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Winning a federal government contract changes the payroll rules for building services and janitorial companies. Once the McNamara-O’Hara Service Contract Act applies to your work, your pay structure, benefits obligations, and recordkeeping requirements shift in ways that can catch unprepared contractors off guard. The financial exposure for non-compliance can exceed the margin on the contract itself.
This guide covers what the Service Contract Act requires, how wage determinations work, how fringe benefits are handled, and what building services operators need to build into their payroll systems to stay compliant.
Last updated: June 2026
What Is the Service Contract Act?
The McNamara-O’Hara Service Contract Act (SCA) is a federal law that governs labor standards for contractors and subcontractors performing services on federal government contracts. It applies to contracts over $2,500 that involve the performance of services in the United States, using service employees — which includes most building maintenance, janitorial, and facility management work performed under federal contracts.
The SCA is enforced by the Department of Labor’s Wage and Hour Division. Violations can result in contract debarment — exclusion from federal contracting for up to three years — in addition to back wage liability for all affected employees. That debarment risk is what makes SCA compliance so consequential for building services contractors who depend on government work.
Wage Determinations: The Foundation of SCA Compliance
The core mechanism of the SCA is the wage determination. Before a federal contract is awarded, the contracting agency obtains a wage determination from the DOL — a document that specifies the minimum hourly rates and fringe benefits that must be paid to service employees performing each class of work under the contract. Wage determinations are locality-specific and occupation-specific.
Wage determinations are incorporated directly into the contract. Once incorporated, they are binding — you cannot pay less than the wage determination rates to any covered employee, regardless of what your normal pay structure would otherwise be. If a wage determination is revised during a multi-year contract, the revised rates apply at the next option period. Contractors who fail to track these changes and update payroll accordingly accumulate back wage liability across their entire covered workforce.
The current wage determinations are available on SAM.gov. Before bidding any federal contract, verify that your payroll rates for each job classification meet or exceed the applicable rates for the performance location. Job classifications under the SCA are standardized — the DOL publishes occupational descriptions for each covered category, and contractors must slot their employees into the correct classification rather than using their own internal job titles.
Fringe Benefits Under the SCA
The SCA requires contractors to provide fringe benefits in addition to the minimum wage rates specified in the wage determination. The current SCA health and welfare fringe benefit rate is updated by the DOL periodically. Contractors can satisfy the fringe benefit requirement by providing bona fide fringe benefits (health insurance, vacation, holiday pay, retirement contributions) worth at least the required dollar amount per hour worked, or by making a cash payment of the same amount per hour in lieu of benefits.
The cash-in-lieu option sounds simple, but it requires careful payroll tracking. If you pay the fringe benefit differential as a cash supplement, that amount must be reported accurately on payroll records, it may affect overtime calculations depending on how it’s structured, and it must be maintained at or above the required rate for each pay period. Many contractors underestimate the recordkeeping burden this creates, particularly on multi-site operations where some employees work hours on SCA contracts and others do not.
Recordkeeping Requirements
The SCA imposes specific payroll recordkeeping requirements on top of the standard FLSA requirements. For each covered employee, contractors must maintain records of hours worked on the contract, wages paid, fringe benefits provided, and the job classification under which the employee was paid. These records must be maintained for three years and must be available for inspection by the DOL.
For building services contractors with mixed workforces — some employees covered by SCA contracts, others on commercial accounts — this means your payroll system needs to track SCA vs. non-SCA hours at the employee level. If an employee works both federal contract hours and commercial hours in the same week, you need to be able to demonstrate that their SCA-covered hours were paid at or above the wage determination rate and that the appropriate fringe benefits were provided.
A connected payroll and time tracking system that can tag hours by job code, site, or contract type makes this manageable. Without that tagging capability, most contractors resort to manual reconciliation — a slow, error-prone process that tends to produce compliance gaps. Netchex allows building services contractors to track hours by location and contract type, calculate pay at the correct rate for each classification, and generate the audit-ready records the DOL requires. See how Netchex supports building services payroll compliance.
Successor Contractor Obligations
The SCA includes protections for incumbent employees when a federal service contract changes hands. When a building services contractor wins a contract previously held by another company, they may be required to offer employment to the predecessor’s service employees before filling positions with new hires. This successor contractor obligation applies when the same services are being performed at the same location and the number of employees required is not significantly reduced.
Successor obligations complicate workforce planning for contract transitions. Before onboarding a full crew for a newly won federal contract, review the predecessor’s employee roster and confirm whether the successor contractor rule applies. Failure to comply with successor obligations is an SCA violation, not just an HR misstep.
Frequently Asked Questions
The SCA applies to contracts with the federal government over $2,500 that involve services performed in the United States using service employees. State and local government contracts and private-sector contracts are not covered by the SCA, though they may be subject to state prevailing wage or living wage requirements. If you perform work on federal facilities or for federal agencies, verify whether the SCA applies before bidding.
Wage determinations are published on SAM.gov and are identified by a unique number. The contracting agency is required to include the applicable wage determination in the solicitation and contract documents. You can also search SAM.gov by state, county, and job classification to find the rates that apply to your performance location. Always verify the wage determination incorporated into the specific contract document, as rates vary by locality.
Underpayment of SCA wage determination rates triggers back wage liability for all affected employees for the period of underpayment. The DOL can assess these back wages through an investigation, and the contracting agency can withhold contract payments until back wages are satisfied. Willful or repeated violations can result in debarment from federal contracting for up to three years — a potentially company-ending outcome for contractors who depend on government work.
When an employee works hours on both federally covered contracts and commercial accounts in the same workweek, you must ensure SCA-covered hours are paid at the wage determination rate and that the applicable fringe benefit is provided or paid in cash for those hours. Your payroll system should be able to tag hours by contract type and calculate pay at the correct rate for each. This is one of the more complex compliance scenarios in building services payroll, and manual tracking significantly increases the risk of error.
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See how Netchex tracks hours by contract type, calculates pay at wage determination rates, and generates audit-ready records for building services federal contractors.
This guide reflects publicly available product information and independent reviewer data (G2, Capterra, Trustpilot, Yelp, Better Business Bureau, Reddit, Software Advice, GetApp) as of 2026. Feature availability and pricing may vary by plan. Contact each provider for current details.
Disclaimer: Any product roadmap or future plans provided herein are for informational purposes only. They do not represent a commitment to deliver any material, code, feature, or functionality. Plans may change without notification. The development, release and timing of any features or functionality described remain at the sole discretion of Netchex, its affiliates, and partners. Netchex does not give legal, tax, or accounting advice. You are responsible for ensuring your use of Netchex product meets your individual business and compliance requirements.
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