Compensation made under an "arms length" negotiated labor management agreement (LMA) is considered reasonable unless some or all of its provisions are "unwarranted or discriminatory" against the government. Conditions of unwarranted or discriminatory provisions of the LMA might include:

1. Under unique circumstances, work conditions may vary significantly from those contemplated by the LMA that are inequitable to the government. For example, if pay rates are based on hazardous employment conditions while the government contracts call for less hazardous conditions.

2. Provisions of an agreement are considered discriminatory against the government when the agreement calls for differing wages under commercial and government contracts for similar work under similar circumstances. For example, an agreement which requires higher pay levels for work on a government contract than for rates applicable to commercial work under similar circumstances would be discriminatory.

When unwarranted or discriminatory agreements are found the costs will not automatically be disallowed but the contractor will be given the opportunity to justify its costs and explain why the unusual conditions require higher compensation to attract or hold necessary personnel.

If no unwarranted or discriminatory provisions exist, the auditor is to assume all compensation is reasonable and not pursue any other steps discussed below. Also, when wage increases for employees not covered by an LMA are comparable to those for the bargaining unit employees, the auditors are to assume they are reasonable and no further tests are required.

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