Timing is Everything: the Right to Recover the Increased Costs of a New CBA
When it comes to the timing of negotiating and implementing a Collective Bargaining Agreement (“CBA”), the Service Contract Act (“SCA”) can be unforgiving. Contractors must give timely notice of a newly-minted CBA if they want a price adjustment for the increased costs of SCA compliance under the CBA. A recent decision from the Armed Services Board of Contract Appeals (“ASBCA”) reminds us that there is a vital prerequisite to this general rule: the Government has its own notice obligations. If it doesn’t fulfill its notice duties, then the tables turn and the contractor may recover its increased costs. The slip opinion of the case, Appeal of Alutiiq Commercial Enterprises, LLC, ASBCA No. 61503 (January 9, 2020), can be found here.
A quick review of the general rules regarding WDs and CBAs under the SCA will put this case in context. The SCA regulations require that the Department of Labor (“DOL”) issue a new wage determination (“WD”) prior to the exercise of a contract option on the annual anniversary date of a multi-year contract subject to annual appropriated funds, and every two years in the case of a multi-year contract not subject to annual appropriated funds. See 29 C.F.R. §§ 4.4, 4.145. When the new WD is incorporated into a contract before the commencement of an option-period’s performance, a fixed priced contractor is entitled to a price adjustment for increased wages and fringe benefits caused by the new WD. FAR §§ 52.222-43 and 52.222-44.
Under section 4(c) of the SCA, a new CBA negotiated by a prime or subcontractor can become a new SCA WD and displace the prevailing WD (or a preexisting CBA WD). As is the case with prevailing WDs, a contractor may be entitled to a price adjustment for a new WD that incorporates a new CBA. However, there are procedural traps that can force the contractor to carry the increased costs on its own until the next option or anniversary. The key to the price adjustment is to time the increase correctly and to give the Contracting Officer timely notice of the new CBA such that the CBA is incorporated into the contract and made effective as a new WD thereby rendering the new CBA “current” as of the beginning of the option period. If you make the deadline, then you may be entitled to a price adjustment for the new CBA if there are increased costs that are covered by whichever SCA price adjustment clause is applicable to the contract. See FAR §§ 52.222-43 or 52.222-44.
Timely notice of the CBA means that the new CBA must physically be in the hands of the contracting officer ideally before the award of a new contract or modification. There are at least three scenarios that could occur if the CBA is provided to the Contracting Officer after the award:
If the CBA is provided to the Contracting Officer after the award of the contract or modification, the CBA WILL NOT be effective if the award specifies that performance begins within 30 days of the award.
For an award of a contract or modification that specifies that performance begins more than 30 days after award, the CBA WILL be effective if it is received after award so long as the contracting agency receives it not less than 10 days before commencement of the work.
Regardless of the terms of the contract, if contract performance does not start within 30 days of the award of the contract or modification, a CBA received after the award will be effective so long as it is received not less than 10 days before the commencement of the work.
If you don’t satisfy one of these scenarios, then you’ll contractually bear the cost of wages and benefits you agreed to under the new CBA but without the benefit of a price adjustment—unless the Government botches its own notice obligations. This is because the CBA will not, by definition, be “current . . . at the beginning of [a] renewal option period” as required by the price adjustment clause. The question of what CBA was current was the crux of the Alutiiq case because, but for the Government’s own missteps, the Contractor’s delivery of the CBA to the Contracting Officer roughly five months after performance would have deprived the contractor of its much-needed price adjustment.
When it comes to the exercise of an option, the Government has three notice obligations—but only one of them is actually, legally relevant to the timing of a contractor’s deadlines for tendering a CBA to the Contracting Officer. However, the other notice obligations are relevant from a purely practical point of view because they can aid a contractor to avoid shooting itself in the foot.
Let’s start with the practical. If the Government elects to exercise an option to continue the Contract beyond the expiration of the ongoing performance period, FAR Clause 52.217-9 OPTION TO EXTEND THE TERM OF THE CONTRACT provides that “[t]he government may extend the term of [the] contract by written notice within 15 days prior to contract expiration; provided that the government gives the contractor a preliminary written notice of its intent to extend at least 60 days before the contract expires. . . .” If the Government misses the 60-day deadline, then the Government loses the right to exercise its option unilaterally. These notifications apply to all options to extend the term of a contract regardless of whether the SCA is in play. And, these notices need only be provided to the Contractor.
The SCA, however, imposes an additional, different notice duty owed to “interested parties under collective bargaining agreements.” FAR § 22.1010. Interested parties are the contractor (or subcontractor) and the collective bargaining agent of the covered service employees. Notice of the contracting action has to be provided in writing “at least 30 days in advance of the earliest applicable acquisition date or the applicable annual or biennial anniversary date” of the contract. If this notice is not provided, the Contractors’ notice deadlines evaporate. This is because FAR § 22.1012-2(c) provides that the contractor’s timely notification requirements will “apply only if timely notification required in 22.1010 has been given.”
It is this last point that Alutiiq so clearly embraces after one sifts through the convoluted facts associated with the perfect factual storm of an unusual 60-day base period, the failure to provide the 60-day notice of intent to exercise the first option, and the execution of a bilateral modification for the exercise of the first option period. When performance began, the contractor and the union representing the service employees working on the contract had not cemented the terms of a new CBA. Indeed, the workers went on strike when the option period commenced. A new deal wasn’t reached until five months later at which time the contractor sent the CBA. The contractor later sought a price adjustment to cover the increased costs of performance under the new CBA.
The Government reject the contractor’s request because notice of the CBA was, in its view, at least five months overdue under FAR § 22.1012-2. The Board, however, ruled that, despite the fact that the contractor plainly was aware of the impending option period and had, indeed, executed a bilateral modification, the Government never provided the notice of the impending option exercise to the union as required by section 22.1010. The failure to fulfill this procedural technicality proved fatal to the Government’s position. The Board’s decision boiled down to this:
Having failed to provide the 30-day notice required by FAR 22.1010(b) to [the contractor] and the collective bargaining agent . . . , the time-of-receipt limitations set forth in FAR 22.1012-2 do not apply. Accordingly, we conclude that [the contractor] is entitled to a price adjustment under FAR 52.222-43 for the increased labor costs associated with the new CBA executed after the option was exercised.
Alutiiq, slip op. at 19.
While this was a great win for the contractor, we hope that you never find yourself behind the eight ball that nearly crushed this contractor’s recovery of its substantially increased costs. If your contract’s service employees are either covered by a CBA or if they are newly unionized and have a collective bargaining agent, you should strive to cut a deal that you can forward to the Contracting Officer more than 30 days in advance of the next option period or relevant contract anniversary date. And, any increases in wages or benefits should be timed to coincide with those dates to maximize your price adjustment rights and limit your risks.
Admittedly, CBA negotiations often challenge the most diligent task oriented contractors. That’s among the reasons why these rules bedevil many contractors and rank among the largest sources of compliance questions that we receive. Thus, be proactive and master these requirements so that you can do everything possible to ensure your rights.