Employers Pursuing Government Contracts For the First Time Should Be Wary of Hidden Costs

April 1, 2009

Many employers, particularly those in the construction and service industries, are considering bids on federal government contracts for the first time. A slow economy and government stimulus dollars can make contract work quite tempting. However, employers should understand that existing laws, as well as recent developments, may make these projects less attractive than they appear.

Businesses currently participating in federal government contracts or subcontracts are aware of the added costs associated with this type of work. These can include compliance with affirmative action requirements, the need to bid jobs and pay employees based on applicable “prevailing wage” rates, and satisfying what can be burdensome, costly and time consuming statistical hiring, firing, promotion, compensation and other record keeping requirements. Employers who have not bid on government contracts need to be aware of these obligations and plan for them.

Contracting with the federal government became even more complicated recently. In late January and early February of this year, President Obama signed four Executive Orders that can place even more requirements and costs on contractors. These are:

  • Executive Order 13494 Economy in Government Contracting: This Order treats as “unallowable” the costs of any activities undertaken to persuade employees of the recipient of the federal disbursement – or any other entity – to exercise or not exercise the right to organize and bargain collectively through representatives of the employees’ choosing. This can preclude the contractor from preparing literature containing information about unions and collective bargaining for distribution to employees, hiring counsel to ensure that communications to employees are legal, and holding meetings with employees to help them obtain the facts they need to make an informed choice about whether to form or join a union.
  • Executive Order 13495 Nondisplacement of Qualified Workers Under Service Contracts: This Order can require employers to hire the employees of a predecessor contractor upon winning a bid. This means that a successful bidder may be required to employ the very same inefficient performers that might have led to the loss of the contract by the predecessor, even though the contractor’s own reliable employees are available to do the work.
  • Executive Order 13496 Notification of Employee Rights Under Federal Labor Laws: This Order requires contractors to post notices of employee rights under the National Labor Relations Act. These postings must be made throughout the contractor’s business, not just where the government contract work is being performed. Failure to post the notices as required can lead to cancellation of the contracts.
  • Executive Order 13502 Use of Project Labor Agreements for Federal Construction Projects: This Order encourages federal agencies to use “project labor agreements.” This means that contractors may be required to abide by the terms and conditions set out or defined in union collective bargaining agreements. This law adds hidden costs in the form of things like unknown work rule inefficiencies, and possible contributions to union health and welfare and pension funds.

These new Executive Orders contain definitions and exceptions that need to be reviewed in detail. Many also require implementing regulations that have not yet been published. Thus, the scope of these Orders is far from clear at present. Nevertheless, all of them are in effect now.

These new Executive Orders also can have a huge impact on how employers bid on and perform government contract work. For example:

  • Contractors might not be able to use their own employees or worse, be required to lay off some good employees to make room for someone else’s poor performers.
  • Contractors may be required to work more inefficiently because of the terms of a project labor agreement.
  • Contractors could be precluded from communicating important facts to employees about unions and collective bargaining.
  • In some cases, contractors could be forced to recognize unions and adopt existing collective bargaining agreements.

All of these factors can add to the costs of satisfy the requirements of a contract. They need to be carefully evaluated before deciding whether or how to bid on federal government contracts. Remember, all that glitters is not gold. For some employers in some cases, the hidden costs of federal government contracts can outweigh the potential benefits.

For assistance in weighing the pros and cons of becoming a federal government contractor or subcontractor or in complying with the new Executive Order requirements, please contact any member of McGuireWoods’ Labor & Employment or Employee Benefits teams including: