3 essential steps for federal service contracts

As the economy ebbs and flows, federal contracts can be a consistent and reliable revenue source for services firms. However, firms must be ready to adhere to the Service Contract Act (SCA).

The SCA, or McNamara-O’Hara SCA, is a federal statute that controls any service contract worth more than $2,500 between the U.S. federal government and a services firm or individual. Services in these contracts can include advisory and assistance, architect-engineering, transportation, research and development, communications and more.

The federal government spent more than $720 billion on service contracts from 2014 to 2019. While there is room to grow business with these contracts, firms need to take three important steps before they sign.

1. Bolster your contracts and back-office departments

Train your contracts personnel to review opportunities and awards for the SCA Federal Acquisition (FAR) clause (52.222-41) and at least one associated wage determination (WD).

Pre-award

• Even when the FAR clause is included in the RFP, agencies do not always include a WD. Create a process to request the Procuring Contract Officer (PCO) to incorporate the relevant WD. If no WD is incorporated, have a strategy in place to accurately price proposed labor and benefit costs based on the anticipated contract work locations. If a WD is incorporated, price the proposal utilizing the WD stipulated minimum wage and fringe benefits.
• Ensure the ability to request an equitable adjustment (REA) is included in the Agreement, via the FAR changes clause (52.243-4). Once the contract is awarded and a WD is incorporated, you will want to re-price the labor effort using the WD minimum wage and benefits amounts. An REA will allow you to modify the contract for additional funds necessary to meet the SCA requirement.

Post-award

• SCA wage and fringe benefit minimums are only applicable to contractors if both the FAR clause and at least one WD is referenced or attached to the award. If the FAR clause is referenced but the award contains no WD, create a process to request the Contract Officer (CO) to incorporate the relevant WD. Agency funding is always based on the contract WD.

The Department of Labor (DOL) Wage and Hour Division (WHD) periodically updates SCA wage and fringe benefit hourly amounts, by location. Do not make the mistake of downloading and adhering to the latest WD on the sam.gov website without incorporating that WD into the contract through a contract action. The contract WD dictates the funding that will be provided to meet wage and fringe benefit requirements.

Assign responsibilities for your Human Resources and Contracts teams to:

• Review covered employee work locations, usually on an annual basis. There are a few tests that contractors can use to determine their covered employee population. At a high level, a covered employee is any employee (exempt or non-exempt) whose job description on an SCA contract can be mapped to an SCA job category, using the SCA Directory of Occupations.
• Compare employee work locations to the applicable wage in the WD that is currently incorporated in covered contracts.
• Work with your Contracting Officer to execute a contract action that incorporates the latest and most relevant WDs into covered contracts.

2. Strengthen your financial records

Support project-level accounting and labor tracking through a sound timekeeping system. Labor is likely your largest expense for service contracts. Ensure you have strong process controls and a timekeeping system in place that is fully integrated with your HR, ERP and other relevant systems.

Create a project structure that clearly segregates projects from one another, directly or indirectly. That will make it easier for you to analyze the portion of labor that is from contracts covered by SCA. Companies are only liable to pay the minimum SCA wage and fringe benefit for time worked on covered contracts.

Begin a process to compare the SCA-covered employee pay to the wage and fringe benefit minimums in the relevant SCA WD. Ensure that covered employees are receiving the minimum amounts and create a process for paying these employees out (via cash payment or retirement contribution) if they are owed any additional funds.

3. Support your SCA-related business processes

Document and store your methodology for SCA related processes, including but not limited to:

• Mapping of internal labor category descriptions to SCA Directory of Occupations descriptions
• Notifying SCA-covered employees of their rights, as stated in the “WH 1313 SCA Poster”
• Reviews and reconciliations between employee pay and SCA WD stipulated minimums
• Reviews of covered employee work locations against current WDs
• Preparing and submitting an REA

Understand your risks

The number of DOL audits and investigations is on the rise, and consequences of SCA non-compliance can be harsh.

Over the past six years, DOL conducted more than 5,000 compliance investigations, and found SCA violations leading to more than $220 million in back wages for workers. The DOL also determined that 60 contractors should be excluded from receiving new federal contracts for three years.

Make the up-front investment in your people, processes and supporting systems, so that your business is ready to adhere to SCA requirements and thrive from the revenue of service contracts.

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