The Commercial Exemption to SCA Coverage -- It's Often a Mirage.
No government ever voluntarily reduces itself in size. Government programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we'll ever see on this earth!
In October of 1994, Congress passed the Federal Acquisition Streamlining Act (“FASA”), which was among the most significant pieces of legislation affecting Federal procurement. A principal thrust of FASA was to reform Government contracting by encouraging the use of commercial practices in the acquisition of commercial items. FASA exempted commercial items from most procurement-related laws and regulations, and, while leaving some discretion to the regulators, or mandated only four clauses. Because SCA was not among them, FASA gave rise to the implication that SCA might not apply to the acquisition of commercial services. Based on this implied authority, the FAR council promulgated an expansive commercial exemption for subcontracts. That regulation listed the mandatory flow down laws that were required to be incorporated into a commercial subcontract, and the SCA was not among them.
However, the U.S. Department of Labor (“DOL”) objected strenuously. According to DOL, because SCA unambiguously vests the authority to issue exemptions in the Secretary of Labor and, moreover, FASA did not explicitly eliminate SCA from applying to commercial item purchases, the SCA still applies to DOL commercial subcontracts. Ultimately DOL prevailed. Intermittently over the ensuing six years, DOL haggled with the Office of Federal Procurement Policy and the FAR Council over the scope of an SCA exemption, if any, for commercial item acquisition.
Finally, on July 26, 2000, both DOL and the FAR Council issued interim regulations, 65 Fed. Reg. 45,903 and 45,943, exempting a defined group of activities from SCA, but imposing certain conditions. Final regulations were issued on January 18, 2001, 66 Fed. Reg. 5,328, and became effective on March 19, 2001. While the final regulations departed somewhat from the interim regulations, they continued the approach of narrowly defining potentially exempt contracts and imposing certain conditions on the reach of such exemptions.
In addition to the preexisting exemptions for certain services in connection with ADPE, office equipment, and scientific equipment, a limited group of new, potentially exempt services was enumerated in 29 C.F.R. 4.123(e)(2)(i):
Prime contracts or subcontracts principally for the following services where the services under the contract or subcontract meet all of the criteria set forth in paragraph (e)(2)(ii) of this section and are not excluded by paragraph (e)(2)(iii):
(A) Automobile or other vehicle (e.g., aircraft) maintenance services (other than contracts to operate a Government motor pool or similar facility);
(B) Financial services involving the issuance and servicing of cards (including credit cards, debit cards, purchase cards, smart cards, and similar card services);
(C) Contracts with hotels/motels for conferences, including lodging and/or meals which are part of the contract for the conference (which shall not include ongoing contracts for lodging on an as needed or continuing basis);
(D) Maintenance, calibration, repair and/or installation (where the installation is not subject to the Davis-Bacon Act, as provided in §4.116(c)(2)) services for all types of equipment where the services are obtained from the manufacturer or supplier of the equipment under a contract awarded on a sole source basis;
(E) Transportation by common carrier of persons by air, motor vehicle, rail, or marine vessel on regularly scheduled routes or via standard commercial services (not including charter services);
(F) Real estate services, including real property appraisal services, related to housing federal agencies or disposing of real property owned by the Federal Government; and
(G) Relocation services, including services of real estate brokers and appraisers, to assist federal employees or military personnel in buying and selling homes (which shall not include actual moving or storage of household goods and related services).
See also FAR 22.1003-4(d).
Although similar in some respects to the conditions on previously exempt contracts, the commercial item exemption imposes five significant conditions. First, the commercial services must be sold regularly to non-Government customers. Second, the prime contractor subcontract must be awarded either sole source or pursuant to a competition in which price is not the dominant criterion for award. Third, the contractor must furnish the services at prices based on established catalog or market prices. Fourth, each service employee “will spend only a small portion of his or her time” on the Government contract (defined as less than 20 percent of annualized hours worked). And fifth, the contractor uses the same compensation plan (wages and fringe benefits) for both Government and commercial work.
The contractor must certify to the contracting officer that it meets these criteria for exemption. If a prime contractor seeks to award an exempt subcontract, it must certify that the subcontractor has met these conditions.
On January 15, 2009, the FAR was finally amended to reflect DOL’s 2001 rules. The FAR rule updated some solicitation representations, but did not substantively change existing requirements. 74 Fed. Reg. 2,724.
So the real story is that few prime and subcontracts are really eligible for the commercial exemption to the SCA coverage in the rule now promulgated. The FAR council had promulgated an expansive commercial exemption for subcontracts in the 1990’s. But DOL objected strenuously to the FAR provisions. There were lots of intergovernmental meetings. GSA relented. And new DOL provisions were issued purporting to make it clear there was no blanket SCA commercial exemption. See 29 CFR 4.123(e)(2). There is a narrow exemption with several prongs for subcontracts for a very limited set of services. Most service contracts are outside of the specified group of eligible contracts. And even if eligible, most contractors cannot satisfy the exemption because it limits the workers to spending no more than 20% of their time on the contract so you can't have a workforce dedicated to the SCA-covered government contract. The workers must spend 80% of their time working on the non-SCA covered commercial contacts.