The Government Contractor’s Guide to Service Contract Act (SCA) Compliance

  • Being a government contractor has always been complicated, but in the last few years, it seems as though the government is almost determined to make it harder than ever. There is no better evidence of this than the Department of Labor’s (DOL) new commitment to Service Contract Act compliance reporting.
  • In recent years, as much as, 78% of contractors audited by the DOL were found to be non-compliant. It is no wonder that random audits (which almost never happened before) are now nearly half of all the audits that take place.
  • With a number of contractors found noncompliant and DOL’s new commitment it should be no surprise that suspensions and debarments are up a combined 163% since 2010.
  • This trend should have contractors stopping to truly assess their compliance systems.

Are You SCA Compliant

  • In order to help contractors through this challenge, AXIM Fringe Solutions Group created a simple Service Contract Act (SCA) checklist to help contractors assess their compliance systems as well as learn more about the possible pitfalls they can encounter when performing their compliance auditing.
  • Each item on the checklist will talk about the important things you need to know about that aspect of compliance, and how you can best handle your compliance management, pricing, labor categorization, base wages, fringe rates, subcontractor compliance, ACA, and fringe benefits.
  • Let’s start by looking at Compliance Management.

Service Contract Act Government Compilance

  • Compliance Management – – Would you be 100% compliant if audited by the DOL?
  • The most important question you can ask yourself is, “If I were audited by the DOL today, would I have any compliance violations?” The only way to know truly know the answer is to know exactly how your compliance system works, which means auditing yourself periodically.
  • If you do your compliance internally, below is a recommendation of how a compliance system can massively prevent leaks and inaccuracy.

Service Contract Act Government Compilance

  • AXIM recommends 3 simple ways to get on track:
  1. Know Your Stuff– take some time to figure out how you are doing your compliance, and be sure that you are meeting the correct standards in the allotted amount of time.
  2. You Have to Check- A one person, one-time review of your compliance is simply not enough. Periodically you need to spot check reports, and every couple of months run an audit.
  3. Make Corrections– In compliance reporting, making a mistake is not necessarily wrong, but not correcting it is. When you find errors, making them right will save you in the long run.
  • Once you have your compliance management intact, you can then turn your focus on Pricing.

Wrap Rate Equation

  • Pricing – Are you maximizing your fringes to build better rates and win more bids?
  • It was not that long ago that this item on the checklist would have been much lower. However, with Lowest Price Technically Acceptable (LPTA) contracts now a large part of the contracting scene, price has never been so important.
  • Through new bidding regulations, the government is forcing contractors to be more efficient. Contractors should take the time to review their process, people, and partnerships. An easy place to lower your cost is a compliance management strategy.
  • The government allows for Fringe Benefit Administration to be paid for (in certain situations) as a fringe benefit. Meaning you can use your fringe benefits to lower your out of pocket overhead costs, which will help with pricing. Plus the right partner will guarantee your compliance, eliminating your risk while saving you money.
  • You can also lower liability through a better understanding of labor categories.

Service Contract Act Compliance hours worked

  • Labor Categories – Are your employees correctly classified under the contract?
  • Labor Categories are a way to determine how much a worker is to be paid on a job. By classifying the different types of workers and their corresponding wages, the government can outline what each level and type of worker will be paid on that job.
  • However, it is not as straightforward as it seems. Employees can work multiple labor categories in a day, and sometimes a type of work being performed does not have a category at. Leaving contractors to guess what they should be paying this person and hope that they are correct.
  • If you cannot prove the different hours an employee worked at each different labor category the government will make you pay ALL of the hours at the highest possible wage. It is like when you lose your ticket on a tollway, you have to pay the largest toll because you cannot prove otherwise. These fines can add up quickly.
  • Messing up labor categories can also have costs beyond just the bottom line.

Service Contract Act Compliance - violations

  • The DOL can also make compliance violations hurt is during the bidding process for future contracts. Compliance violations follow you around for three years. It’s become a significant factor in determining contract award status. Essentially, a few misclassifications can give your entire government contracting efforts a gloomy outlook.
  • Another area of SCA compliance where a simple mistake can cost you a lot is base wages.

Service Contract Act Compliance - Wage Determinations

  • Base Wages – Are you paying proper wage rates by classification?
  • There are a number of tricky factors that go into figuring out the base wage, Contractors need to pay particular attention to it as the DOL focuses heavily on base wages during an audit / investigation.
  • Despite the fact they consider base wages to be so important, the DOL doesn’t make it easy. Who is the employee and do they have specific trade certification or license? What type of equipment are they using? All of these are factors in determining the correct base wage for an employee.
  • One of the most common mistakes when considering base wages is place of performance:

Service Contract Act Compliance - Place of Performance

  • Base wages are calculated on the idea that a worker’s pay should reflect the cost of living in that area. So changing locations can complicate things. In some situations, there are even “invisible borders” within cities that will change wage rates on top of county and state lines.
  • Taking that one step further, if your company adds a new office, a new warehouse, or an employee starts working from home… that changes their location and thus, their base wage could change as well.
  • DOL auditors tend to look closely at base wages. Make sure you stay on top of Place of Performance changes, for everyone on the contract.
  • Once you have determined the correct base wage, it is time to be sure the fringe rate is also accurate.

