Back to Basics: SCA Price Adjustments on Cost Reimbursement and Hybrid Contracts

“It is like giving the Nobel prize in medicine to Dr. Pepper.” 

—David Spade

A client recently wrote to me and asked  whether FAR 52.222-43 applies to cost CLINS on a hybrid contract (i.e., with both fixed-price and cost reimbursement line items). The client notes that he has read a few of my blogs but didn’t find anything directly on point.

I replied that I have had it in mind for a few months to write a blog on cost reimbursement contracts, economic price adjustment (“EPA”) clauses, and the Service Contract Act (“SCA”) Price Adjustment Clause (usually FAR 52.222-43) overlap. It is blog subject that I have tacked to my cork board over my desk. But I have never blogged on it in the past. Nor am I aware of anything else written on the subject. No one has ever paid me to look carefully on this subject, so I can’t pretend that my thoughts are dispositive and even fulsome. But, of  course, I do have some ideas on the topic, so here they are, for what they are worth.  

Let’s start with the basics. FAR 52.222-43 is meant to be used for “fixed price, time-and-materials, or labor -hour service contracts” which involve options or multiple year awards. See FAR 22.1006(c)(1). Less commonly used is the similar clause found at FAR 52.222-44, which involves the same kinds of contracts, but is used for those which are not multiple year awards and which don’t have options to renew. Accordingly, neither proviso requires its use in a contract which is cost reimbursement. There is no special price adjustment clause exclusively for SCA-covered cost reimbursement government contracts work. Generally, cost reimbursement contracts have their own cost rules and contain some kind of economic price adjustment (“EPA”) clause specifying when and how the contractor gets compensated.

An example of how this overlap plays out in practice is the claim for sick leave benefits under the SCA is that arose in Space Gateway Support, LLC, ASBCA no. 56592, 12-1 BCA ¶  34,941 (2012). There, a successor contractor was required under the SCA and its collective bargaining agreement (“CBA”) to accept liability for the predecessor’s accrued sick leave balances under a cost-reimbursement contract. That CBA also had a cash-out provision for the end of employment. Ordinarily, sick leave is a bona fide benefit under the SCA , and the CBA is self-executing under the SCA and thus requires the government to pay for the price adjustment under FAR 52.222-43. See 29 C.F.R. 4.53 (expressly naming “sick leave pay” as a fringe benefit) and 29 C.F.R. 4.163(b) (expressly saying “Section 4(c) is self-executing.”). But the SCA clause in the contract wasn’t the only price adjustment provision.

The ASBCA in Space Gateway rightly found that carry-over of sick leave from the predecessor was bona fide fringe benefit, and the Contracting Officer had no authority to disallow it. The contractor argued that “"to the extent that [the contract] was intended to disallow costs of a collectively-bargained, bona fide fringe benefit without a variance hearing, it is contrary to the Service Contract Act, as well as FAR 52.222-41 (f) and FAR 31.205-6, and is therefore void and unenforceable" 12-1 BCA at 23. The Board, however, only felt the need to address the cost principles in FAR 31.205-6. Id. The Board concluded that “as a fringe benefit, the costs of reserve sick leave termination payments are allowable under FAR 31.205-6(m)(1).” Id. at 24.

Thus, the ASBCA resolved the Space Gateway dispute without needing to apply any SCA-related rules. That is probably good since the boards of contract appeals have sometimes fumbled the ball in the past trying to resolve the meaning of the SCA Price Adjustment Clause. The boards are on more familiar ground when deciding ordinary cost issues. If the costs are reimbursable under the standard cost principles and the contract terms, then it just isn’t necessary to recover them under the SCA -- particularly when the SCA price adjustment expressly excludes the overhead, general & administrative costs, and profit that otherwise may be recoverable under the cost reimbursement contract provisions.

Of course, hybrid contracts (like those which prompted my client’s question) can present some more complicated issues. I have worked through the overlap a few times in the past. My view is that, generally, FAR 52.222-43 applies to the fixed-price CLINS, while the contract EPA clause would cover the cost reimbursement work. For the cost CLINS, my view is that contractors should get paid their CBA labor costs in accordance with the cost principles and their contract terms – it is ordinarily compensable so long as allowable, allocable, reasonable, within the cost ceiling, and not otherwise barred by the contract. The FAR, of course, has some labor cost rules -- and most notably some requirements for retroactive back pay (see, e.g., FAR 31.205-6(h)). All the terms of the contract are applied, and interpreted as a whole, including any special allowability provisions.

But for the fixed-price CLINS, the SCA Price Adjustment Clause may have some relevance if such a clause is added to the contract. Some hybrid contracts only have an EPA clause. Then the price adjustment (even for the SCA work) is arguably processed under the EPA clause found in the contract. But if the contract has both an EPA clause and FAR 52.222-43 or -44,  then each clause probably applies to its own sphere of coverage. The EPA clause covers the cost reimbursement CLINS. The SCA Price Adjustment Clause covers the fixed-price CLINS. Of note, that likely means the fixed-price CLINS only get what I call an inequitable adjustment, since the contract clause squeezes out the overhead, G&A, and profit from the adjustment.

Each contract has its own terms, of course, which may be unique, and these rules can vary. As I tell my clients, read your contract. That is Government Contracts 101. I also suppose that this isn’t rocket science. No one is going to give me a Nobel prize for explaining it.