The Armed Services Board of Contract Appeals (ASBCA) recently granted a claim sponsored by the prime contractor for its subcontractor’s employee severance costs under a fixed-price contract. Appeal of Government Contracting Resources, Inc., ASBCA No. 59162 (March 12, 2015).

Government Contracting Resources, Inc. (GCR), sought additional compensation for severance costs it incurred, along with its subcontractor, upon expiration of its service contract with NASA for the distribution of mail at the Kennedy Space Center. A collective bargaining agreement (CBA) between GCR subcontractor Creative Management Technology Inc. (CMT) and the International Association of Machinists and Aerospace Workers (IAMAW) granted severance pay to CMT bargaining unit employees who were not rehired by a successor company at the end of the service contract. The provisions of the CBA had been incorporated, through a modification, into GCR’s service contract with NASA.

GCR learned that upon expiration of the service contract, NASA intended to award the follow-on contract to a program that employed blind and disabled workers, leaving 13 union employees entitled to severance pay under the terms of the CBA. After severance payments were made to these employees, GCR sought an equitable adjustment for these costs, and that request was denied.

On appeal to the ASBCA, GCR sought compensation under FAR 52.222-43, the Fair Labor Standards Act and Service Contract Act Price Adjustment Clause. NASA agreed that GCR was bound by the CBA but argued that because the service contract was fixed-price, the severance payments had been accounted for in GCR’s initial price proposal.

The ASBCA granted GCR’s appeal and rejected NASA’s position. The ASBCA held that NASA’s reliance on the fixed-price nature of the service contract was incorrect, noting that the “focus is on whether the contractor has experienced an increase in its costs providing the benefits required by the applicable wage determination.” The ASBCA also found that GCR could not have predicted severance costs in its initial price proposal because at the time the CBA was incorporated into the contract, GCR could not know whether severance costs would be owed since it could not have known whether the service contract would be reprocured, awarded to another contractor or performed by other employees.

Ultimately, the ASBCA found that the severance costs were compensable costs, not included in the initial fixed-price due to their uncertainty, and therefore GCR was entitled to additional compensation under the price adjustment clause. This decision is an important victory for service contractor’s seeking reimbursement for severance costs which could not be known or accurately reflected in initial price proposals under fixed-price contracts. However, please remember that the decision does not relieve bidders of their obligation to assess potential future severance obligations when pricing a contract.