Rethinking time and materials

A proposed rule would make it easier for agency officials to pay contractors for the time and materials required to complete a job rather than settling on a fixed price upfront and hoping for the best.

Members of the civilian and defense acquisition councils published an advance notice of proposed rulemaking last week, seeking ideas and suggestions on how the rule should be written. The rule would also cover labor-hours contracts, which are similar to those based on time and materials.

Advocates said a time-and-materials approach allows agency officials to get better prices, in many cases, because contractors facing a job whose cost they can't accurately estimate are likely to set a high rather than a low fixed price.

The shift to time-and-materials contracts was advocated by the Services Acquisition Reform Act, enacted as part of the 2004 Defense Authorization bill.

Opponents, however, are concerned that the contracts could open doors to abuse.

Officials at the Project on Government Oversight, a watchdog group, are wary of the potential for excessive costs, said executive director Danielle Brian. The contracts allow almost unlimited billing without the delivery of any product, and they can obscure the real cost of work, she said.

"It's a recipe for disaster," Brian said. "We can see the use of these contracts if there's expanded transparency and you can get cost and pricing data and accounting provisions. But I suspect the reason there's a push toward them is precisely because they don't have that transparency."

Office of Management and Budget officials have historically been cautious about the time-and-materials approach for similar reasons. "The government assumes the risk because the contractor must only make best efforts, not deliver a product," one official said.

The services acquisition legislation authorizes use of the contracts only if the contracting officer determines that no other type of contract is suitable. It also requires the contracting officer to set a ceiling price.

By contrast, the Federal Acquisition Regulation forbids the use of time-and-materials or labor-hours contracts for commercial procurements, said Chip Mather, senior vice president of Acquisition Solutions Inc. The irony, he said, is that the FAR did not have to be as restrictive as it is.

"That's why [the General Services Administration] is able to do time-and-

materials contracts on [GSA schedule contracts], because it's not prohibited by law," Mather said. With the proposed rule, the councils are "giving themselves authority that they themselves had taken away."

Mather said although the little-used contracting approaches offer some benefits, they also have drawbacks when not used well. "You're only buying hours," he said. "If someone burns through all your hours and doesn't deliver what you want, you can't take much action, legally."

In practical terms, however, smart contractors deliver what is asked of them, he said, or agency officials do not hire them again.

The Professional Services Council, a group that represents professional and technical services companies, has been an advocate for expanding the use of time-and-materials and labor-hours contracting, said Alan Chvotkin, the group's senior vice president and counsel. "It's disappointing that it's taken the councils this long to get to a notice of proposed rulemaking," he said.

A passage in the FAR ranks time-and-materials contracts as least preferred on a list of choices for procurements in which such contracts are not explicitly banned, Chvotkin said. In many cases, it's an appropriate ranking, because the contracts can be difficult to manage, he said.

However, it is a type of commercial contract that council officials said should be available for agency managers to use.

"They're still appropriate in a wide variety of situations," Chvotkin said. "If an agency can find a firm-fixed-price contract or other kind of contract, those are preferable. What we have championed is that there are situations where [time-and-

materials contracts] are preferable. Simply putting them at the bottom of the list for all choices" is too broad a restriction, he said.

In cases in which the final cost of a service is difficult to predict, time-and-materials contracts would fill the need, Chvotkin said. "We've not said these should be the best or always used," he said. "The argument we've used is that the government should be flexible enough to use what best suits its needs."

Bundling revisited

Defense Department officials have published an interim rule that restricts the practice of consolidating contracts. The practice is one in which requirements for several small contracts are combined into a large single procurement, which often puts it out of bidding reach for small businesses.

The rule implements Section 801 of the Defense Authorization Act for fiscal 2004 and applies to combined contracts with a value of more than $5 million. It imposes some additional controls specifically on DOD contracting officials to supplement existing rules aimed at minimizing the practice of contract bundling.

Under the interim rule, officials may not consolidate contract requirements valued at more than $5 million unless they can provide market research and a determination by the senior procurement official that the benefits of such a combination substantially exceed the benefit of any alternative.

DOD officials will take comments on the contract bundling rule through Nov. 16.

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Setting a new rule

Public comments on a proposed services acquisition rule for all agencies will be accepted until Nov. 19 at www.regulations.gov.

Office of Federal Procurement Policy officials would like comments on questions such as:

What types of services are sold to the general public primarily on a time-and-materials or labor-hours basis?

What conditions typically apply to a commercial time-and-materials or labor-hours contract?

Should time-and-materials or labor-hours contracts be restricted to cases in which it is not possible at the time of placing the contract to accurately estimate the time and costs of the work?

In private-sector contracts, what oversight ensures that work is billed properly?

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