Federal Contractors: Avoid Getting Shortchanged on Prevailing Wages

The Davis-Bacon Act and the FAR

The Davis-Bacon Act, 40 U.S.C. §§ 3131-3148, (the Act) is a fact of life in federal government construction contracting. The Act, passed in 1931, establishes the requirement of paying the local prevailing wages for certain employees in all public work projects and is applicable to both contractors and subcontractors "performing on federally funded or assisted contracts in excess of $2,000 for the construction, alteration, or repair (including painting and decorating) of public buildings or public works."¹

These prevailing wages are typically established through Department of Labor (DOL) wage determinations and are usually reviewed annually—but can be subject to change at any time.² In essence, the Davis-Bacon Act may require contractors to provide wage increases to their employees throughout the course of contract performance following the exercise of options by the government.

The Federal Acquisition Regulation (FAR) addresses the Davis-Bacon Act by providing a contracting officer (CO) numerous ways in which to address increased labor costs through prescribed clauses which can be inserted into a government contract. One of these ways, which should be on the radar of anyone entering into such a contract, is known as the "no-adjustment" clause.

This clause takes the approach of informing the contractor that no adjustment of prices will be awarded unless strictly provided for elsewhere in the contract. That is to say, unless you negotiate a method or avenue for increased prevailing wages for future option years into your contract, you're simply out of luck.

The Case of Gulf Pacific Contracting, LLC

Recently, the Armed Services Board of Contract Appeals (ASBCA) addressed the ability of a contractor, facing federally mandated wage increases, to obtain equitable relief despite the existence of a "no-adjustment" clause in their contract.³

Gulf Pacific Contracting, LLC, had a contract to perform various construction-related services at Hurlburt Field in Florida that included a number of one-year options that the Government could exercise at its discretion. Simultaneous with the Government exercising the first-year option, the DOL issued new wage determinations that resulted in Gulf Pacific being required to increase wages commensurate with the new determinations for certain workers.

To alleviate the new federally mandated costs, Gulf Pacific sought compensation from the government through a Request for Equitable Adjustment (REA) to which the CO refused, pointing to the no-adjustment clause. Gulf Pacific appealed to the ASBCA, which ruled that the inclusion of the no-adjustment clause precluded the Government from providing any additional payment.

FAR 22.404-12

Subsection (c) of FAR 22.404-12, which provides standards for contracts containing construction requirements and option provisions that extend beyond the term of the contract, requires a CO to include in any fixed price construction contract a clause that specifies one of four methods, "to provide an allowance for any increases or decreases in labor costs that result from the inclusion of the current wage determination at the exercise of an option to extend the term of the contract."

The four methods available for the CO to choose from are:

• (1) No adjustment;
• (2) An adjustment specifically provided for in the contract;
• (3) A price adjustment based on a percentage rate of a published economic indicator specified in the contract; or
• (4) A price adjustment based on actual costs.

Option 1, the "no-adjustment" option, which was used in the Gulf Pacific contract specifically states that:

The contracting officer may provide the offerors the opportunity to bid or propose separate prices for each option period. The contracting officer must not further adjust the contract price as a result of the incorporation of a new or revised wage determination at the exercise of each option to extend the term of the contract. Generally, this method is used in construction-only contracts (with options to extend the term) that are not expected to exceed a total of 3 years.

Using general principles of contract interpretation, the ASBCA interpreted this clause of the FAR to permit the Government to draft a contract which would preclude any additional payment to a contractor for increased costs during performance of an option, despite those costs being caused by new Davis-Bacon Act labor rates (via a DOL wage determination).

What This Means for Contractors

DWT has previously written about the need for extreme diligence when entering into a government construction contract.⁴ The holding in Gulf Pacific should serve as an additional warning.

Following these three simple steps can help prevent contractors from shouldering the risk of federally mandated wage adjustments:

• First - Prior to entering into any construction contract with a Government agency, understand the breadth of the Davis-Bacon Act and what it's potential impact could be on your labor rates. If necessary, engage a government contracting attorney for help understanding who and what is covered by the Davis-Bacon Act.
  
• Second - Negotiate pricing adjustments to account for annual DOL wage determination labor rate changes. Make sure your contract adequately allows for option year adjustments to account for an increase in prevailing wage rates. Do not anticipate relief through the REA process. Save time and money by negotiating any anticipated (or unanticipated) changes directly into your contract.
  
• Third – When in doubt, reach out to an experienced government contracting attorney for help drafting or reviewing your contract.

FOOTNOTES

1  U.S. Department of Housing and Urban Development, Labor Relations Desk Guide, retrieved 8 October 2021.
2  See https://sam.gov/content/wage-determinations for current wage determinations.
3  Appeal of Gulf Pacific Contracting, LLC, ASBCA No. 61434 (2021).
4  See https://www.dwt.com/blogs/government-contracts-insider/2019/09/wait-wait-dont-sign-that