The Deal's the Deal: ASBCA Rejects Claim Seeking Price Adjustment for Overseas Wage Increases

We’ve all heard the old adage that a deal’s a deal. The Armed Services Board of Contract Appeals (“ASBCA”) recently demonstrated how this adage can cost a federal contractor a fair chunk of change when it comes to the cost of increasing wages owed to service contract employees—especially for work performed overseas. See Appeal of KF&S, ASBCA Nos. 62223, 62292 (Dec. 9, 2020).

The Army awarded a fixed-price contract to KF&S Corp. (“KF&S”) to provide security guards who were posted at various locations in the Republic of Korea. At some point during the performance of the contract, the Korean government increased its minimum wage rates. Under the terms of its contract with the Army, the Korean government’s action required KF&S to give its guards pay raises. To account for the increased wage costs, KF&S requested a price adjustment. The Contracting Officer rejected KF&S’s claim.

KF&S appealed the Contracting Officer’s decision to the ASBCA and argued that one or both of two price adjustment clauses should have been included in its contract. If they’d been in the contract, they should have received an adjustment. They further argued that the Government’s failure to include the clause breached the duty of good faith and fair dealing owed to KF&S, particularly given the fact that the contract required KF&S to comply with Korean labor laws.

The ASBCA rejected KF&S’s arguments, granted the Army’s motion for summary judgment, and denied KF&S’s appeal—case closed. The upshot of the ASBCA’s rationale was that the Army had no duty to include the price adjustment clauses. Thus, KF&S’s fixed-price contract placed the risk of wage increases squarely on KF&S’s shoulders.

Businesses that have experience performing domestic federal service contracts should be familiar with the general duty to pay prevailing wages and provide vacation, holiday and health and welfare benefits. These duties arise from the McNamara-O'Hara Service Contract Act ("SCA") of 1965. The SCA applies to employees working on federal contracts and subcontracts in the United States. On the surface, the SCA’s requirement that contractors pay applicable wages and benefits is straightforward. However, the implementation of the law is anything but simple. In particular, the SCA presents pitfalls for contractors who prepare their proposals in ignorance of what the Act requires and how it works in practice. 

The SCA applies to “[e]very contract . . . entered into by the United States or the District of Columbia in excess of $2,500 . . . the principal purpose of which is to furnish services in the United States.” In accordance with certain procedures, the Government is required to include one or more wage determinations (“WDs”) issued by DOL into the contract. A WD covers a specified geographical area and lists the minimum wages and benefits that the contractors in that territory must pay to dozens of classes of employees. The SCA further provides that updated WDs be included in SCA-covered contracts before the exercise of an option, on the annual anniversary date of a multi-year contract, or every two years in a multi-year contract not subject to annual appropriations.

When a new WD requires the payment of increased wages and benefits or if the federal minimum wage increases, a fixed priced contractor is entitled to a price adjustment for increased wages and fringe benefits. See FAR §§ 52.222-43 and 52.222-44. Because contractors may be entitled to price adjustments, contracts containing the SCA Price Adjustment Clause require contractors to warrant “that the prices in [the] contract do not include any allowance for any contingency to cover increased costs for which adjustment is provided under this clause.” FAR 52.222-43(b). The purpose of this warranty is to prevent double recovery of nonexempt employee labor escalation costs.

All this stuff, however, only applies to employees working on service contract in the United States. The SCA and the price adjustment provisions don’t apply and are not required to be included in service contracts performed abroad. This is why the Army owed no duty to include the SCA clauses in KF&S’s contract and ultimately wasn’t entitled to a price adjustment under the SCA.

However… individual agencies have the ability to adopt supplemental acquisition regulations. Of relevance here are regulations contained in the Department of Defense Acquisition Regulations (“DFARS”) and the Army Supplemental Acquisition Regulations (“AFARS”). As noted above, KF&S’s contract required it to comply with Korean labor laws under AFARS clause 5152.222-4034. The Army could have included, but chose not to include, a DFARS clause that permits an economic price adjustment to cover the increased cost of wages and benefits that are controlled by a foreign Government. See DFARS § 252.216-7003. This clause essentially mirrors the SCA clauses that require price adjustments for increased wage and benefits costs for contracts performed in the U.S.

However, unlike the SCA, the DFARS states that the CO “may” include the clause but doesn’t have to. Herein lies the lesson applicable to service contracts outside the United States. If the contract requires compliance with local labor laws AND it has a price adjustment clause such as the DFARS clause mentioned above, a contractor may not include price escalations for wages and benefits for affected nonexempt employees. Their price protection comes in the form of the price adjustment provisions. On the other hand, if there is not a price adjustment clause, the Government is not obligated to provide an adjustment for wage and benefits increases. The Contractor, however, is fully within its rights to account for potential wage and benefits increases in future option periods.

So, returning to the original point—a deal’s a deal. In the context of fixed price service contracts, a prospective offeror needs to review the solicitation to consider what clauses are or are not in the RFP. It may be that the RFP doesn’t comply with applicable laws. We regularly encourage clients to raise that issue early. Ultimately, if your proposal misses the mark, you may be left with a contract that costs you more than you anticipated without the means to recoup the increased costs.