In Innovative Technologies, Inc., ASBCA No. 6186, 62185, the Armed Services Board of Contract Appeals (“ASBCA” or the “Board”) held that, despite the federal government’s failure to include or incorporate the McNamara-O’Hara Service Contract Act (“SCA”) FAR Clause 52.222-41 (the “SCA Clause”) in the contract, the contractor was required to comply with the SCA and not entitled to an equitable adjustment for all costs it incurred from a $1.5 million settlement with the U.S. Department of Labor (“DOL”) for its noncompliance. This case serves as an important reminder for contractors to be vigilant in determining whether their services contracts are covered by the SCA, even if the agency fails to include or reference the SCA Clause.

Factual Background

In 2006, the Defense Media Agency (“DMA”) awarded the contractor a firm-fixed price contract for performance of engineering services in the United States. The DMA contracting officer did not include or incorporate in the contract or any subsequent task orders the SCA Clause, but the surrounding circumstances indicated that the SCA might apply to the contract, including incorporation of DOL wage determinations (“WDs”) in the contract; an attachment with “Contractor Labor Categories” for offerors to propose “Fully Burdened/Escalated Rates”; the predecessor contract containing the SCA Clause; and the solicitation questions and answers for the predecessor contract describing how WDs would be issued and prices adjusted for those new WDs. Here, the contractor’s price proposal was not clear whether it intended to comply with the SCA, but it also had passing references suggesting that the contract might be subject to the SCA. The contractor proceeded to perform almost the entire contract from 2006 to 2013, without the contractor or DMA appearing to acknowledge the contact was subject to the SCA or seeking to incorporate new WDs into the contract.

In May 2013, the DOL notified the contractor it was investigating several potential labor violations and required DMA to modify the contract to add the SCA Clause and applicable WDs. In October 2013, the DOL issued a determination, finding the contractor failed to pay workers appropriate prevailing wages and fringe benefits in compliance with the SCA, including misclassifying workers, paying at lower labor categories, and failing to keep records as required by the SCA. After initially disputing the violations, the contractor ultimately entered a settlement agreement with the DOL, agreeing to pay roughly $1.53 million in back wages to impacted workers, retroactive to the date of the initial 2006 contract award.

In January 2017, the contractor submitted to DMA a request for equitable adjustment (“REA”) under FAR 22.1015 and other equitable adjustment language in earlier contract modifications, seeking repayment of the $1.5 million DOL settlement, plus another $850,000 in “applicable burdens.” The contractor argued that it was entitled to an equitable adjustment because DMA’s failure to include the SCA Clause resulted in its noncompliance and led to the $1.5 million DOL settlement. The DMA mostly denied the contractor’s claim, but it subsequently issued an equitable adjustment for $568,000. The contractor then appealed the decision to the Board for the amount it initially sought.

The Board’s Holding

On review, the Board held that: (1) the SCA clearly applied despite the lack of FAR clause; and (2) most of the claim did not fit the criteria to receive an equitable adjustment under FAR 22.1015 or other equitable adjustment provisions.

• Compliance with the SCA was Required Despite Omission of the SCA Clause: The Board found that the contract was subject to the SCA despite the DMA failing to reference or incorporate the SCA Clause into the contract. The Board noted “[t]he contract was patently for the furnishing of services in the United States through the use of service employees, so it was governed by the Service Contract Act.” The Board found that the SCA Clause could apply by operation of the law, reasoning that the “DMA’s omission of the SCA [C]lause and other administrative lapses, however negligent, did not alter the fundamental nature of the contract, nor the applicability of the SCA.” The Board also rejected the contractor’s argument that DMA’s inattention to the SCA requirements should factor into the contractor’s noncompliance. Instead, the Board highlighted the fact that the contract mentioned the SCA in other clauses and included WDs at time of award.
• The Claim Did Not Fit the Criteria for an REA: The Board noted that REAs are required for increased labor costs when: (1) the agency has failed to include or omitted WDs; (2) the contractor’s labor rates do not meet or exceed the rates in the applicable WDs; and (3) the DOL requires the contractors to fix the errors or omissions. Here, however, the Board found that the contractor “d[id] not contend, or offer any evidence, that it would have proposed different contract labor rates, or acted differently in any other way, if the SCA [C]lause had been incorporated into the solicitation.” In fact, many of the contractor’s wages were already higher than the applicable WDs. The Board also noted that the remedies for FAR 22.1015 are “limited to costs caused by a government wage determination mistake and this FAR provision is not a free pass for contractors to obtain compensation for unrelated labor problems of their own making.” Here, the Board found that the contractor was entitled to an REA for a small portion of the backpay related to the missing applicable WDs, but the contractor was not entitled to an REA for the majority of DOL’s settlement because it was based upon labor violations unrelated to omission of applicable WDs, i.e., misclassification, nonpayment of overtime, and insufficient fringes violations. The Board also found that the equitable adjustment language in the contract modifications between DMA and the contractor mirrored the language in FAR 22.1015, so the contractor was limited to the same remedies as under FAR 22.1015.

Practical Takeaways

This case underscores the importance of contractors determining before contract performance whether their services contracts are covered by the SCA. Even if the agency fails to include or reference the SCA Clause in the contract, as here, contractors will not likely be relieved of their obligations to comply with the SCA for service contracts that fit the criteria for SCA coverage. The SCA also carries significant remedies for noncompliance, including significant back wages, suspension or termination of federal contracts, or mandatory debarment of the contractor from being able to contract with the federal government. Even where the DOL does not seek contract remedies or debarment, contractors can find themselves without recourse for an equitable adjustment under FAR 22.1015 or otherwise for any costs incurred relating to SCA noncompliance.

Prudent contractors should closely review (with counsel) any service contracts for SCA coverage before contract performance, even if the contract does not include or reference the SCA Clause, WDs, or have other indicia of SCA coverage. If it is unclear whether the SCA may apply to a services contract, contractors should consider all surrounding circumstances and materials, including whether the predecessor contract was subject to the SCA, whether the solicitation includes any references to the SCA, WDs, or service workers, and whether the employees performing services on the contract are non-exempt employees that could be subject to the SCA. Contractors might also consider submitting questions and answers to the agency to clarify the agency’s position in addition to conducting their own independent review.

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