Minimum Wage Executive Order 2021: How It Effects Contractors

On 27 April, President Biden signed an Executive Order that will increase the minimum wage rate to $15.00/hr for workers performing work on or in connection with federal contracts.

The Minimum Wage Executive Order 2021 states that beginning January 30, 2022, all agencies must incorporate the new minimum wage rate into covered contract solicitations and that by March 31, 2022, all agencies must incorporate the minimum wage into new contracts and any existing contract when the agency exercises its right to extend such contracts.

While most prevailing wages already exceed the new minimum wage requirement – a study by the Economic Policy Institute suggests that ~390,000 federal contractor resources, or ~15% of the federal contracting workforce, are currently paid under $15/hr.

Firms should move quickly to facilitate discussions between their program teams and government counterparts to understand the full impact of this minimum wage executive order 2021 change to their programs, and prepare to capture associated opportunities and/or mitigate risks.

How to Plan For the Execution of the Minimum Wage Executive Order 2021

Here are a few example considerations to help get the planning and conversations moving forward:

• Indirect Rates – increased DL cost absorption should lower some indirect rates, provided there is not an offsetting increase to labor costs for indirect positions whose current wage rates also fall below the minimum wage requirement; FP&A teams should be assessing potential impacts to rates [and margin] at the portfolio/segment level.
• Contract Modifications – federal contractors should work closely with their government contracting counterparts to ensure that rate modifications are incorporated into any impacted contracts prior to the effective date of execution.

Since some rate modifications may also require other contractual modifications (e.g. – increase to contract funding ceiling), it is important to engage with program contracting officers as soon as possible to minimize any delays in execution.

Also important to note is that these non-competitive rate modifications may open the door for the Government to negotiate and request certified cost and pricing data, and contractors should be prepared to disclose impacts to their rate buildups.

• Cashflow – cashflow, largely impacting fixed rate and fixed price contracts, can be affected in two ways:
  • a delay in incorporating any applicable contract modifications may result in a billing rate adjustment that lags behind adjusted payroll; this could be particularly exacerbated where REA’s are the mechanism for recovery,
  • fixed price contracts where the contractor is expected to invest in working capital for a portion of the contract period (e.g. – milestone or progress payments) will experience IRR dilution tied to the increase in labor rates.
• Workforce behavior – the increase to minimum wage is likely to impact attrition, where job seekers will gravitate to the federal contracting space for higher paying jobs, especially in areas where the prevailing non-federal contracting minimum wage is materially lower.

While this will create more supply in the labor pool, that supply may be concentrated around less “demanding” positions at the minimum wage level, leaving other positions at that wage rate scrambling to fill demand.

Should this occur, contractors should be willing to proactively increase wage rates beyond minimum wage executive order 2021to ensure a reasonable supply of workforce talent toward the positions they require.