Fringe Rate - DOL

  • Fringe Rate – Are you providing workers the correct fringe rate?
  • A common mistake contractors make regarding fringe rates is that they believe it’s “locked in” (static) by the contract. The SCA guidelines are VERY clear about this. Contractors should almost always be paying whatever the current fringe rate is.
  • The only way a contractor wouldn’t need to update their contract is if they were given expressed written permission (DOL). Without the contract officer’s go-ahead, paying a lower fringe rate is unacceptable. Furthermore, in re-bidding situations, if you’re not paying current fringe rates… that’s the kind of thing that gets held against you. It might even prevent you from keeping your contract.
  • The rate is often changed right around July, but can be changed at any time. Make sure that you are paying the current fringe rate. The cost of tracking down and employees and pay them what you owe (fringe dollars), sometimes years later, is much more costly than it seems.
  • Subcontractors present another challenge when it comes to compliance.

Subcontractor Compliance - Liability Questions

  • Subcontractor Compliance – Who’s responsible for a subcontractor’s compliance?
  • In govcon, using subs is almost as unavoidable as death and taxes. However, smart contractors know using subs can help speed up projects, perform intricate tasks, or simply do the things that you don’t want to do yourself. Not to mention the fact it’s a great way to save on costs.
  • The Service Contract Act (SCA) states it’s the responsibility of the prime contractor to ensure that “every single worker” that set foot on the job (including subcontractors) were paid the correct wage and fringe rate as set by the contract regardless of who the employee works for.
  • We know many prime contractors who love everything about working with their subs, except for their compliance. Government compliance is difficult enough with one party doing it, let alone two.

Subcontractor Compliance - Who Pays?

  • If a subcontractor is found to be in non-compliance (DOL audit), the prime contractor is at fault. They take the performance record hit along with back wages and/or additional penalties. In other words, prime contractors better ensure their subs are compliant because it’s their butts on the line.
  • There’s also the additional administrative burden on your staff to review the subcontractor’s compliance ensuring it’s been done properly. What we hear from government contractors all the time is that their compliance is the worst part of using them as a sub.
  • The best strategy is to work with subcontractors that perform quality work and take government compliance seriously. Be sure to examine their compliance before putting them on the contract.

ACA Compliance - Cash-in-lieu of Benefits

  • Cash Fringes – Nothing stays the same forever
  • In the past, contractors enjoyed higher profit margins where they could afford to do “cash-in-lieu” of benefits. It allowed them to remove the burden of compliance reporting, even if it was more expensive.

ACA Compliance - Cash Fringes

  • Cash fringes are an “easy way” to handle your compliance reporting compared to providing fringe benefits. It takes little time and resources on behalf of the contractor.
  • However, they pay a lot for that simplicity and ease. Cash-in-lieu of benefits also increases a contractor’s tax burden (FICA, Workers Compensation, and other taxes). A simple, but expensive solution in a landscape where profit margins are shrinking.
  • Being outbid on a contract or renewal is not the only negative impact of using cash fringes.

Fringe Benefits - Recruitment Retention

  • Fringe Benefits – Is your benefits package competitive enough to attract and retain skilled workers?
  • While the Department of Labor allows contractors to provide cash-in-lieu of benefits on SCA contracts. That very same cash fringe could become an issue under the Affordable Care Act (ACA).
  • For example, let’s say you provide cash fringe instead of benefits and one of your employee’s purchases health care coverage on their own. You may be found in non-compliance for not providing the correct minimal amount of health care coverage under ACA guidelines.
  • It gets worse. What you might not know is that a small ACA violation can lead to a full DOL investigation / audit of all your contracts. While cash fringes meet SCA compliance requirements, it might not work for ACA compliance.
  • The government is “strongly encouraging” contractors to start providing benefits for their fringes. The good news is that contractors now have new fringe benefit options that solve a growing problem.

Fringe Benefits - Contractor's Advantage

  • For most contractors today, good help is hard (if not impossible) to find. Many in the SCA space are struggling to find skilled workers and raising wages to combat the rising tide.
  • This is where a better benefits package can truly help. Your fringes, properly managed, can deepen your offering of benefits to your employee. Accident and disability coverages among other premium benefits are strong recruiting and retention tools.
  • AXIM saw a critical need to diversify the benefits that contractors could offer their employees. So we made it possible to give employees coverages like Accident, Life, Disability, Critical Care, and even supplement their Tri-Care coverage. Premium benefits- paid for by fringes.
  • Best of all the employees have a choice in which benefit they select to be their fringe. Allowing them to customize benefits to suit their needs, and have a say in their own compensation.