Why Private Companies May Stop Taking Incidental Government Contracts

Bruce McQuain has an article on how McDonald's is closing some contract-operated fast food outlets at military bases.  The article speculates that the closures on new government minimum wage regulations for government contracts.

Frankly, I doubt this explanation.  I know something of the world of government contracting, and contractors in these cases routinely just pass on wage increases to their customers in the form of higher prices.  After all, their contracts give them a monopoly of sorts in these bases.

I would like to offer an alternative explanation.

In March, a new regulation took effect that all contractors with anything larger than a $50,000 a year contract with the government must go through an expensive affirmative action planning process for ALL of their locations, not just for the people involved in that particular contract (41 CFR 60-2.1  and 41 CFR 60-4.1)

We don't do government contracting work.  We lease government facilities, but get paid 100% by customers -- since we don't take government money, we are not a contractor.  But there is one exception.  We have a $52,000 a year contract to clean bathrooms near the campgrounds we operate in California.  Basically, we bid this contract at cost because we want the bathrooms cleaned well -- if they are not, it hurts our nearby businesses.

In this contract, we have government-mandated wage requirements under the Service Contract Act.  When these mandated wages go up, we just raise the price to the government in proportion.  No big deal.

We were informed that having this contract, under the new March Obama regulations, now made us liable to go through an expensive and time consuming affirmative action planning process for every location -- of which we have over 120 -- not just for this one contract.  So this one contract was going to force us to create 120 annual written plans and presumably get them approved by someone in the government.  No way.  I might have done it if I only had to do a plan for the contract, but it is just too much work to do this everywhere merely because I have a $52,000 contract on which I make no profit.  So we told the Feds we were dropping the contract.

I think it is very unlikely that private businesses will be accepting government contracts as 5 or 10% of their business any more.   This new regulation just imposes too much cost on the other 95% of the business.  Many will drop the government contracts.

I wonder if this is what is really going on with McDonalds.  A regulatory requirement that applied just to the base operations, like a minimum wage, strikes me as manageable.  But having these three or four contracts drive an expensive requirement to create some sort of affirmative action plan for every location - essentially every one of their tens of thousands of stores, so tens of thousands of plans - that would drive them out of these contracts VERY fast.

  • JimP

    Ah, yes: OFCCP. Enjoy!

  • J Calvert

    That's insane. I wonder how many contractors are not aware of this regulation? My favorite part is where the contractor can negotiate, and gain government approval, to have plans that encompass larger business units than the location, i.e. have a single plan that covers the entire company. BUT:

    "Agreements allowing the use of functional or business unit affirmative action programs cannot be construed to limit or restrict how the OFCCP structures its compliance evaluations."

    They'll audit your plan in any way they see fit anyway.

    What good is an negotiated agreement they can ignore anytime they want?

    What is an "affirmative action plan" anyway? How in the world do you audit that?

    Jeff

  • mogden

    The notion that the federal government compels you to discuss with each employee their race or ethnicity, and then report that to a bureaucrat on a form, is deeply offensive.

  • Chris

    Aren't most McD's franchises though?
    I know the richest guy in my home town growing up owned two.

    Would a franchisee be required to do this because of something the home office did?

  • marque2

    I would start a sub company that is wholly owned by the parent company, and then do the bids and labor under the sub company. They probably would not require the data for the parent company then.

  • marque2

    It might be difficult for an individual to make a bid on a government contract for food services, so the parent company has to put their own restaurants in. McDonald's is a mix. Mostly franchise, but it has corporate locations as well. In the USA approximately 15% of McDonald's are corporate owned. England and Ireland they own 70% and in other countries they usually operate joint ventures with the government.

    http://en.wikipedia.org/wiki/McDonald's#Business_model

  • Matthew Slyfield

    Don't bet on it. And if someone gets away with that, they will change the law to fix the loophole.

  • Matthew Slyfield

    " How in the world do you audit that?"

    They shove a stick up your A** and wait for you to cry uncle.

  • marque2

    You think Pratt & Whitney has to tell the government about Otis Elevator or Carrier Air conditioners? I would be surprised.

  • marque2

    Matt shot down the shell parent company idea - but I am pretty sure it would work. There would have to be some level of independence though.

    Another idea - no employees, hire them all through temp agencies or better yet have everyone incorporate and then pay their services. Folks do this all the time "corp to corp" contracting. Then everyone would have zero employees and you would not have to worry about it.

  • irandom419

    Wouldn't it be simpler to have a quota system? You could have a table to look-up business size and the expected diversity make-up. I thought once we had a melanin president, this bull would go away.

  • kidmugsy

    I recounted this tale to my wife. All she said was "Land of the Free".

  • slocum

    My first thought here is cronyism. This sounds like a way for the businesses that specialize in government conracts to get rid of competition from the much larger pool of businesses that could potentially do government work as a sideline.

  • DerKase

    This is one of the reasons why Hillsdale College takes no gov't money at all. Once you take $1, the gov't can dictate every aspect of how you run your entire business.

  • John Phillips

    another worry is that the government is narrowing its list of potential contractors down to a list of a few specialists - which means much less vigorous competition for contracts - which means higher prices for the tax payer. If this continues, there may be little reason for the government to contract the work out at all.