Win or lose the contract, don't forget employee transitions

Both the Department of Defense and the Department of State recently awarded multi- year, multi-billion-dollar contracts. DOD’s was the Logistics Civil Augmentation Program (LOGCAP) for Army strategic sourcing aimed at base operations and sustainment services. The State contract was for Diplomatic Platform Support Services (DiPSS) to provide life support, logistics, and operations & maintenance. These are just two examples of a big award season.

This has huge implications for the contractors who were and were not awarded positions on the contracts, especially if there is a change of contractors – and this is not just around revenue. This is an excellent opportunity to review your CYA risk management strategies. Just because a contract changes hands, it doesn’t mean that there is a significant change in the labor pool. Often employees stay on an existing contract even though the “employer” changes.

This is where things get tricky. If you picked up a new contract and kept the existing labor pool, what are you doing to ensure whatever injuries were incurred with the prior employer stay with the prior employer?

What CYA strategies are you using if you are coming off a contract? Your current employees may not know whether they are going to be picked up for the new contract or sent home. This is an inherently complex time because there is a bias for employees to start filing claims under the Defense Base Act.

Consider this case study (note: this is not based on a specific contractor):

Sample overseas contractor with operations in Afghanistan employed workers doing a combination of clerical work and heavy labor. Their insurance carrier charged them $3 per $100 of payroll for the clerical workers and $7 per $100 for the heavy labor. 

As uncertainty around the status of existing contracts and the possibility of changing employers persisted, those workers faced the prospect of having to return home where they faced a future of lower pay doing the same work or even no pay. Given this, it was it in their best interest to file DBA claims and get what they considered was guaranteed compensation.

The insurance carrier ended up paying out $2 in claims for every $1 in premium they took in. This means If the insurer originally charged a total of $1,000,000 in premium before the uncertainty of the employees’ futures, they had to pay out $2,000,000 in claims. This is not sustainable for any organization.

In order to make up for those losses in revenue, the insurer then charged the contractor $7 per $100 payroll for the clerical workers and $50 per $100 payroll for heavy work. Hypothetically, the premium the contractor paid went from $1,000,000 per year to over $6,000,000 per year.

This makes for a difficult conversation with the contractor’s customer, the U.S. Government. The contractor is responsible for negotiating premiums with the insurer but often they are reimbursed by the government for these expenses. These are called “cost plus” contracts. If the contractor was awarded a contract based on the lower expenses, then this material change could put those contracts, and future contracts, in jeopardy.

The point is that even if you, as the contractor, opt to pay out-of-pocket to screen employees going on and off contracts, it is ultimately in your best interest to have pre-hire and pre-separation processes in place. This is an essential CYA strategy to protect your bottom line as well as that of your insurers and most importantly, your customer.

Big awards like those for LOGCAP and DiPSS mean big opportunities for overseas contractors. It is important that all contractors ensure they are closing the circle for both the beginning and the end of their contracts with effective CYA risk management strategies.