Federal Service Contractors Must Now Pay $5.92 an Hour in Benefits — Here's the Catch

Federal Contractors Owe Workers More — But You Won't Get Paid Back Automatically

If your business holds a federal service contract — cleaning government buildings, staffing a call center, providing IT support, security, food service, or dozens of other categories covered by the McNamara-O'Hara Service Contract Act — the Department of Labor just raised the minimum health and welfare benefits you owe your employees. Effective August 10, 2026, the Wage and Hour Division increased the prevailing health and welfare (H&W) fringe benefit rate from $5.55 an hour to $5.92 an hour. That's an extra 37 cents per hour, per covered employee, that you're now on the hook to provide in benefits or equivalent cash wages.

For a contractor with even a modest crew of 20 SCA-covered employees working full time, that increase works out to roughly $30,800 a year in added benefit costs once it's fully phased in across your contracts. The good news: you're generally entitled to recover that cost from the government. The catch: only if you handle the process correctly, and most contractors don't know the rules well enough to avoid leaving money on the table.

What Actually Changed

The Service Contract Act requires contractors performing covered service contracts with the federal government to pay employees prevailing wages and fringe benefits set by the Department of Labor. The health and welfare component of that fringe benefit package just went up across the board:

• The standard H&W rate rose from $5.55 to $5.92 per hour.
• For contractors obligated to comply with Executive Order 13706 (paid sick leave for federal contractors), the rate rose from $5.09 to $5.42 per hour.
• In Hawaii, where the Hawaii Prepaid Health Act applies, the updated rates are $2.51 per hour without the EO 13706 obligation and $2.01 per hour with it.

These are per-hour, per-covered-employee amounts. Contractors can satisfy the requirement by providing benefits — health insurance, retirement contributions, life insurance — worth at least that amount per hour, or by paying the difference in cash wages if benefits don't add up to the full rate.

Here's the Part Most Contractors Get Wrong: This Isn't Automatic

Getting the new wage determination issued by the Department of Labor doesn't mean it applies to your contract yet. According to government contracts attorneys at PilieroMazza, the rate that actually governs your obligations is whatever wage determination is currently incorporated into your specific contract — not whatever the newest published rate happens to be.

That distinction matters because of how new rates get applied:

• New solicitations issued more than 30 days after a wage determination is published should already include the new rate.
• Existing contracts only pick up the new rate when the contracting officer incorporates it — typically at the contract's option-year renewal, through a contract modification. Contracting officers can incorporate it earlier, but rarely do.

Bumping employee pay before the new wage determination is officially incorporated into your contract is a bigger risk than it sounds. Contractors who raise wages early, out of fairness or to avoid employee complaints, can actually forfeit their ability to recover that cost later. Once the new determination is incorporated, you can only recover the difference between what you're already paying and what the new determination requires — not the difference between the two published wage determinations. If you've already voluntarily raised pay to match or exceed the new rate before the contract catches up, there's no gap left to recover.

You're Entitled to a Price Adjustment — If Your Contract Has the Right Clause

Most SCA-covered federal contracts include a clause, FAR 52.222-43, that entitles contractors to a price adjustment covering the increased wage and fringe benefit costs once a new wage determination is incorporated — including associated tax and insurance cost increases, not just the raw wage difference. This is the mechanism that keeps a wage determination increase from simply eating into a contractor's margin.

Two things worth checking on your own contracts:

• Confirm FAR 52.222-43 (or its equivalent) is actually in your contract. Some contracts omit it or include modified language that limits your recovery — worth a careful read or a call to counsel if you're unsure.
• If you haven't seen a new wage determination incorporated into your contract in several years, it's worth flagging to your contracting officer. It's not technically your job to remind them, but DOL notes that contracting officers sometimes miss updates, and a quiet reminder now can prevent a much bigger, messier true-up — or a disgruntled-employee complaint to DOL — later.

What to Do This Week

If you hold or are bidding on federal service contracts, here's the practical checklist coming out of this update:

• Do not automatically raise employee pay to the new $5.92 rate across all contracts. Check which wage determination is currently incorporated into each specific contract first.
• For any new bids or proposals, price in the new $5.92 (or $5.42, or Hawaii-specific) rate, since new solicitations should reflect it.
• For existing contracts approaching an option-year renewal, watch for the wage determination update and be ready to request the FAR 52.222-43 price adjustment as soon as it's incorporated.
• If you have a unionized SCA workforce under a collective bargaining agreement that's been properly submitted to the contracting officer, know that the CBA — not DOL's standard wage determination — generally governs your fringe benefit obligations.

Getting this wrong in either direction is costly: pay too late and you risk employee complaints to DOL; pay too early, outside the contract modification process, and you may forfeit your right to recover the cost. If your business is new to government contracting altogether, it's worth making sure the fundamentals are solid first — from choosing the right business entity structure to keeping a clean profit and loss statement that can absorb a wage determination true-up without throwing off your cash flow. Contractors relying on financing to bridge the gap between paying employees and receiving a price adjustment should also have a clear picture of their SBA loan options in case a modification takes longer than expected to process.

The Bottom Line

A 37-cents-an-hour increase in a fringe benefit rate might not sound like breaking news, but for small businesses running on federal service contracts with thin margins, it adds up to real money — money you're generally entitled to recover, but only if you follow the contract modification process instead of jumping ahead of it. Check your current wage determinations, confirm your price adjustment clause, and don't move faster than your contracting officer on this one.

Photo by Towfiqu barbhuiya on Unsplash