Can getting a government contract hurt my business?
Some executives think of adding government contracting to their business portfolio as a sure way to make loads of money. It can be quite lucrative, especially from a long term, cash flow and “guaranteed” work perspective. However, there are mistakes and landmines that can lead to losing money, not to mention damage to reputation. Today I’ll address one of the bigger landmines, the Service Contract Act (SCA).
This type of contract has a plethora of compliance and pricing implications. And sometimes, a company can bid on a contract without even realizing that it falls under the Service Contract Act. For example, you may see this line in the long list of FAR clauses in the RFP:
52.222-41 Service Contract Labor Standards
You may see this in the PWS/SOW:
29 CRF Part 4, Section 4.6 Labor Standards clauses for Federal service contracts exceeding $2,500.
You may also see a Wage Determination attached to the RFP. You’ll know immediately, if you see an attachment with the letters “WD” and often a city and state. For example, “WD – San Diego, CA”.
If you provide a service to the government, and your employees are non-exempt under the Fair Labor Standards Act, there’s a good chance your contracts will be classified as SCA.
These contracts are often competed at “Lowest Price Technically Acceptable” (LPTA), which means they will be awarded to the lowest acceptable bidder. The wage determination provided by the DOL (and often attached to the RFP) will provide the lowest possible rate you can pay each labor category. Because of this, companies will often bid the lowest rate, add their wrap rate (their indirects) and a modest fee – or no fee, if they just want to win and “break even”.
Problems that can arise from this scenario include:
1. Companies overestimate a decrease in their indirect rates upon award. This results in the company LOSING money on the contract. Because they bid so low, possibly with no fee, there is no wiggle room.
2. Companies don’t realize that they must honor the original service dates of the incumbent employees and therefore underestimate how much vacation time they will owe each employee. This will also cut into profit – or result in losing money.
3. When the winning company bids the lowest possible wage rate, this means that many employees will receive a cut in pay upon contract award. This is typical but can obviously result in many unhappy employees. These employees have been on contract, possibly for many years (with different employers) and they know how these contracts should run. Disgruntled employees can lead to many things such as poorer performance, a call to the Department of Labor if the employer isn’t complying with the many requirements of the SCA, and a heavier than expected burden on your management, HR and finance staff.
Winning a SCA contract is not all bad, but not knowing what you are getting into (or even that you are getting into it!) before you bid can certainly have a negative impact on your company.
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