DOD time-and-materials contracts raise red flag for GAO

GAO report on DOD contracting (.pdf)

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Defense agencies can expect to analyze whether time-and-materials contracts have become their default contracting method when other pricing arrangements may be more appropriate, a Defense Department official has said.

The Government Accountability Office said in a June 29 report that DOD is turning to those contracts because they can be awarded quickly and the department can adjust some parts of them if issues arise. Despite their increasing use, contracting officers rarely explain why they pass on less-risky contract types. Also, GAO found little attempt to convert follow-on work to a different type of contract.

In response to GAO, Shay Assad, DOD’s director of Defense procurement and acquisition policy, wrote that he will require agencies to analyze contracts before the end of the fiscal year.

DOD’s reported that obligations under time-and-materials contracts doubled to $10 billion from 1996 to 2005. However, GAO said even that amount is understated.

Under time-and-materials contracts, agencies pay contractors based on the number of labor hours billed at hourly rates and other direct costs. Because of the risk these contracts poses to the government, agencies are supposed to limit their use to cases in which no other contract type is suitable, according to GAO.

GAO recommended that DOD require more justification for using time-and-materials contracts to avoid making them a default contract type. GAO also wants contract monitoring plans to recognize the inherent risks in these types of contracts and set specific activities to address these risks.

Assad agreed with GAO’s recommendations. In addition to ordering analyses, there may also be changes before the end of the calendar year to the Defense Federal Acquisition Regulation Supplement, Assad’s letter to GAO stated.

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