Changes or Price Adjustment

Government contractors are subject to several labor and employment laws in their contracts. Construction contractors are subject to the Davis – Bacon Act (“DBA”)¹ and service contractors are subject to the Service Contract Act (“SCA”).² The DBA requires contractors to pay mechanics and laborers at the work site the “prevailing wage rate” on federal construction projects. This prevailing wage rate is periodically set by the Department of Labor (“DOL”) in the Wage Determination (“WD”) for a given locality and includes base pay plus fringe benefits. This WD must be included in each solicitation covered by the DBA. If the Contracting Officer (“CO”) fails to incorporate a WD in a contract, the CO must modify the contract to incorporate the required WD and equitably adjust the price. What is a contractor to do when a WD wage rate adjustment is incorporated into a contract after award?

The Civilian Board of Contract Appeals (“CBCA”) or the “Board”) released their opinion in the appeal of W. G. Yates and Sons Construction Company (“Yates”) v. General Services Administration (“GSA”), CBCA 1495, on December 21, 2010.

Yates was awarded a firm fixed price contract on March 31, 2005 for $54,045,000 to construct a new field office building for the FBI in Houston, TX. Yates awarded a fixed price subcontract to an electrical contractor KENMOR Electrical Company (“KENMOR”). The contract included the Changes clause.

A new modification was incorporated into the contract on August 17, 2005 for the construction phase but a revised WD for the electricians dated July 1, 2005 was not incorporated into the modification. The revised WD was incorporated into the contract on June 12, 2006. The CO requested a cost impact from Yates, who proposed $1,420,596 of which $1,323,959 was for KENMOR. The proposal included indirect costs and profit. However, this claim was denied because the CO stated Yates was not entitled to overhead and profit under the Davis – Bacon Act Price Adjustment clause.³ The KENMOR proposal was audited by the GSA IG who disallowed a total of $312,148 pursuant to the Price Adjustment clause and the FFP type of contract. Yates resubmitted its claim for $1,064,891, including overhead and profit, which was partially paid leaving a balance of $550,059.02 which the CO denied paying.

Which method of price adjustment is applicable? Yates stated that under the Changes clause it is entitled to recover all increased costs incurred on all labor hours worked including overhead and profit, whereas, the Government claimed it was liable for only direct costs increased based on hours bid or proposed excluding overhead and profit.

The CO is required by regulation⁴ to incorporate the wage determination by modification into the contract retroactive to the date of award and equitably adjust the contract price for increased or decreased cost of performance.

The CBCA found that the revised WD, which increased the hourly electrician rate from $18.51 to $29.98, caused KENMOR to pay the higher wages and fringe benefits for all hours worked. The formula for an equitable adjustment is the difference between the reasonable cost of performance without the change and the reasonable cost of performance with the change.⁵ The equitable adjustment must safeguard both parties so the equitable adjustment must be closely related to and contingent upon the altered position which the contractor finds itself.⁶ The Board noted that where a contractor has established its actual costs and credited them to a particular modification of the contract, it is error to disallow, increase, or otherwise adjust those costs in the absence of specific evidence.⁷

There was, however, no price adjustment clause⁸ in the contract specific to the Davis-Bacon Act as the clause applies to the exercise of an option to extend the term of the contract. The clause contemplates the prevailing wage rate will be incorporated into the construction contract at the time it is awarded and will establish minimum wage for the duration of performance. The construction phase was a new award and not merely an option.

The appropriate basis for the price adjustment is the Changes clause under which cost elements are added to the actual cost to make the contractor whole. Moreover, direct costs must bear the pro rata share of indirect costs.⁹ Such indirect costs properly claimed must be part of any equitable adjustment. The Board noted an increase in mandated minimum hourly wages and fringe benefit costs necessarily makes provision for increased overhead and G&A costs and profit, unless these factors are expressly excluded by some pertinent contract provision.¹⁰ Here, there is no such clause. The CBCA awarded $550,059.12 to Yates.

The moral of the story is determine whether a price adjustment clause is in your contract if it is subject to DBA or SCA. If so, be certain any price adjustment is implemented upon exercise of an option or new contract. If not, then any price adjustment must be implemented under the Changes clause.

Tom Petruska
Contracts Unlimited, Incorporated

The foregoing discussion is not intended to be legal advice or a legal opinion. Please see your attorney for legal support.

Footnotes:

40 U.S.C. 3141-3144; FAR 22.4
41 U.S.C. 351-358; FAR 22.10
FAR 52.222.32
FAR 22.404(6)
Sauer Inc. v. Danzig, 224 F.3d 1340-1348 (Fed. Cir. 2000)
Nager Electric Co. v. United States, 442 F.2d 936,946 (CT. CL. 1971)
Teledyne McCormick-Selph v. United States, 588 F.2d 808 (CT.CL. 1978)
FAR 52.222-32
FAR 31.203 (c), (d)
Bell South Communications Systems, Inc., ASBCA 45955, 1994

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