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In the “good old days” of state contracts, the contractor simply submitted a negotiated labor rate in a “time and material” change order to the owner and its construction manager who paid the amount agreed upon. But in recent years, Ohio public agencies have pushed back on what they believe were excessive labor rates and demanded to see proof of actual costs. Contractors, particularly on Ohio School Facilities Commission (“OSFC”) work that is not prevailing wage, replied that this was an unreasonable administrative burden because it was impractical to document every labor hour and rate per employee (many of whom make a different wage) working on each discrete change order.

The OSFC dealt with this challenge by agreeing to the practice of “blended” rates, where a contractor at the start of a project would submit a proposed blended labor rate for the project, which would be utilized in “time and material” change orders. This seemed to be a reasonable compromise between practicality and the OSFC’s desire to avoid paying excessive change order labor rates.

However, the OSFC is now beginning to utilize its contractual right to audit contractor cost records after the fact, in an effort to determine whether the “blended rate” reflects the contractor’s actual wage rates, together with appropriate fringe benefits. The OSFC is then attempting to force contractors to disgorge any monies associated with “excessive” labor rates if an audit cannot support the “blended rate” agreed upon.

Contractors, particularly open-shop contractors, must take care to select a blended labor rate for change orders that is fully supportable and documentable if challenged. Otherwise, these contractors are at risk of being forced to give money back to the OSFC long after a change order labor rate was negotiated and agreed upon, and the work performed and paid for.