Congress looks for price fix

How do companies buy services?

The Services Acquisition Reform Act panel found that commercial-sector companies that buy services prefer fixed-price contracts and avoid time-and-materials contracts whenever possible.

Private-sector executives told the panel that time-and-materials contracts give the service provider little incentive to be efficient, though some disagreed with that premise.
They added that one problem with buying services on a time-and-materials basis is that the customer becomes the project manager, rather than shifting those risks and responsibilities to the service provider.

The panel recommends enforcing limits on how often agencies use the contracts and requiring them to convert the time-and-materials contracts to a performance-based acquisition as soon as possible. It also said agencies should not award this type of contract except when circumstances warrant it.

— Matthew Weigelt

Regulators left a gap in a final rule on time-and-materials contracts that lawmakers say exceeds the authority that Congress granted. Now, lawmakers want to close that gap and curtail the use of such contracts.

The Senate Armed Services Committee said contractors can defraud the government too easily through time-and-materials contracts because departments have a hard time monitoring the work and ensuring that the prices they pay are fair.


“This bill contains important management reforms, including…tighter competition requirements for the billion of dollars the [Defense Department] spends on contract services,” Sen. Carl Levin (D-Mich.), chairman of the Armed Services Committee, said in a statement. 


In the fiscal 2004 National Defense Authorization Bill, Congress wanted DOD to mirror commercial best practices for the use of time-and-materials contracts. The Office of Federal Procurement Policy determined that companies seldom sell services on a time-and-materials basis unless requirements are not well-understood. But the committee said OFPP gave no evidence that the private sector commonly uses hourly rates to buy even under those circumstances.


Lawmakers say the OFPP rule published in December also exceeds the intent of the 2004 authorization bill. 


Lawmakers now want to tighten the leash on the rule about paying contractors based on hourly labor rates. The 2008 National Defense Authorization Act would limit DOD from buying commercial items based on time and materials and labor hours except for emergency repairs and for services supporting a commercial item.


“Congress is saying, ‘Go back and do it right,’” said Marcia Madsen, chairwoman of the Services Acquisition Reform Act panel and a partner at law firm Mayer Brown. 


House and Senate members have been working out the differences in their versions of the authorization bill since Oct. 1. The conference report may come in November.


DOD in the past decade has turned increasingly to time-and-materials contracts, making them one of the most popular ways to buy. The Government Accountability Office said DOD spent at least $10 billion in 2005 on such contracts, up from $5 billion in 1996. But that figure is understated because DOD incorrectly coded the contract type for orders made on the General Services Administration’s schedules contracts, GAO found. 


The administration disagrees with the need for the provision, citing DOD efforts already under way to cut back on time-and-materials contracts. The administration said the bill “would substantially restrict DOD’s ability to follow the common commercial practice of acquiring commercial services on time-and-materials or labor-hour basis when fixed-price contracts are unsuitable and the extent or duration of work cannot be accurately estimated.”


Many government officials and experts agree the provision is too restrictive. 


“We don’t like time-and-materials contracts, and we don’t like the provision. That tells you something,” a senior acquisition official said.


The official said contracting officers need as much flexibility as possible. The real issue is determining the instances when agencies should use time-and-materials contracts, the official and others said. 


Madsen said the Acquisition Advisory Panel recommended contracting officers use time-and-materials contracts only on a short-term basis and move to another type once they have a well-defined scope.

About the Author

Matthew Weigelt is a freelance journalist who writes about acquisition and procurement.

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