Price Adjustment:
Under the Service Contract Act, Changing Prices in Government Contracts

In recent years, the majority of Government contracts have been issued for services. A large number of those contracts contain the prescription that the contract is subject to the Service Contract Act (“SCA”).1

Under this Act, the contractor is required, to pay service employees a minimum wage and specified fringe benefits. The hourly rate is set forth in a document called a Wage Determination that is issued by the Department of Labor. The contractor may pay a wage higher than the minimum rate in the Wage Determination, but not less than the prevailing rate.

Generally, contracts with the Government for which the principal purpose is to furnish services with a value in excess of $2,500 and that require the use of five (5) or more service employees will contain a contract clause imposing the SCA on the prime contractor.2 In addition, the service contract will contain the clause that authorizes a price adjustment to the contract by reason of an actual increase or decrease in applicable wages and fringe benefits.3 The wage adjustment is activated when the contractor receives a new Wage Determination from the Department of Labor to replace the original Wage Determination.

The contractor is required to notify the Contracting Office within thirty (30) days after receiving the new Wage Determination of any increased cost or decrease in cost, and to submit a claim for the change.

The SCA contract clause is applicable to the prime contractors and all subcontractors performing a service contract whether they have a Collective Bargaining Agreement (“CBA”) or not.

The SCA is designed to protect workers' wages and fringe benefits, and to prevent contractors from underbidding each other by
unscrupulously cutting workers' wages and fringe benefits. The SCA works well as a “floor” to prevent the erosion of wages and benefits.

The Federal Acquisition Regulations (“FAR”) require the Government to include the SCA Price Adjustment4 clause in service contracts that contain the SCA clause. The purpose of the Price Adjustment clause is to provide a method for contractors to recover cost increases in hourly labor rates and fringe benefits imposed upon them by the Department of Labor, Wage and Hour Division, in future Wage Determinations.

This Price Adjustment Clause was the subject of discussion by the United States Court of Appeals for the Federal Circuit (the “Court”) in Lear Siegler Services, Inc. vs. Donald H. Rumsfeld, Secretary of Defense, No 06-1080 decided on July 28, 2006. Lear Siegler Service, Inc. (“LSI”) was awarded a Firm Fixed Price (“FFP”) contract to perform aircraft maintenance at Sheppard Air Force Base, Texas. The contract contained the SCA clause with a wage/benefit determination and the Price Adjustment Clause,“which required the Government to pay LSI for increases in applicable fringe benefits made to comply with the Wage Determination.”

LSI had a collective bargaining agreement requiring the company to provide its employees with a defined-benefit health plan. LSI had sought a price adjustment for increased costs to fund the plan during an option year. The Air Force denied the request. LSI appealed to the Armed Service Board of Contract Appeals (“ASBCA”), who decided in favor of the Air Force, and LSI appealed again. The Court reversed the ASBCA.

LSI had succeeded Lockheed Martin as the prime contractor and, under the “successor-contractor” rule, inherited the CBA from the predecessor contractor. Of course, it succeeded itself-the “regulations make clear that the term 'wage determination' includes a CBA-defined benefit level.”5

The Court rejected the Government's argument that the Price Adjustment Clause is activated by an increase in benefits rather than by increased costs of providing those benefits.

The Court stated that “the clause6 does not address increases in the nature of the contract's requirements, but rather the effect on the contractor, which logically can only refer to changes in cost.” Next, the Court indicated that there was an “equivalency of fringe benefits to be measured not in terms of value to the employee, but cost to the employer.” The regulations refer to the equivalency of the fringe benefits and cash benefits, which means they are equal in terms of cost to the contractor.7

In a preceding case,8 the Court's decision held “that the benefits were due entirely to the Wage Determination applicable at the beginning of the renewal option period and were required to be paid in accordance with the Price Adjustment Clause.”

In both cases, the employer's costs of compliance changed. In the LSI case, “a Wage Determination required LSI to pay whatever was necessary for it to meet its obligations to its employees, in light of changes in the costs of providing them with an agreed upon level of health care benefit.”

The Court held that “the Price Adjustment Clause is triggered by changes in an employer's cost of compliance with the terms of a Wage Determination.” The Court further held that the fact “that there was no change in the level of benefit provided by the defined benefit plan is simply irrelevant.”

The moral of the story here is that, if you have a service contract with the Government you, as an employer, must pay your service employees the wages and fringe benefits mandated in the Wage Determinations. If your cost for compliance increases, then you are entitled to recover those costs from the Government. Do not be deterred if the Contracting Officer objects to paying the increased costs-you now have firm legal grounds from which to obtain those costs. Of course, you must also pass along to the Government any cost decreases.

Tom Petruska, Owner
Contracts Unlimited, Incorporated

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Footnotes:

1. 41 U.S.C. 351-358

2. FAR 52.22-41

3. FAR 52.22-43

4. id

5. 4 CFR 4.50; 48CFR52.22-43 (a)

6. FAR 52.222-43(d)

7. 29 CFR 4.177(a)(3)

8. United States vs. Service Ventures, Inc 899 F.2d1 (FED.CIR1990)

The foregoing is not legal advice nor is it a legal opinion. Please contact your attorney for legal advice.

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