LSI had a firm fixed price contract to provide the Air Force with aircraft maintenance services and the contract incorporated the Service Contract Act (SCA) which required the government to pay LSI for increases in applicable fringe benefits made to comply with its collective bargaining agreement (CBA).  The CBA specifically required LSI to provide employees with a defined-benefit health plan which, in contrast to a defined-contribution plan, obligates the employer to spend whatever is necessary to continue to provide employees with an agree-to level of benefits, even if costs rise.  When the cost of providing that plan increased during the third option year it sought reimbursement from the Air Force claiming the plain language of the SCA Price Adjustment Clause protected the contractor from increased costs of providing health and welfare benefits.  The government and Appeals Board rejected LSI’s position saying it distinguished between increases in an employer’s cost of providing benefits, which the Board said is insufficient to trigger the Clause, and increases in the benefits themselves.  The Board stated any increased cost experienced by LSI was caused by inflation and not compliance with SCA.  

The Federal Circuit reversed the Board’s decision saying there was no merit in the argument the Price Adjustment Clause is triggered only by an enlarged benefit rather than enlarged costs of providing those benefits.  The Court said the contract price labor rates will be adjusted to reflect the contractor’s actual increase or decrease in applicable wages and fringe benefits where the critical consideration is in “monetary cost to the contractor.”  The Court concluded the Price Adjustment Clause is triggered by changes in an employer’s cost of compliance with the terms of the wage determination – the fact there was no nominal change in the benefit provided is “simply irrelevant” (Lear Siegler Services Inc. V. Sec of Defense, Fed. Cir., No. 06-1080).

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