By RAM on Thursday, July 11, 2002
- 06:06 pm:
I need help on settling a topic of debate regarding the
allowance of an escalation applied to direct labor which is
subject to the SCA. The example: solicitation for fixed-price
contract with base and option years - includes FAR 52.222-43.
Proposals include direct labor that is subject to SCA. Offerors
apply an escalation rate (straight %) to this direct labor cost
in the out-years.
Question: Is this a deficiency that must be corrected through
discussions?
My opinion: This is a deficiency that will require the need for
discussions.
My Logic: (which can be unique )Based on my reading of the FAR
clause, an offeror that does this is building in a contingency
that the clause already provides a remedy for. I also relied on
some guidance from a cost&pricing guidebook. To be fair, the
guidebook, while clearly stating building in the contingency is
not permissible, does give the impression that if higher rates
are proposed for out-years and the successive wage determination
rates are lower, then a modification can be done to reduce the
contract cost by the appropriate amount. My thought is that if
it is identified during the evaluation phase - and it will have
to be dealt with either sooner or later - why not sooner.
The opposing argument has two questions: 1) Why shouldn't the
offeror be allowed to escalate labor rates subject to SCA by a
reasonable escalation factor? And, 2)If it really isn't allowed,
and evaluation doesn't turn up any other deficiencies, can award
without discussions be made by identifying this problem as
weakness that will be resolved by modification to the contract
when the option is exercised (if necessary)?
Opposing Logic: We get pay raises every year. Why shouldn't the
offeror's personnel? If offeror's rates (or escalation factor)
are determined reasonable and end result is that out-year rates
are higher than successive year(s) wage determination rates that
should be okay. Contractor should not have to eat the difference
out of his profit by only being allowed the amount of the
successive wage rate.
By Vern Edwards on Thursday,
July 11, 2002 - 08:55 pm:
RAM:
There is some GAO case law on the SCA-FLSA price adjustment
clause. I just scanned it; I didn't read it closely; but it does
not appear to answer your question.
I don't think that the offeror's escalation of option year
prices constitutes a deficiency, unless it violates some
instruction in the RFP. There is no standard, SCA-related FAR
solicitation provision that prohibits offerors from escalating
option year prices. The SCA specifies only minimum wages and
fringes; it does not limit the contractor to the wages and
fringes in the wage determination. There is no rule that says
the offeror cannot simply decide to charge you more in the
option years. The only effect of the offeror's escalated pricing
will be that if a new wage determination increases wages and
fringes, but does not increase them to levels higher than those
proposed, then the contractor will not be entitled to a price
adjustment due to higher SCA wages and fringes. I think that's
it.
I wonder whether the offeror escalated the option year prices by
mistake, not realizing that the SCA-FLSA price adjustment clause
already provides for an increase due to a new wage
determination. If you have some reason to think that the offeror
has made a mistake, then you must put the offeror on notice.
By joel hoffman on Thursday,
July 11, 2002 - 11:32 pm:
From your description of the scenario, it appears that the
Offeror intends to pay the SCA minimums for the base period,
then incorporate an escalation factor for out-year prices. I
recommend discussing this with the offeror. Find out if its
intent is to continue paying the SCA minimums in the out-years.
If so, I'd point out that the contract provides a mechanism to
protect the contractor from escalting SCA rates in the future.
I'd also not count on a credit, if the escalated out-year prices
outstrip increases in the SCA wage determinations. Credits are
voluntary, on the part of the Contractor, at least for
Davis-Bacon adjustments, and the FAR states that SCA adjustments
for option years are handled similarly. The Contractor could
pocket the difference.
If the Contractor intends to pay SCA minimums in the out-years,
I believe that I'd indicate to the Offeror that the Government
doesn't agree with its pricing scheme for the out-years, because
it only benefits the Contractor.
Again - the above is based on the impression that the Offeror
intends to pay its employees the minimum SCA wage rates. If that
isn't the case, the Offeror's pricing approach may be valid.
happy sails! joel
By RAM on Friday, July 12, 2002
- 09:30 am:
Joel - Vern - thanks for the advice. I guess the scenario in the
guidebook threw me off - maybe I will throw away the guidebook.
