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Argy Articles
Proposed Changes to the Federal Acquisition Regulation Concerning Time and Materials (T&M) and Labor-Hour (LH) Contracts
The federal government is proposing to revise regulations on labor hour (LH) and time and materials (T&M) contracts. As proposed, the new regulations would significantly hinder small businesses from competing for and managing federal government work.
In recent years, the federal government has gone from rarely using T&M contracts to using them as a preferred vehicle. A controversy was raised by DCAA that noted that the payments clause of the T&M contracts indicates that subcontracts are on a cost reimbursable basis only. This was contrary to the practice followed by most companies that also had subcontractors work on labor required by the contract. The contractors in those cases charged the government using the fixed hourly rate, not the subcontract cost plus allocable indirect expenses.
Background
The FAR council has proposed to modify the regulation to:
- Require government contractors to charge the actual cost of subcontracts as a material unless they are listed in the contract.
- Expand the definition of Materials to include Travel and ODCs and
- Explain what indirect costs are allocable to the revised definition of materials.
The Environment
For decades, both large and small businesses have been using consultants and subcontracts to supplement their workforce and compete on federal T&M and LH awards. Typically, these contracts require more staff or expertise than an offeror has in-house. Also for large businesses, subcontracting the hourly part of the contract is used to meet the small business goals of the federal government. The federal procurement often does not require all hourly services full-time, and the expense of hiring and retaining such personnel would be too costly for a small business.
Other times, an offeror’s expertise is only in one area of the work they are being asked to bid. So the offeror develops a team to bid on such work, combining their expertise and workforces to compete for and complete the contract.
There are times after the contract award when a business may hire a new subcontractor or consultant to do work under a federal T&M or LH award. They can be summarized as follows:
- To replace another subcontractor.
- To supplement its own workforce so that it may bid on the task.
- To avoid the time and cost of hiring and benefits for a short-term need.
- To provide the government with the expertise they have asked for but the business does not currently have.
Such labor is invoiced by the government at the contracted rate. Sometimes using the subcontracted services results in an accounting loss. That is, the cost of the subcontract and allocable indirect costs is more than the amount of revenue generated from the contract. The contracts are not personal services contracts.
Sometimes a business does not have the staff in-house to do the work when it was bid and used salary surveys and its own indirect cost structure to estimate the cost of subcontracted employees. That intent may or may not be disclosed. But on large procurements, it may be the only way to be responsive. Later, a federal auditor may find that subcontractors or consultants were used in fulfilling the government’s requirement.
The Problem
The problem stems from the classification of labor versus subcontracted services.
T&M contracting has become a great source of business for companies. Such contracts are easier to administer for the government. But no one developing the original regulations ever envisioned the way they would be used. Clearly the practices have long since passed the original purpose of the regulations in use.
Even T&M and LH contracts are subject to the Truth in Negotiation Act, and as such, intentionally misrepresenting the estimated cost has very serious consequences. The focus should be on making sure that the government gets the services for which it contracted.
The proposed changes to the rule would allow subcontracting only if the subcontractor was known at the time of award and listed in the contract under clause 52.232-7. Listing the subcontractors in a contract clause will not help many small businesses and would discourage prime contractors from finding and using small businesses. Thus on subsequent subcontracts, the contractor may have to bill for the subcontract at actual cost. Though it is possible to modify a contract, a major reason for procuring using a T&M vehicle may be lost.
The proposed changes to the rule redefines materials to include subcontracted services and other direct costs. We believe that the government should exclude the word materials altogether and use entirely new language.
We believe the government should require disclosing subcontracts and consultant costs that may be used to fulfill the requirements of a T&M or LH contract. Definitions of what is considered labor need to be expanded just to meet the subcontracting requirements being placed on large businesses. Identifying that the subcontracts and consultants may be used on a LH contract will give flexibility to small businesses to fulfill the requirements of their contracts when employees cannot be hired or would be economically harmful to the small business.