Board: Contractor On Hook For Incumbent Employees’ Vacation Time

The Service Contract Act requires contractors to pay certain provide no less than certain prevailing wages and fringe benefits (including vacation) to its service employees. The amount of vacation ordinarily is based on an employee’s years of service—and service with a predecessor contractor counts. The FAR’s Nondisplacement of Qualified Workers provision, in turn, requires follow-on contractors to offer a “right of first refusal” to many of those same incumbent employees.

A follow-on contractor is to be given a list of incumbent service personnel, but that information ordinarily isn’t available at the proposal stage. So what happens when a follow-on contractor unknowingly underbids because it isn’t aware how much vacation is owed to incumbent service personnel? The answer, at least in a fixed-price contract, is “too bad for the contractor.”

So it was in SecTek, Inc., CBCA 5036 (May 3, 2017)—there, the Civilian Board of Contract appeals held that a contractor must pay employees retained from the incumbent nearly $170,000 in wage and benefit costs based on its underestimate of those costs in its proposal.

In 2015, the National Archives and Records Administration issued a request for quotations to provide security services at two NARA buildings. This solicitation fell under the Service Contract Act and also included the FAR’s the Nondisplacement of Qualified Workers clause (FAR 52.222-17). In other words, the successful contractor had to provide a right of first refusal to qualified service employees, and honor years of service incurred by those employees with the predecessor contractor.

The solicitation included a wage determination that informed offerors that incumbent employees’ benefits were defined in part under a collective bargaining agreement. Under this agreement, the predecessor contractor had agreed to provide its employees with the following levels of vacation time:

  • 2 weeks, for employees with 1-4 years of service;
  • 3 weeks, for employees with 5-14 years of service; and
  • 5 weeks, for employees with 15+ years of service.

Before submitting its final quote, SecTek asked whether the government would provide a list of the incumbent contractor’s security officers, including their seniority, before proposals were submitted. The government did not, citing the FAR’s provision that this list must instead be provided after award.

Without this list, SecTek was forced to guess the amount of vacation that would be due incumbent personnel. SecTek estimated that the average length of service for incumbent personnel was only three years and provided 80 hours of vacation time for all guards.

SecTek’s fixed price offer was $40,918,522.84. It was awarded the contract and, ten days later, was given a seniority list of the predecessor contractor’s service employees.

After award, SecTek learned that some of the incumbent’s service employees were owed more than 80 hours of vacation, given their seniority. So SecTek sought an equitable adjustment of its contract for this vacation time, totaling nearly $170,000. NARA denied this request, saying that it fully complied with the FAR’s requirements in disclosing the seniority list.

SecTek then filed a formal certified claim seeking a contract adjustment. After NARA refused to timely respond, SecTek appealed the deemed denial to the Civilian Board of Contract Appeals.

The issue, on appeal, was relatively straightforward: did NARA’s failure to provide SecTek with a seniority list of the incumbent contractor’s service employees before contract award entitle SecTek to a price adjustment reflecting those employees’ true vacation time? According to SecTek, the government’s refusal to provide this information precluded it from knowing the actual level of vacation pay that it would be required to pay the incumbent contractor’s employees; had it been provided this information, it could have priced its offer accordingly.

The Board denied SecTek’s appeal, finding that NARA did not violate any FAR provision by refusing to provide the incumbent contractors’ seniority levels before the award. Just the opposite, in fact:

Although information about the seniority of the predecessor contractor’s employees may have been helpful in estimating the level of benefits extended to those employees, this does not mean that the information must be, or even could have been, provided in advance of the contract award. . . . The Government . . . is not entitled to request the list [from the incumbent contractor] until thirty days prior to the expiration of the contract. In addition, the Government is not permitted to release the seniority list to the successor contractor until after contract award. The Government furnished the seniority list to SecTek on August 28, 2014—ten days after contract award and in full compliance with the FAR requirement.

Because NARA could not have properly provided SecTek with the incumbent contractor employee seniority list before the award, it did not bear any responsibility for SecTek’s low estimate of incumbent employee vacation time. The Board noted that the contract had been awarded on a fixed-price basis, and that “the general rule in fixed-price contracting is that, in the absence of a contract provision reallocating the risk, the contractor assumes the risk of increased costs not attributable to the government.” Here, SecTek “bore the risk that its cost projections might prove to be insufficient,” and SecTek alone was on the hook for the additional vacation time costs.

Through no fault of its own, SecTek underestimated the amount of vacation time due incumbent employees (which it was required to make make good faith efforts to hire) and, as a result, must absorb nearly $170,000 in additional benefit costs. SecTek, Inc.  shows that when the Service Contract Act and Nondisplacement of Qualified Workers provisions intersect on a fixed-price contract, the result can be harsh.