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    Is "escalation" labor cost allowable in a FFP construction contract modification as a result of Government delays. The contractor is adding in their proposal "staff escalation labor cost for 1st and 2nd year. Is this allowable?


    From your limited background information, this appears to be anything from government caused delay, to a change under the Changes clause or even and impact claim.  As far as escalation of labor rates and are these allowable, these are the questions I would have to consider. How long is the contractor being delayed from starting the original work?  Is it a few weeks?  6 months?  A year plus? Does the contractor normally escalate those labor rates each year?  What percentage? What’s normal for that industry and region?
    As for what FAR part 31 states, it addresses several aspects.  FAR 31.105 in construction contracts encourages you to have advance agreement. Absent an advance agreement and if the delay was significant, then you will have to apply the reasonable standard.  A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Additionally, any cost would have to meet the allowability standard at FAR 31.201-1
    FAR 31.204(d) states, “Section 31.205 does not cover every element of cost. Failure to include any item of cost does not imply that it is either allowable or unallowable.”  In ascertaining what constitutes a cost, any generally accepted method of determining or estimating costs that is equitable and is consistently applied may be used.
    If by the time the HAZMAT mitigation work was negotiated and completed, this extended the original contract work close to a 6 to 12 month period (or into a contractor’s new fiscal year) or more there could be a basis for the contractor to escalate his labor rates.  The contractor should provide documentation that there is historic data of his labor increasing each year. You could also utilize and to verify for that industry what is reasonable escalation for labor. 
    Whether you will pay additional profit will depend on which clause/s authority you issue the modification under.  If it is under the suspension of work, FAR 52.242-14, this clause only allows reimbursement of costs (no profit) where the Changes clause, FAR 52.243-4, allows the Contracting Officer shall make an equitable adjustment which can include profit.

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