That $15 minimum contractor wage will make the most work for the government itself

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Among his first hundred days actions, President Joe Biden issued an executive order establishing a $15 an hour minimum wage for federal contractor employees. A detailed analysis shows the order won’t affect federal spending much, but it will cause a lot of work for contracting officers.  Federal Drive with Tom Temin got the details from the managing director of Censeo Consulting, Curt Cote.

Tom Temin: Mr. Cote, good to have you in.

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Curt Cote: Great to see you, thank you.

Tom Temin: And I should say you’re joining me in studio, and this is the first for us in about 15-18 months since the pandemic, so the world is returning to normal. But you looked at the population of contracts that could be affected by this executive order. And I thought the most amazing detail was the effect that would have on contracting officers tell us what you found out.

Curt Cote: Yeah, when the executive order came out on, I think it was April 27, we saw a lot of great analysis on the macroeconomic impacts of the order, analysis on what it may mean for the standard of living for individuals who may be impacted who are currently making the federally mandated minimum wage. But we didn’t really see any coverage of how the government would put it into action. And when we started thinking about what our clients were going to be facing, we realized there’s going to be a lot of work that contracting officers and acquisition organizations are going to have to do in the next year.

Tom Temin: Basically, to verify that the contractors are doing what they’re supposed to.

Curt Cote: Yeah, exactly. So imagine that you’re a government contractor, and you put in your price proposal for a typical base plus for your option contract. When you put your price proposal together, you’re going in with a set of assumptions on what your cost is. Now imagine you’re a contractor, you’re in the second year of a contract, and employee a lot of folks that make the minimum wage, and all of a sudden your costs go up 50%, going from about $11 to $15. Well, it’s reasonable for you to go to the government and say, hey my cost basis has risen, can I get an economic adjustment for the price that I charged to the government.

Tom Temin: And so the bottom line is a lot of hours of work.

Curt Cote: A lot of hours. So if you’re the contracting officer, you get a request for an adjustment from one of your contractors ,from one of your vendors. First you need to take that data, you need to analyze what they’re saying, you need to do your due diligence to make sure that the cost increases substantiated with data, then you need to make sure that there’s budget available from your program office customers. As we keep thinking about all the work that’s going to happen, we estimate based on our benchmarks, that’s about 15 hours of work per contract. And the question is then is how many contracts are going to be impacted, and we came up with about 30,000 contracts are going to need to be looked at analyzed and edited.

Tom Temin: Alright, and so what does that add up to in hours before people pull out their calculators?

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Curt Cote: Yeah, so 15 hours per contract, 30,000 contracts. That’s 450,000 hours of additional contract workload. So that translates to about 240 individuals.

Tom Temin: Wow. So that’s a real piece of work, then.

Curt Cote: It is, it is. And it’s spread across the agencies – Department of Defense, obviously, as the the biggest spender in the government is going to bear the brunt of this. But agencies such as Veteran Affairs, USDA, the Department of State, they all have sizable contract portfolios, which we think are going to be impacted.

Tom Temin: And you mentioned a total government wide of some 30,000 contracts that could be affected. What is the general nature of those types of contracts?

Curt Cote: Our first analysis was, are professional services contracts going to be impacted? And as we suspected, the answer is no. Very few professional services contracts have employees making the federal minimum wage. Then what we did was we looked at labor classification data. And what we found out was, there are a pretty discrete set of contracts that are going to be impacted – janitorial services is the biggest, landscaping services, food services and laundry services round up the top five.

Tom Temin: So that’s where people doing the contracting work, and on which the bids were made then our low paid people.

Curt Cote: Yeah, exactly.

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Tom Temin: We’re speaking with Curt Cote, he’s managing director of Censeo Consulting. And, again, DoD has the most contracts that would be affected by this rule.

Curt Cote: They do. DoD we’re estimating has about 11,000 contracts that are going to be impacted. VA is about 8,000. And then USDA and the Department of State are both about 2,000 each.