By Vern Edwards on Friday, July
12, 2002 - 09:58 am:
Ram:
Don't throw it way! What's the name of the guidebook?
By RAM on Friday, July 12, 2002
- 03:40 pm:
Vern:
It is an old FORSCOM guidebook.
Exact title is FORSCOM Handbook for Cost and Price Analysis -
FY00 - Forces Command DCS for Logistics. Mind you, I am no
longer at a FORSCOM installation but had it handy and thought it
would still be useful.
By Vern Edwards on Friday, July
12, 2002 - 03:50 pm:
RAM:
I think you're talking about FORSCOM PAM 715-10, Nov 91. Right?
Rescinded in February 2000.
By RAM on Friday, July 12, 2002
- 04:57 pm:
Vern:
I don't believe that is correct. If you go to the following web
address you can access this handbook: http://www.forscom.army.mil/contract/policy.htm
The guidance that got me going on this issue starts about the
middle of page 59 and runs through page 60.
By Vern Edwards on Friday, July
12, 2002 - 05:23 pm:
RAM:
Thanks.
I looked at the FORSCOM handbook and it is pretty unequivocal:
"Offerors must propose Non-Exempt labor based on the wage
determinations in the solicitation. That is, the offerors must
propose at least the minimum wage; they may initially propose
wages higher than the stated minimums. Under fixed price
contracts, offerors cannot propose higher Non-Exempt wages in
the out years. FAR considers this an unwarranted contingency
based on the fact that the contract provides a mechanism for
wage adjustments in the out years. Under cost-reimbursement
contracts, contractors are not restricted from proposing higher
out year wages."
Italics added.
I could not find any support in FAR Subpart 22.10 for the idea
that offerors cannot propose higher wages and fringes in the
option years. The closest thing that I could find that could be
said to support the statement is the second paragraph in the
SCA-FLSA price adjustment clause, FAR § 52.222-43, which says:
"The Contractor warrants that the prices in this contract do not
include any allowance for any contingency to cover increased
costs for which adjustment is provided under this clause."
Now let's suppose that the wage determination for the first year
of performance specifies combined wages and fringes of $15.00
per hour. The FORSCOM handbook seems to say that an offeror
could propose $17.00 for the first year (higher than the wage
determination, in order to establish and maintain a top-notch
workforce), but must propose no more than $15.00 for the options
years. That doesn't make sense to me. What if the wage
determination for the first option raises the rate from $15.00
to $15.75, a five percent increase, but lower than the $17.00
paid during the first year? Does the contractor have to make a
choice between cutting the workers' wages and fringes or taking
a reduction in profit or even a loss?
What am I missing? I must be missing something.
By Anonymous on Friday, July
12, 2002 - 05:32 pm:
Vern & RAM:
I'm a contractor who just submitted an SCA bid for a Navy
contract that had FAR 52.222-43. This isn't my first SCA bid,
and I have seen evaluators handle it differently, much to my
consternation. I suspect it doesn't help much that so many
contractors don't understand SCA, especially in T&M contracts.
Here's my take:
No escalation following FAR 52.222-43 means Direct Labor (DL)
and the stipulated Health & Welfare (H&W) cannot be escalated at
all. BUT, DL & H&W do not exist alone in the pricing structure.
Overhead still escalates. Fringe not covered by the H&W
allowance escalates. G&A escalates. So, I don't touch DL or H&W,
but all else--especially in a multi-year risky T&M bid-- must be
escalated.
The reason is simple. As a contractor, the only adjustments I
can expect to see when a new DoL Wage Determination is issued is
a penny-for-penny increase in the DL and a penny-for-penny
increase for H&W. Therefore, I MUST be allowed to escalate other
expenses not covered by DL and H&W. As an evaluator, you may
very well see what appears to be escalation because the burdened
labor goes up from year-to-year, but it may be due to the non-DL
and non-H&W factors.
By joel hoffman on Friday, July
12, 2002 - 05:58 pm:
Anon, that makes perfect sense and is something that can be
reasonably clarified during discussions.
