Too Clever by Half Bidding Strategies for CBAs for SCA-Covered Contracts
"Anyone who has never made a mistake has never tried anything new."
–Albert Einstein
Coincidentally, both my colleague Howard Wolf-Rodda and I wrote a blog on the same new Board case on the same day. I held my blog so Howard could go first. See https://www.awrcounsel.com/blog/2025/4/24/flawed-pricing-strategies-can-be-costly-under-the-service-contract-act-price-adjustment-clause.
The new case raises a question I have been asked many times. Under section 4(c) of the Service Contract Act (“SCA” ), an offeror must pay not less than the wages and fringe benefits set forth in the predecessor’s collective bargaining agreement (“CBA”). This is known as the Successor Contractor Rule. In essence, the predecessor’s CBA becomes the wage determination for the contract, and the rates set forth therein are required during the base term of the performance. But if the successor contractor signs no new CBA during that base term, then come the new option year, there is no CBA to succeed to, and the standard prevailing wage determination ordinarily becomes the operative wage and hour requirement for those option years.
The application of these rules prompt some contractors to consider gaming the system in their proposal in order to get a competitive advantage over other competitors. They want to bid the predecessor’s CBA rates for the base contract and then bid the prevailing rates (presumably lower than the CBA rates) for the option years of performance. This gives them a price advantage. As the lower priced offeror, they win the work.
Now comes the hard part. The successful offer must figure out how to perform the work in the first option year without recognizing the union or convince the union to lower the rates in the predecessor’s CBA. Both are difficult propositions since the union is in place, and the workers have some measure of legal protection. It is not easy to take away what wage and benefits they have. Moreover, even if you could do so, the SCA price adjustment clause provides for a downward adjustment in price if the wages or benefits fall. FAR 52.222-43 and -44 both cover upward and downward adjustments for the “increase or decrease of “ wages and benefits. Thus, the contractor would be on the hook to pay the Government for the decrease in wages and benefits after the base year of performance. Accordingly, it makes no sense to bid lower wages and benefits in the option year since the entire fiscal benefit accrues to the Government and not the awardee. And the awardee loses out on the benefit of the decrease because the savings accrue to the Government per the contract terms.
And getting rid of the union, replacing the workers, and dealing with a strike is usually not wise or feasible. Thus, most contractors end up just negotiating their own CBA, and the section 4(c) rule then makes them a successor to themselves, and their new CBA becomes the wage determination for the option years. As for that new CBA, the FAR 52.222-43 and -44 price adjustment clauses only provide for the “actual” increased cost (i.e., the difference between what the contractor was paying and what it is required to pay under the new CBA. The clause language doesn’t apply any “as bid” analysis to the cost. It is just the differential between what was actually paid and what is now required to be paid under the new CBA in the option year. So, busting down the wages in your proposal does get you to where you want to be when it comes time for a price adjustment. If you were required to pay the predecessor’s wage and fringe benefits in the base period, then that is the base line unless superseded by any higher wage or benefit you actually paid.
Which brings us to a recent case at the Armed Services Board of Contract Appeals (“ASBCA”) called Appeal of HD Inc., ASBCA no. 63794 (March 24, 2025). https://www.asbca.mil/Portals/143/Decisions/2025/63794%20HD%20Inc.%20(Witwer)%203.24.25%20Decision.pdf?ver=bQiXHeXf2rSlbWJmYFneow%3d%3d. The HDI case has some unusual facts, but the gist of the case is they claimed to have bid CBA rates for the base period, in compliance with the SCA, but then bid lower SCA prevailing wage determination rates for the option years. The dispute centered on the second option year, after they had negotiated their own CBA. HDI wanted to price the adjustment for the second option year using the differential of those new CBA rates to the prevailing rates it put in its bid. The Board rejected that claim saying the as bid rates were not controlling. What controlled for option year 2 was the actual wages paid in option year 1. That was the only wage and benefit differential that would be subject to a price adjustment. As t that narrow ruling, and based on these case facts, the ASBCA appears to be correct.
But vary the facts, and the ASBCA holding is misleading. It assumes in all circumstances the Successor Contractor Rule kicks in. but that isn’t always true. There are circumstances, as noted above, where the successor contractor never enters into its own CBA, and in those cases the US Department of Labor’s position is that the prevailing wage determination, not the predecessor CBA wages will apply to the option year. In that sense the Board confused matters by the way it stated the rule, even as it correctly held that under these facts, the CBA entered into by the predecessor contractor would ordinarily be binding.
HDI also made several other arguments, the most interesting of which was based on solicitation language in the which stated:
Q46. For the purpose of calculating Labor costs for Option Years 1-4 are we to default to, and use, the published SCA Wage Determination rates?
— Use SCA and consider CBA
HDI claimed the Government directed it to use the prevailing wage determination rates and not the CBA rates. The Board rejected that interpretation as unreasonable for several reasons, not the least that that the instruction to “use SCA” isn’t inconsistent with paying the CBA rates, since the CBA had become the section 4(c) wage determination. And anyway, the response told them to “consider the CBA.” HDI’s interpretation nullifies that instruction. And, moreover, the response to the other Q&A’s was even clearer that the CBA rates might govern even after the base period, like when they negotiated their own CBA, just as HDI did.
Basically, I have told clients now for decades not to do what HDI did. Don’t just try to pencil in lower rates in your cost proposal. Such a bidding strategy will just lead to a trail of tears. The result reached by the Board is entirely consistent with my decades of advice. But the grounds relied upon by the Board, while correct given the case facts, are nonetheless misleading. The Board suggested that under section 4(c) of the SCA, the contractor is bound to the predecessor’s CBA rates for all the option years of the contract. But that is not DOL’s view. Ordinarily, the contractor is just bound to those rates for the base period of performance. If the successor contractor doesn’t negotiate its own CBA in that period, then section 4(c) has no impact on the option years because there is no valid CBA in place to succeed to in those option years. In that event, the wage determination reverts to the prevailing wage rates. However, if the contractor decides to lower wages and benefits in the option year, the specific terms of the FAR SCA Price Adjustment clauses provide for a downward price adjustment for any wage savings. Accordingly, this is ordinarily a fruitless bidding strategy. And anyway, that rule doesn’t apply to HDI, because it negotiated a new CBA and thus succeeded to itself.
HDI made a mistake in bid. It was likely unilateral, since the bid did not disclose the wage busting scheme for the option years, so the Government wasn’t even on notice that they intended to pay the prevailing rates thereafter. And the reliance on the SCA Price Adjustment clause to make them whole for the mistake was misbegotten. The language of the clause is limited to actual increase costs required by a new wage determination compared to the actual cost paid in the prior contract period. It never afforded a remedy for this mistake. And so it goes.