DOD interpreting labor rate cap too strictly, group claims

A law requires Defense agencies to try to keep labor and overhead rates charged by contractors to 2010 levels, but a contractor advocate says the department has more leeway than it realizes.

An industry group complained Sept. 19 that the Defense Department is misinterpreting the law in setting the labor and overhead rates they pay contractors for services.

The fiscal 2012 National Defense Authorization Act (H.R. 1540) tells defense officials to establish a “negotiation objective” to cap how much a company can charge the department for labor and overhead. The law (read the text here) requires DOD to make its objective to not exceed the rates it or another military department paid the company in fiscal 2010. The cap is related to contracts or task or delivery orders for services worth more than $10 million. On July 31, defense officials issued guidance to implement that section of the bill.  (Read the guidance document here.)

However, defense procurement officials have apparently forgotten about the negotiation objective aspect and the cap has seemingly become mandatory, said Stan Soloway, president and CEO of the Professional Services Council.

“The goal of holding contractors’ labor and overhead rates at 2010 levels is being received by some not as a negotiation objective, but as a mandate that forbids paying higher rates, regardless of whether the increased rates are justified,” he said.

In some cases, he said acquisition employees have ordered companies that negotiated rates before DOD issued its guidance in July to revert back to 2010 labor rates, or warning that the agency won’t exercise a contract’s option year, he said.

“This rigid stance hardly represents a negotiation and certainly doesn’t represent a ‘good-faith’ negotiation,” he said.

A DOD spokeswoman said Sept. 19 officials would fully examine PSC's letter to make an informed and measured response, but they had not had enough time to do that.

DOD’s guidance doesn’t provide allowable exemptions to the 2010 cap, which has led to defense agencies misinterpreting and misapplying the law, Soloway wrote in a letter Sept. 18 to Frank Kendall, undersecretary of defense for acquisition, technology, and logistics.The guidance doesn’t offer flexibilities, such as for commercial items, firm-fixed price contracts, or instances when contractors have pre-negotiated forward pricing rate agreements, Soloway wrote. Further, the guidance fails to clarify when a contracting officer is allowed to negotiate rates that are higher than the 2010 amounts.

“Although the guidance states that negotiation objectives should seek to hold rates to 2010 levels, unless the rates are otherwise established by law, the guidance fails to provide meaningful examples that would clarify such instances,” he wrote.

What makes the issue more complex to Soloway, several of military services and defense agencies have issued their own supplemental interpretations of the guidance, which he considers “equally misguided.”

Soloway urged revised guidance, particularly since the defense authorization bill before Congress would extend the provision to fiscal 2014 funds.

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