During his 2014 State of the Union address, President Obama announced that he intends to use his executive power to increase the minimum wage for federal government contractors to $10.10 per hour.  The forthcoming Executive Order is expected to impose this wage increase on all new and renewed federal service and construction contracts after the Order’s effective date.  However, specific details regarding the Order’s contents are still under development by the White House.

An increase from the current federal minimum wage of $7.25 per hour will have varying effects on government contractors.  Twenty-one states, as well as the District of Columbia, currently have established minimum wage requirements greater than $7.25.  As a result, contractors in these areas will feel less of an impact than those in states with minimum wages at or below the current federal level.  Similarly, some contractors may already have self-imposed minimum pay rates that meet or exceed $10.10 per hour, and will not be affected by the mandate.  Contractors who will be affected, however, should be sure to consider the following direct and indirect effects to their existing workforce and contracts:

  • Personnel wages for all labor categories at and around the new minimum wage requirement.  The most direct and immediate impact to government contractors will be the requirement to increase the wages of any affected employees making less than $10.10 per hour.  An indirect consequence of this, however, is that contractors will likely need to also reassess and consider wage increases for employees who were previously paid at or slightly above $10.10 per hour.  If more senior or highly skilled employees are suddenly paid the same amount as their less qualified colleagues, employers will likely see an increase in employee turnover and a negative impact on morale.  Contractors who have unionized employees may also be required to renegotiate their collective bargaining agreements.
  • Impacts to negotiated government rate agreements and proposals in processContractors who have negotiated forward pricing or other rate agreements with the federal government will need to assess, propose, and negotiate the impact of their increased direct wages on such agreements.  Contractors may also be required to re-price proposals for new or renewed government contract bids in process, depending on how much lead time the Executive Order provides before the wage increase takes effect.
  • Effects on existing contracts containing future option years.  While the minimum wage increase will only directly apply to future new and renewed contracts, it may have a collateral impact to existing contracts with options that overlap with the new wage effectivity.  A contractor may have pre-existing contract options for future work based on today’s rates.  If this same contractor also intends to obtain new government contracts for the same or similar work after the new minimum wage becomes effective, the contractor will have to wrestle with how to handle having similarly qualified personnel being paid at differing rates.  If the contractor maintains disparate rates, employee morale and retention could suffer.  Conversely, the contractor could suffer significant financial impacts if it chooses to increase wages for personnel on the existing contract without the benefit of re-pricing its contractual compensation.
  • Subcontractor concerns.  Finally, contractors should be prepared for similar concerns to be voiced to them by their subcontractors.  Subcontractors who are paid on a fixed-price or time-and-materials basis will likely be more vocal regarding these issues because they will bear the impact of increased costs to perform.  However, contractors who compensate their subcontractors on a cost-reimbursement basis may also suffer, since such costs are passed through to the prime (and likely to the government) and create a greater risk of budget overrun.

Regardless of whether government contractors support or dislike the idea of increasing the minimum wage, the President’s Executive Order is imminent.  While many details remain unknown at this time, contractors should be proactive in assessing the potential impacts of the wage increase on their respective business operations, pricing practices, and current government contracts.  If it appears that current contracts will be impacted, contractors should begin a dialogue as soon as possible with their government contracting officers and internal suppliers to discuss how the impacts of the minimum wage change can be amicably resolved.