Is it OK to underbid an SCA Contract?

Businesses competing for federal contracts will be successful if they are able to offer high quality products and services for a reasonable price when compared with the offerings of their competitors. A recent bid protest decision issued by the Government Accountability Office offers a poignant reminder about how challenging it can be to come up with a price to perform a federal service contract. See Nemean Solutions, LLC, B-422298; B-422298.2 (April 22, 2024).

Contracts are covered by the McNamara-O'Hara Service Contract Act ("SCA") of 1965 where “the principal purpose of [the contract] is to furnish services in the United States.” The SCA requires the payment of specified minimum wage rates and fringe benefits to covered employees so as to insulate them from the ravages of price competition among contractors. While this goal is easy to grasp, the implementation of the law is anything but simple. One of the most bedeviling impacts of the law arises at the very moment a contractor decides to compete for an SCA-covered service contract. Contractors will create serious problems for themselves if they prepare their proposals in ignorance of what the Act requires and how it works in practice.

A Contracting Officer gets the SCA ball rolling when he or she determines that the contract is covered by the SCA. When a contract is SCA-covered, the Contracting Officer should incorporate the SCA clauses from the Federal Acquisition Regulations (“FAR”) into the contract. The clauses most commonly are FAR 52.222-41 and FAR 52.222-43. In addition, the Contracting Officer should obtain the proper Wage Determination (“WD”) for the locality where the contract will be performed and incorporate it into the contract. You can search for WDs on www.sam.gov - specifically here. The WD will list the minimum wage rates for a laundry list of labor categories and set forth the various fringe benefits that are required (e.g., health and welfare benefits, holidays, and vacation).

From there, it’s the contractor’s job to figure out how it will provide the services required by the contract, part of which will involve making a plan about how the contract will be staffed. Once the contractor decides how it will staff the contract, it must turn to how it will comply with the SCA. A critical element of SCA compliance is the proper classification of the jobs that will be performed by the people who will perform those services. Some workers may be classified as exempt, salaried managerial personnel; however, others will hold non-exempt positions. Those positions will be covered by the SCA and the contractor must then figure out which jobs fit within which of the employee classifications listed on the WD and if a job doesn’t fit within a classification on the WD, then the contractor will need to obtain a “conformance” to establish a wage rate for those unlisted occupations. If the contractor gets the classifications right, then it will know the minimum wages it must pay in order to comply with the SCA’s prevailing wage requirements.

But what price should the contractor propose to the Government? While the SCA requires the payment of prevailing wages and the provision of fringe benefits, the SCA does not dictate what a contractor should bid. While many contractors will want to offer prices that cover all of their costs plus some profit, contractors sometimes make a strategic decision to underbid the costs in an effort to get their foot in the door. Most of the time, that’s not a problem. Indeed, if “a firm offers hourly rates below those specified in an SCA wage determination, that firm [will] nonetheless [be] eligible for a contract award provided the proposal does not evidence intent to violate the SCA and the firm is otherwise determined to be responsible.” Sci. Applications Int'l Corp., B-419961.3, B-419961.4, 2022 CPD ¶59 at 14 (February 10, 2022). Such an offer “[o]n a fixed-price contract . . . that does not take exception to the solicitation's SCA provisions, yet offers labor rates that are less than the SCA-specified rates, may simply constitute a below-cost offer [and an award] on the basis of such an offer is legally unobjectionable.” Id.

While below cost bids are technically ok, a contractor that loses to a lowball offer might wonder how their successful competitor won the award when, from the loser’s perspective, there’s no way they could hire workers, comply with the SCA, and not go bust in the middle of the contract. That was a central issue in the Nemean Solutions protest. The protester argued that the awardee would violate the SCA because it had improperly misclassified many workers as exempt when those workers were classified as nonexempt under the predecessor contract. Nemean Solutions, slip op. at 6. It asserted that the Government should have found the awardee’s prices unrealistic insofar as the prices could not be realistic unless they violated the SCA. Id. The GAO rejected this argument on the ground that, so long as the Government’s judgments were reasonable and adhered to the evaluation criteria, the GAO would not second-guess the award, particularly since SCA compliance was not, in and of itself, an element of the evaluation criteria. Id. at 8.

So, the GAO’s historically unremarkable decision, shines a spotlight on the challenges of coming up with prices for an SCA-covered contract and why it is crucial that a contractor have a firm grip on the SCA’s requirements. If the awardee in this protest actually botched the classifications and based its prices on a flawed understanding of its SCA-mandated labor costs, it may take a significant loss on the contract.

My partner wrote a blog entitled “A Short Wage and Hour Primer for Contractors Submitting Service Contract Proposals.” If you’re new to the world of federal service contracting, I commend it to your attention for a high-level overview of some things to consider when putting together a proposal.