Tom Temin: Got it. So agencies where there’s people in uniform may have a lot to pay, because laundry goes out. Would TSA be part of that, I wonder?

Curt Cote: I bet it would, I bet it would. TSA, part of Department of Homeland Security.

Tom Temin: And let’s talk about the impact on federal spending this will have.

Curt Cote: Yeah, so that was one of our other questions. After we looked at what’s the workload impact – what’s the implication on budget? As we started, 30,000 contracts, that has to have a pretty big impact, right. But these contracts, they tend to be relatively low dollar figures. And what we’ve calculated is only about a $1 billion to $2 billion impact on total government spending – which a billion to $2 billion, it’s not like that’s nothing, but when you think about the government’s total contract spending, $600 billion in 2019, we’re talking about a fraction of a percent.

Tom Temin: So then what is the bottom line advice that you’ve got for agencies now facing a lot of work possibly, a lot of examination? And probably it’s fair to say every agency should look at the contract, even if they don’t have the quantities that DoD does. What are you telling people?

Curt Cote: Yeah, we think every agency needs to look at your contract portfolio and identify how much spend you have in these key impacted areas. Number two, then go into those contract files and look at the pricing structure, that’ll help you understand just how many contracts you’re talking about. What’s the workload going to be starting in January 2022? And then we’re also recommending that agency put policies and processes in place, right. We need to answer questions like, who’s going to be doing this work? Will it be the responsibility of individual contracting officers? Or might it be more efficient for an agency to set up a working group, a tiger team that will just handle this in mass? What data does the agency need vendors to submit to substantiate their request for price information? And how’s that data going to be validated?

Tom Temin: Right. And when does all this take place? There’s a deadline,, it’s not tomorrow.

Curt Cote: It’s not tomorrow. So the order goes into effect January of 2022. Essentially, any new contracts that are awarded after that date, or when a contract hits its option period. That’s the point that the the minimum wage goes into effect, as well as guidance that agencies should start incorporating this now, even though it’s not policy yet, it will be.

Tom Temin: And there’s also an open question here that’s not strictly part of the research, but something we can imagine. I’m looking at, say nursing services, and trying to overlay that with, say Veterans Affairs Department. Now the Veterans Affairs Department has its own nurses as employees – but as they pay a larger number of community care advisors, I guess you wonder will the administration extend this to people that are funded by the government, but not on a contract basis, but on some other programmatic basis like the Community Care program?

Curt Cote: Yeah, I mean, I think that’s a natural way to read the intent of the order, right. It was very clear in the order that this doesn’t just apply to prime contractors, to subcontractors as well. So it seems like the attempt is to widen this net to encompass all folks that do business with the federal government.

Tom Temin: Yeah. So that could be by the contracting EDM or by any one of other mediums – grants, for example.

Curt Cote: You got it.

Tom Temin: And just briefly, what was your methodology for discovering and distilling out all of these different types of contracts and the quantities associated with them?

Curt Cote: Yeah. So there was a lot of data analysis that we did. It started with looking at government spending from FPDS. We then looked at labor classification data from the Department of Labor, as well as prevailing wage data, also from the Department of Labor. And then we looked at cost structure data from benchmarks – how are contracts structured? Where are the costs coming from that build up to the agency prices?

Tom Temin: Sure. And a final question, there is a little bit of regional flavor to this because the contractors in the South pay less than those, say mowing lawns in Albany, New York.

Curt Cote: Yeah, exactly. Just like any facet of the government, the prevailing wages are much higher on the coasts than they are in the Midwest and Deep South. So as we’re advising our agencies, we’re recommending, don’t just look at the categories of contracts – but look at the place of performance. If you have a janitorial service being executed in New York City, you are certainly paying those employees more than $15 an hour. If you’re in the Midwest, in the Deep South – yeah you may have a sizable population that would need to be fluffed up.

Tom Temin: Alright. Good report to see all of us quantified. Curt Cote is a managing director of Censeo Consulting. Thanks so much for joining me.

Curt Cote: Thank you.

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