Legal Insights: Contractor Awarded Equitable Adjustment for Actual Increase in Wage Rates
Spring 2011

Late last year the Civilian Board of Contract Appeals awarded a construction contractor an equitable adjustment for a wage rate increase in W.G. Yates & Sons Construction Company v. General Services Administration, CBCA No. 1495 (Dec. 21, 2010). The most significant aspect of this decision is that the Board permitted the adjustment to be calculated based on actual rather than estimated labor hours under a fixed price contract. Also noteworthy was the Board’s granting recovery of overhead and profit on the increased labor costs.

In 2005, Yates was awarded a fixed price construction contract to build the FBI field office in Houston, Texas for $54 million. Yates, in turn, awarded a fixed price subcontract for the electrical work to KenMor Electrical Company. The prime contract required the contractors to pay applicable Davis-Bacon Act wages.

Prior to contract award, the Department of Labor issued a revised wage rate determination increasing the minimum wage for electricians. The revised wage rate determination was mistakenly not incorporated into the contract awarded to Yates.

During the course of performing the contract, the GSA conducted an audit and found the revised wage rate determination should have been part of the contract. This oversight was corrected and the revised wage rate determination was added to the contract by means of a bilateral modification. The contracting officer and Yates agreed that a separate modification would be issued to address any cost changes resulting from a new wage determination. The contracting officer then asked Yates to submit a proposal for both the past and future cost impact of the wage determination. Yates submitted a written proposal for the total cost impact of the new determination.

Under the Davis-Bacon Act, federal contracts in excess of $2,000 for the construction, alteration, or repair of public buildings must provide for payment of wages of no less than the prevailing (i.e. union) wage rate as determined by the Secretary of Labor. The FAR contemplates that the prevailing wage rate in effect at the time of contract award be included in construction contracts. There is no requirement that subsequent revisions of wage determinations be made applicable to the contract. The Government is authorized and expected, however, to correct erroneous wage rates that are included in awarded contracts.

The GSA audited the Yates proposal and determined that it would pay for the new wage determination using estimated labor hours rather than the actual labor hours incurred. Yates and KenMor insisted that the equitable adjustment should be based on actual labor hours. Although KenMor offered to provide the auditors with its actual hours and costs, the GSA declined to audit this information, reasoning that under its approach, actual hours and costs had no bearing on the proper price adjustment.

The contracting officer issued a decision providing that the Government would pay the equitable adjustment based on estimated labor hours. Her rationale was that had there been no revised wage determination, the Government would have paid for labor hours based on an estimated figure. If Yates or its subcontractors had actually performed the work in fewer hours than proposed, they would benefit from performing efficiently. Conversely, if Yates or its subcontractors expended more hours than proposed, they would bear the cost of doing the work less efficiently.

The contracting officer also denied Yates’ request for indirect costs and profit on the wage increase based on FAR 52.222.32 which precludes indirect costs and profit on Davis-Bacon price adjustments. The contracting officer had to concede this clause was not included in the contract, but she said it should have been.

Because the revised wage determination had the greatest impact on electrical work, Yates submitted to the Board a certified pass-through claim on behalf of KenMor. Seeking an adjustment attributable to the wage rate increase, the claim amount consisted of the increased cost of actual hours worked up to that point plus projected hours to project completion. The claim also sought recovery of indirect costs and profit.

On appeal, the Board recited that the issue to be decided was the method for calculating a price adjustment to the contract that appropriately accounts for the impact of the increased wage determination. Yates argued that the price adjustment should be calculated based on increased costs incurred with respect to all actual labor hours worked and should include indirect costs and profit. The Government contended that it had already fully compensated Yates for the cost impact of the increase of the wage rate because the price adjustment had to be based on the labor hours estimated by KenMor in its bid. In addition, the Government contended that indirect costs and profit are not permitted in calculating an adjustment for changes to the Davis-Bacon minimum wage.

In rendering its decision, the Board noted that the Changes clause incorporated into the contract provides for an equitable adjustment if any change causes an increase or decrease in the contractor’s cost of, or the time required for, the performance of any part of the work. In other words, this adjustment should reflect the difference between the reasonable cost of performing without the change and the reasonable cost of performing with the change.

The Board then reached its primary holding in this case. Despite the fact that the Yates contract was a fixed price contract, the Board ruled that where a contractor has established its actual costs and correlated them to a particular modification of the contract, it is error to disallow, increase, or otherwise adjust those costs in absence of specific evidence. Yates was thus permitted to recover the wage differential for all hours actually worked.

The Board also decided to include an award of indirect costs and profit in the equitable adjustment. It noted that under the Changes clause, these costs are routinely added to actual costs incurred to make the contractor whole. Although the Board acknowledged that a FAR clause excludes these costs from Davis-Bacon wage adjustments, this clause was not incorporated into the Yates contract. Since it was not disputed that the modification increased the direct wage and fringe benefit cost of performing the contract, under FAR Part 31 cost principles, those direct costs must bear their pro rata share of indirect costs.

Further supporting its award of indirect costs and profit, the Board noted that the argument for excluding such costs assumes that these costs never increase with an increase in wage and fringe benefit rates; and that an increase in wage and fringe benefit rates has no effect on the contractor’s risk, cost of financing, or other factors normally compensated by profit. Here, the GSA did not make such a showing and it could not do so because the auditors refused to audit on the basis of actual hours and indirect costs incurred by KenMor.

The Board concluded that Yates presented credible evidence of the hours it incurred in performing the work and the actual cost of the wage differential it sought as an equitable adjustment. The contracting officer testified she had no basis to question Yates’ calculation of hours and costs. Accordingly, the Board found Yates met its burden to prove the quantum it was owed. The appeal was granted and Yates received an equitable adjustment of $550,000.

This was a great result for Yates and KenMor. They expended more hours performing their fixed price contract than estimated at the time of contract award. Despite this overrun in anticipated labor costs, the contractors recovered the wage differential on all labor hours because the GSA mistakenly failed to include the current wage determination in the prime contract.

Yates and KenMor were not just lucky, however. These contractors also made their own luck. Two factors for which the contractors were responsible stand out as keys to the successful outcome of this appeal. The first is KenMor’s decision to offer to the GSA for audit its actual labor hour and cost records supporting the request for an equitable adjustment. Not only was this the right decision, KenMor was able to make this decision because it had apparently maintained records of sufficient quality that it could offer these records for audit to the Government. Second, the contractors clearly knew well the terms of the prime contract and specifically what clauses were and were not included. Other contractors laying the foundation for claims against the Government can profit from the example of this case.


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