Mar 12, 2015

SCA Implications for Multiple Award Schedule Pricing

One of the greatest challenges of commercial item acquisition is accounting for differentials between commercial and government pricing. In particular, pricing related to fundamentally governmental requirements with no analog in the commercial marketplace. Nowhere is this more evident than in the incorporation of the Service Contract Act (SCA) into the GSA and VA Schedules Programs.

The McNamara-O’Hara Service Contract Act of 1965 (41 U.S.C. §§ 6701-6707) applies to federal contracts with a value in excess of $2,500 and a principal purpose of furnishing services in the United States through the use of service employees. For the purpose of the Act, a ‘service employee’ is generally defined as an individual engaged in the performance of a service contract who cannot be classified as a bona fide executive, administrative, or professional employee in accordance with 29 C.F.R. § 541. Nice circular definition, right? The SCA mandates that service employees performing on SCA-covered contracts (1) are paid a minimum hourly wage, which varies according to labor class and the performance location, (2) receive a minimum hourly health and welfare benefit, and (3) receive a minimum amount of annual vacation and holiday leave based on duration of employment, among other things. A listing of these minimum rates is found in the SCA wage determination that applies to the geographic location (county, state) where the work is performed.

Until recently, the SCA was only incorporated into Schedules whose scope clearly contemplated extensive use of service employees, such as the Document Management (36), Temporary Administrative and Professional Staffing (736), and Professional and Allied Health Care Staffing Services (621 I) Schedules. Starting in 2010, however, the professional services Schedules, such as MOBIS and PES, began incorporating FAR 52.222-41, Service Contract Act of 1965, and current SCA wage determinations into their solicitations through mandatory modifications. GSA implemented this highly-impactful change with little fanfare, leaving many contractors unaware of the gravity of the potential implications to its pricing and wages, or mistakenly believing it didn’t apply to them.

While many professional services providers hold that they are immune from the SCA because it only applies to services contracts with ‘significant’ use of service employees, they may not be aware that the DOL considers the threshold for significant use of service employees to be at only 10-20% of the number of employees or hours worked (48 F.R. 49736, 49743). When you combine this low threshold with certain positions listed in the SCA Directory of Occupations commonly used in professional services contracts, such as CAD operators, foreign language translators, media specialists, and technical writers, it isn’t hard to imagine there are many GSA and VA Schedule task orders in which service employees are not being paid in accordance with the applicable wage determinations.

To give an example of the SCA implications to GSA Schedule pricing, let’s consider an SCA-covered MOBIS task order for the Department of State in Washington, D.C. to provide strategic policy assistance, including the development of research studies and program analysis documentation. Part of the contract requires the services of a graphic artist and an experienced technical writer. First of all, did you even realize those positions were probably covered by the SCA? I’m sure many people would categorize them as professional employees, but they aren’t according to the Department of Labor (DOL) in most circumstances. Your graphic artist is an entry-level employee who may be paid $20.40/hour and the technical writer is an independent contractor whom you may pay $38.00/hour. What you may not realize is that you may already be in violation of the SCA.

According to the current Washington, D.C. wage determination, the minimum wage for a graphic artist is $26.80/hour and the minimum for a Technical Writer III is $32.47/hour. Additionally, the minimum health and welfare benefit is $3.81/hour (remember to check your contract because the rate may be lower if the wage determination has not been updated). At the very least, the graphic artist in our example is being underpaid by nearly 25%, without bringing health and welfare into the equation. Although the technical writer is being compensated at a high enough level to cover both the minimum wage and health and welfare, unless you are specifically calling out a health and welfare amount in your payment, you are short paying this individual by around 10% because wages in excess of the minimum cannot be used to discharge the health and welfare requirement.

While we have established that an SCA infraction has occurred, we haven’t yet talked about how this impacts your GSA Schedule pricing. In order to bring the graphic artist category into compliance, you would need to increase the pay rate significantly, which would then impact your margins on this category. Here’s the rub, though: all of your commercial contracts have a price for graphic artist that is based on the non-SCA pay rate as the SCA only applies to government contracts. How will you be able to justify a price increase with GSA, especially such a large one, when none of your commercial invoices support the higher rate required by the SCA? This situation occurs quite frequently and it has been my experience that not all GSA and VA Contracting Officers understand SCA well enough to be willing to award Schedule pricing that exceeds commercial rates.

One final thing to remember: mapping between a GSA schedule, the DOL labor categories and task order labor categories is complicated and fraught with pitfalls. During this process, it is important to keep in mind that just because GSA approved labor categories and amounts, does not mean DOL will approve. Because GSA does not act as the seal of approval for DOL, when creating and pricing your schedule, be sure to incorporate your understanding of the pricing for the correct wage determinations so that you would not have to bill above your GSA rate to avoid an SCA violation. Also, remember to include health and welfare benefits including the hourly rate, holidays and vacation time when to ensure you cover your expenses.

For more information about GSA Schedules, see our upcoming classes:

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