBCA No. 544449, 2005-1 BCA ¶32,937, aff’d on reconsid. 2005-2 BCA ¶33,110. 

The bottom line is that when bidding on U.S. Government service contracts covered by the SCA, it behooves offerors to propose and hire new workers, who have no prior service with either the offeror or the predecessor contractor. Those workers do not have to be furnished any paid vacation benefit in the first year under the ordinary prevailing SCA wage determination. Of course, they can be given leave without pay. But come their first anniversary date, they become entitled to say two weeks of vacation benefits under the usual wage determination. But since that step up occurs in the option period of a normal one year with additional options contract, it is subject to a price adjustment. Thus, the offeror can pass the cost of the two weeks of vacation on to the Government, provided that they did not load the cost into their  bid price (only one bite at the apple, please!). This means that savvy bidders can get a cost advantage over the competition who are less clued in. Simply put, offerors are entitled to a SCA price adjustment for increased costs incurred for vacation pay benefits during a contract renewal option period.