Vern,

I'd certainly agree on the SCA issue. Good management tracks and anticipates wage trends. In fact, for grossly underestimating out-year cost based on known trends, an award fee reduction might be in order under a management criterion in some contracts! Quality of cost estimates, realistic projections and "no surprises" should be something of award fee interest.

Ramon

By Vern Edwards on Monday, July 24, 2000 - 08:17 pm:

Ramon:

I agree. I think that J. Inman and I believe that it would be a poor business decision to assent to an increase in a contractor's fee merely because the Dept. of Labor has increased the SCA wage rates, because the contractor would not have done anything that would warrant such an increase. The increase in fee would not would not reward the contractor for additional effort.

However, the external mandates that you mention might require additional contractor effort and thus might justify an increase in fee, even though an agency program manager might not see the benefit of it.

I don't think that compliance with the SCA is one of those mandates. Offerors should anticipate SCA wage rate increases and price their option year proposals accordingly.

By Ramon Jackson on Monday, July 24, 2000 - 05:51 pm:

Vern,

You raise an interesting point here that may fall more into the general category of reasonable behavior than rules and regulations.

Prohibition of fee based on percentage of cost is a reasonable effort to prevent a contractor from increasing profit by inefficient or intentional additions to cost. Where the cost is driven by an external mandate it would seem reasonable in many, though probably not all, cases to adjust fee.

For example, considering that fee in part reflects reward for effective mitigation of risks, it would seem a contractor meeting a mandate issued during the contract from external forces to reduce pollution throuch actions that increase cost might be well deserving increased fee for doing so well and cost effectively. All else aside, reaction to a legitimate government directive -- at any level -- that changes cost could most fairly be treated as a government directed change order even if the agency, Department, or even government holding the contract did not directly issue the order provoking the change. Knee jerk "not my change" seems a good way to damage long term effectiveness.

It would seem that a contractor presenting evidence of a changed legal requirement that changes cost should have a change proposal fairly and reasonably considered by the contracting agency and a fee adjustment based on the normal process of such changes.

Thoughts?

By Vern Edwards on Monday, July 24, 2000 - 03:15 pm:

J. Inman:

While I, too, would not willingly increase a contractor's fee because of an increase in Service Contract Act wage rates, I do not agree that doing so would create a cost-plus-percentage-of-cost (CPPC) contract.

A CPPC contract is one that includes a contract term that makes some element of the contractor's compensation a function of the contractor's cost experience, so that as its costs increase its compensation increases accordingly. A key attribute of of a CPPC contract is the fact that the cost impact on the government is not known at the time of contract award.

In Julie's case, she might be making an improvident business decision by agreeing to increase the contractor's fee because of an increase in the Service Contract Act wage rates, but in my opinion she would not be violating the prohibition against CPPC contracts, because (1) the contract itself does not make the contractor's fee a function of its costs and (2) the parties would know the size of the increase in fee before they sign the contract modification. Moreover, an increase in fee under those circumstances would not motivate the contractor to be inefficient, because it would not entitle the contractor to further increases in fee due to further increases in cost.

By J. Inman on Monday, July 24, 2000 - 11:11 am:

No, you should not increase the fee because of an increased cost element -- if you did, you would create a cost-plus-percentage-of-cost contract, which is specifically forbidden. The contractor and Government agreed that $xxx was the estimated cost to do a job, and agreed that $yyy was an appropriate fee for the job. If circumstances prove that the estimated cost cannot be met (either overrun or underrun), the fee is still payable at the same agreed-upon amount. If the contractor anticipated an underrun, would it ask for a reduction in the award fee pool? No. Similarly, it cannot ask for an increase in the award fee pool because of an overrun.

Note: This philosophy applies where there is no change in the work statement -- a government-directed change in work, up or down, may be a valid reason to adjust the fee. But where the only matter at hand is an increased cost element, no change in fee is warranted.

By Vern Edwards on Friday, July 14, 2000 - 02:34 pm:

FAR Subpart does not prescribe a SCA/FLSA price adjustment clause for use in cost-reimbursement contracts. (But see my parenthetical comment at the end of this post.) This is probably because the Allowable Cost and Payment clause covers the contractor for SCA/FLSA increases. However, the parties should adjust the estimated cost of the contract to reflect SCA/FLSA increases in order to avoid the appearance that the increase is a cost overrun.

When awarding a cost-reimbursement contract you should include a special contract provision to the effect that the parties will adjust the estimated cost to reflect SCA/FLSA increases, and that the contractor should not include any amount in an option year estimated cost to cover such increases, but that there will be no adjustment to fee. It will be up to the contractor to decide whether or not to propose higher fees in the option years in anticipation of the higher estimated cost.

You could tailor the clause at FAR 52.222-43 for that purpose by changing "price" to "estimated cost."

(The clause matrix in FAR Subpart 52.3 in my Commerce Clearing House edition of the FAR indicates that the clause at FAR 52.222-43 is required-when-applicable in cost-reimbursement service contracts, so does the matrix at the Air Force FAR Site, but not the matrix at the GSA website. Go figure.)

By Julie A. Talley on Friday, July 14, 2000 - 11:51 am:

Is a contractor entitled to additional award fee under a CPAF Service Contract when wage determination rates are increased?

FAR 52.22-43 Fair Labor Standards Act and Service Contract Act-Price applies to fixed priced service contracts. Paragraph (e) of the clause states any adjusmnents will be limited to increases or decreases in wages and fringe benefits. It goes on to state the increases or decreases shall not otherwise include any amount for G&A costs, overhead, or profit. This is great if you have a fixed price service contract, but what about a CPAF conract?

If the increased labor rates increase the CPAF contracor's total estimated cost, and the total estimated cost is the base for the award fee, is he entitled to additional award fee? The contractor is paid G&A on his actual cost, therefore paying G&A on the increase is understood, but I'm not convinced he's entitled to additional award fee. Can anyone help?