Vern, I think that the FORSCOM guidance is simply not well
verbalized. It might be referring to the FAR 52.222-43
restriction on not escalating wages to cover adjustments,
otherwise provided for in the SCA mechanism. happy sails! joel
By Vern Edwards on Friday, July
12, 2002 - 08:22 pm:
Anonymous of 5:32pm:
You say: "No escalation following FAR 52.222-43 means Direct
Labor (DL) and the stipulated Health & Welfare (H&W) cannot be
escalated at all."
Are you saying that an offeror is not allowed to propose higher
prices for option years based on higher wages and fringes than
the base year wage determination? If so, since SCA-FLSA price
adjustments are limited to the increases caused by the the new
wage determination, wouldn't that effectively make the option
year SCA wages and fringes maximums instead of minimums?
Joel:
Yeah, I guess it could mean that. You know, I've read that
clause maybe a hundred times and never really thought clearly
about what paragraph (b) meant. Now I'm wondering about the
practical effect of that "warrants" language. It probably
doesn't become an issue very often because most offerors don't
propose wages and fringes that are higher than the minimums
specified in the wage determination. The practical effect of the
SCA is that the Department of Labor specifies the wages that
will be paid, not just the minimum that must be paid.
By Anon2U on Sunday, July 14,
2002 - 06:52 pm:
The SCA sometimes hurts labor rather than helping it as
intended. The wages are too low in many cases and don't take
into account spot shortages of certain career fields such as
security personnel after 9/11.
We have contracts where the competition was so fierce that
anyone proposing wages higher than the SCA minimums would have
been eliminated due to high price. But once the contract is
awarded, the contractor has a hard time keeping the good
personnel who jump to higher paying commercial contracts. The
SCA wages are a middle average - a good wage for mediocre
workers, bad wage for good workers.
This puts the contracting officer and source selection authority
into a bad position too. In a best value you can select a higher
price but how are you to know at time of award if the proposed
SCA wage will be detrimental. If you select based on higher
wages, a protest is almost sure to follow. After all, how can
proposing Department of Labor wage rates make the proposal a bad
value.
Union contracts complicate things even more because wages are
allowed to drop from Union pay the first year to wage
determination the second. It is not likely because a new union
contract will probably be negotiated during the first year,
however, they could bid that way, and did on one of my
contracts. They ended up $15M cheaper because of it. We solved
that problem with a GAO suggestion that we follow Department of
Justice's practice of dictating the current union wages for all
the out years. While this does not allow for a company to "buy
in" on wages, it does eliminate the labor turmoil and high
performance risk of wages cut by 33% after the first year.
By jimso on Thursday, October
10, 2002 - 11:56 am:
Move on down to par (c) which addresses G&A, overhead and
profit. When taken in conjunction with the "warrant" in (b), I
believe that any escalation of outyear rates is a violation of
this clause and could be used to seek reductions from the
contractor if rates have been escalated in the out years. This
is an example of a clause that is a pricing clause as opposed to
an accounting/allocation clause. The logic was that a
contractors costs do not increase just because of a labor rate
increase and therefore, the contractor is not entitled to
additional G&A, overhead and profit, only the incremental costs
of the labor and fringe. The clause ignores the allocation of
burdens based on dollars as required by CAS 402 and therefore
penalizes the contractor in labor rates for outyears. If the
contract is the only one the company has, the pricing rule is
probably true. If the contractor has several contracts of mixed
types, escalation of rates will eventually erode his profit on
the contract to nothing when adjustments are made under
52.222-43.
Several years ago I attempted to bring this to the attention of
the Service Contracts Association but their then legislative
analyst was not interested in exploring a clarification or
change to the clause.
I think there is need of a FAR case to clarify this. Also one to
clarify the "fee" limitation on A&E contracts.
By joel hoffman on Friday,
October 11, 2002 - 10:32 pm:
jimso, I assume that you are referring to the ambiguity in the
use of the term "fee", on A-E contracts. Yes, the term "fee" can
be read as the entire charge for the design or it could be
interpreted as the markup on costs - profit?, G&A and profit? A
"design fee" is different than a "fee" or "profit allowance".
There are also varying interpretations of what is excluded from
design costs - surveys, reports, drafting, etc.! happy sails!
joel
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