ASBCA Denies a Service Contractor's Appeal for Additional Labor Costs

The U.S. Armed Services Board of Contract Appeals' recent decision in HD Inc., ASBCA 63794, demonstrates the importance of following the terms of a solicitation when submitting a proposal on federal projects, particularly as it pertains to applicable wage rates on service contracts.

What Is the Dispute About?

The Solicitation

The U.S. Air Force (the "Government") entered into a contract with HD Inc. ("HDI") for grounds maintenance services at Moody Air Force Base in Georgia (the "Contract"). The Contract required that HDI provide personnel, equipment, tools, and supervision necessary to perform landscaping services on the base. The Contract contained a one-year base period following award and four option years thereafter.

The solicitation issued by the Government for the landscape services contained a U.S. Department of Labor ("DOL") wage determination that reflected the locally prevailing wages and benefits for the Contract. The solicitation also included a Collective Bargaining Agreement ("CBA") executed between the contractor preceding HDI and its service employees. The previously negotiated CBA did not include wage rates for every employee position. However, for the positions covered by the CBA, the agreement set higher wages than those included in the DOL's wage determination. For those positions not covered by the CBA, the DOL's wage determination applied. Notably, the solicitation did not require offerors to specify the labor rates used in proposal calculations. As such, HDI did not specify which rates the contractor used in crafting its proposal.  

The solicitation also noted that the Contract was subject to the CBA during the base year of the Contract. Thereafter, the awardee could negotiate a new CBA for each of the option years. If negotiations resulted in increased wages for employees, the awardee could later submit a Request for Equitable Adjustment ("REA") to recover any wage increase under the new CBAs.

The solicitation further incorporated by reference FAR 52.222-41 (Service Contract Labor Standards) and FAR 52.222-43 (Fair Labor Standards Act and Service Contract Labor Standards—Price Adjustment—Multiple Year and Option Contracts).

HDI's Proposal and Contract Option Years

As part of its proposal, HDI used the CBA for its base year labor calculations. However, HDI used the DOL wage labor rates for its option years, despite the solicitation's reference to the CBA. The Government awarded the Contract to HDI. As part of the Contract, the Government included the CBA as an attachment and incorporated by reference FAR 52.222-41 and FAR 52.222-43.

Following the base year, the Government elected to exercise the first and second option years of the Contract. For both years, HDI negotiated a new CBA with wage increases for its covered employees. HDI's labor costs increased for both option years. HDI subsequently submitted REAs to the Government to recover the increased labor costs. In both instances, the Government provided partial reimbursement for the costs sought by HDI.

Particular to HDI's second option year, HDI submitted an REA for $174,874 in costs, asserting that the labor costs were higher than those in its proposal, as well as the wages in the CBA negotiated for its first option year.

The Government again offered partial reimbursement of HDI's costs. HDI rejected the offer and submitted a certified claim to the Government. The Government denied the claim. HDI appealed the denial to the ASBCA. In response, the Government filed a motion for summary judgment on HDI's appeal.

ASBCA Decision

On appeal, the ASBCA found for the Government. The parties agreed that HDI was entitled to reimbursement for its increased labor costs between option-year one and option-year two. Thus, the dispute revolved around whether HDI appropriately calculated its labor costs as part of its claim. HDI asserted that it was entitled to the difference between the labor rates included in the second-year CBA as negotiated between HDI and its employees and the option-year labor amount calculated by HDI as part of its proposal, based on the DOL local wage rates. However, the Board rejected HDI's argument.

The Board noted that the solicitation and the underlying Contract incorporated the Service Contract Act (the "Act"). Pursuant to the Act, a wage rate may be based on the DOL's determination of locally prevailing wages or the wages specified within a CBA. However, once a CBA is executed, the CBA's terms take precedence over the DOL's prevailing wage determination, even if the wages contained in the CBA exceed the local wage rate. Therefore, a service contractor may not pay its employees covered by a CBA any less than the rates included in the agreement. Moreover, under the Act, when a predecessor contractor executes a CBA, a successive contractor performing on a services contract must pay employees an amount equal to the wages established in the predecessor's CBA.

The Board determined that once HDI was awarded the base year of the Contract, HDI became a successor contractor for purposes of the Act. As a result, it was subject to its predecessor's bargaining agreement. While HDI could negotiate new wage rates as part of subsequent CBAs for the respective option years, the rates included in the CBAs could not fall below those established by the predecessor's CBA.

The Board further determined that in conjunction with the Act, the solicitation and Contract incorporated FAR 52.222-43 (a price adjustment clause) as well. Under the clause, HDI was entitled to an increase in contract price for actual changes in wages resulting from an increased wage determination applied to the contract by operation of law, such as an increase in labor costs under the Service Contract Act. Because the wage determination was set by the predecessor contractor's CBA, HDI was required to base its option-year labor costs on those rates. However, HDI failed to do as much when the contractor used the DOL's local wage rate determination to craft the option-year costs for its proposal.

As a result, HDI was not entitled to a wage increase that accounted for the difference between HDI's second option year and those costs included in its proposal amount. Rather, HDI's recovery was limited to the difference between the wages negotiated as part of HDI's CBA for option-year two and those rates included in the CBA for option-year one.

The Board ultimately returned the matter to the parties to determine an appropriate reimbursement rate, undoubtedly lower than the amount sought by HDI.

Takeaway

It is imperative that contractors operating as a successor contractor on a services contract pay close attention to the terms of the solicitation and calculate responsive proposals accordingly. Like the contractor in HD Inc., failure on the part of the contractor to base its proposal on the appropriate labor rate may limit the reimbursement of increased labor costs incurred during performance.