Flawed Pricing Strategies Can Be Costly Under the Service Contract Act Price Adjustment Clause

Some years ago, my partner blogged wrote a blog entitled “Service Contract Act Negotiation Strategies for Unionized Contractors: Happy Wife, Happy Life.”

Among other things, he pointed out that when expiring unionized contracts come up for reprocurement, all offerors, including the incumbent, should be cognizant of the fact that, in the base year of the contract that succeeds the expiring contract, they will be required to bear the cost of the wages and fringe benefits set forth in the then-current Collective Bargaining Agreement (“CBA”) that was incorporated into the predecessor contract pursuant to section 4(c) of the Service Contract Labor Standards statute (codified at 41 U.S.C. § 6707(c). While offerors are entitled to propose whatever price they believe maximizes their opportunity for the award of a new contract, they should recognize that it will be a losing proposition for them to price their proposals on the payment of wages and benefits in the base year that are lower than the rates in the CBA. Likewise, they should be mindful of the risk of underbidding labor costs in the rates they propose for option years.

A recent decision issued by the Armed Services Board of Contract Appeals (“ASBCA” or “Board”) highlights how contractors might be forced to take a loss if they propose option year pricing that is less than the base year costs mandated by the predecessor CBA. See HD, Inc., ASBCA No. 63794 (March 24, 2025). In this case, the Government incorporated the predecessor contractor’s CBA into the solicitation; it also incorporated the Department of Labor-issued Area Wage Determination (“WD”). See id., slip op. at 2. During the solicitation process, an offeror asked whether an awardee would “have to comply with the existing CBA.” Id. at 3. The Government responded that “[t]he first year has to be in accordance with the first year of the existing CBA and afterwards the CBA can either continue to be in effect or a new CBA can be negotiated.” Id. The Government also was asked whether “for the purpose of calculating Labor costs for Option Years 1-4 are [offerors] to default to, and use, the published SCA Wage Determination rates.” Id.The Government’s terse response was “Use SCA and consider CBA.” Id. WD, Inc. (“WDI”), the awardee and claimant in this appeal asserted, and the Board accepted, that it based its prices on the labor costs of the CBA in the base year, but thereafter based its option year prices on the WD. Id. at 4.

HDI negotiated a new CBA with wage rates that were to be paid in the first option period that carried forward the rates that had been in the predecessor CBA incorporated into the solicitation. Id. at 5. It then negotiated a new CBA with higher wage rates that were to be paid in the second option period. Id. at 6. HDI submitted an SCA Price Adjustment for the second option period that based its proposed price adjustment on the difference between the second option period rates and the wage rates in the WD as opposed to those set forth in the predecessor CBA. It asserted that it did so as a result of the Government’s statement that offerors should use the WD for the pricing of labor costs in the option years. The Government, on the other hand, asserted that the price adjustment must be measured by the difference between the current CBA and the predecessor CBA.

To my mind, nether HDI nor the Government got this right. However, the Board ultimately reached the right result after one peels away the debate over whether HDI was required to base its option year labor costs or those set forth in the predecessor CBA in the solicitation. This is because the Board held that the proper measure of a price adjustment under the SCA Price Adjustment Clause “is the difference between the wages HDI paid under the Option Year Two CBA and the wages paid under the Option Year One CBA.” Id. at 13-14.

A crucial lesson of this case is that contractors submitting proposals to perform unionized contracts in a reprocurement must be mindful of their obligation to bear the cost of a predecessor CBA’s wages and fringe benefits in the base year and its obligation to warrant that it has not escalated any costs in its option year proposals for which adjustment will be sought under the SCA Price Adjustment Clause. Of course, a prospective contractor may underbid the rates premised on a bet that it will be able to extract wage concessions from its unionized employees. However, if its bet doesn’t pay off, it is stuck with the consequences of its improvident price proposal because the underlying basis for the proposed price simply doesn’t matter for price adjustment purposes. As confirmed by the Board, an SCA Price Adjustment is limited to the actual increase between the costs paid in the expiring period of performance and the costs that will be incurred in the new period of performance.