Choices, Choices, Choices; the Cause and Effect of the Different Davis-Bacon Act Price Adjustment Clauses.

You've got to know when to hold 'em, Know when to fold 'em, Know when to walk away, And know when to run. – Kenny Rogers

Unlike the Service Contract Act, where there are two similar but standard price adjustment clauses, there are three separate and different price adjustment clauses for the Davis-Bacon Act (“DBA”) . Each clause is appropriate for a different situation. This blog will discuss the different DBA clauses, where you can find them, and what the appropriate situation is for their use.

FAR 52.222-30 is called the “None or Separately Specified Method”. As set forth in its name, the clause can provide for no price adjustment or provide for some special formula adjustment. This clause thus is used when the Government wants the contractor to anticipate the wage and benefit inflation and load the cost into the bid price. It is used in two different types of construction contracts. The first is fixed price contracts which allow the Contracting Officer to extend the contract or exercise option where the Contracting Officer determines that the best method of price adjustment is one listed in FAR 22.404-12(c)(1) or (c)(2). These other adjustment methods include an opportunity to rebid or propose different pricing or a separate pricing method that allows adjustments each option period. In other words, if it is fixed price contract, and the Contracting Officer doesn’t like the methods in FAR 22.407, then they can pick from FAR 22.404-12(c)(1) or (c)(2). The other situation where the None of Separately Specified Method is used is Cost Reimbursement contracts that allow for the CO to extend the length of the contract. Here, any price adjustment clause is unnecessary because the contractor’s labor costs are already reimbursable as long as they are Allowable, Allocable and Reasonable.

FAR 52.222-31 is called the “Percentage Method”. I am sure you can guess a little about how this works, but the gist of it is that the Contracting Officer will increase the portion of the contract price that is related to labor costs, by a fixed percentage or by the percentage indicated in whichever index or publication the Contracting Officer determines is relevant. For example, if the Contracting Officer determines that the Consumer Price Index for Urban Wage Earners is the most applicable index, then they will apply the percentage increase in wages on that index to the portion of the contract that relates to labor costs.  This clause is inserted in fixed price contracts subject to the Davis-Bacon Act in which the Contracting Officer determines that the adjustment method in FAR 22.404(C)(3) (which is also the Percentage Method) is appropriate.

Finally, FAR 52.222-32 is called the “Actual Method”. The actual method most resembles the Service Contract Act adjustment clause located in FAR 52.222-43. The actual method is used in fixed price contracts subject to the Davis-Bacon Act which allow the contracting officer to extend the term of the contract by exercising option years. Additionally, the regulations in FAR 22.404-12 suggest that this method is generally only appropriate when the contract is predominantly for services and thus subject to the Service Contract Act. Since the Davis-Bacon Act can apply to distinct, severable, construction line items, and the Service Contract Act applies to federal contracts predominantly for services, then both acts can cover the same agreement. If this is the case, then the Contracting Officer will use the actual method which adjust the contract price by the actual cost increase to the contractor as a result of the new wage determination. This way, the methods used to adjust labor costs will be the same even though two or more different acts cover the labor portion of the contract.  

These clauses allow the Contracting Officer flexibility in structuring their contracts. On the other hand, it means that contractors should take note of which clause is in the solicitation so that they can structure their bid in accordance with the correct clause. If no adjustment is offered that will influence the bid price compared to the use of the Actual Method approach. A contractor who finds the Percentage Method in their contract may want to pay its employees more than the wage determination at the beginning of the contract, so that if wages necessarily increase, they are not left holding the bag if the corresponding index does not adequately reflect the wages in the locality. Alternatively, a contractor who finds the Actual Method in the solicitation may feel that this method appropriately covers them for an increase in wages and would want to submit the most competitive bid possible with out any escalation for covered workers. These are different strategies that contractors can use to gain an edge on the competition. After the bidding stage, these methods also determine how to calculate the sum certain necessary for price adjustments. So, in sum, read Davis-Bacon Act covered solicitations for information on the price adjustment clause. It may give your bid a competitive edge or save you money later on while performing on the contract.

What happens if the Government leaves out a DBA-related price adjustment clause entirely? Or what if you are not performing a FAR covered contract? Well that can be a tough issue. Perhaps no adjustment is provided for, particularly if no new wage determination is ever added to the contract. …. Or perhaps, if a wage determination is added to the contract later, the contractor gets an adjustment under the Changes clause, and it is a full equitable adjustment including overhead, G&A and profit.