Alan Chvotkin Senior Vice President and Counsel Professional Services Council Thursday, July 26, 2007 11:15am – 12:15pm

2. The New Time & Materials Rules:What Do They Mean for You? Alan Chvotkin Senior Vice President and Counsel Professional Services Council Thursday, July 26, 2007 11:15am – 12:15pm 2:00pm – 3:00 pm

3. TYPES OF T&M CONTRACTS • TYPES OF T&M CONTRACTS • COMMERCIAL T&M • NON-COMMERCIAL T&M • ADEQUATE PRICE COMPETITION • NO ADEQUATE PRICE COMPETITION • DoD • ALL OTHERS

4. Commercial Item Definition Utilizes the existing definition of a commercial item in FAR Part 2.

5. Appropriate Use • All T&M Contracts. T&M contracts should only be used when it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence (FAR 16.601(c)). • Commercial T&M Contracts. Must be competitively awarded (FAR 12.207(b)).

6. Determination and Findings (D&F) • All T&M Contracts. Contracting Officer must execute a determination and findings that no other contract type is suitable (FAR 16.601(d)). • Commercial T&M Contracts. D&F must (FAR 12.207(b)): • Describe the market research conducted • Establish that it is not possible at the time of placing the contract or order to accurately estimate the extent or duration of the work or to anticipate costs with any reasonable degree of certainty; • State that the requirement has been structured to maximize the use of firm-fixed-price or fixed-price with economic price adjustment contracts for future acquisitions of the same or similar items.

7. D&F - Indefinite Quantity Contracts • All T&M Contracts. The Contracting Officer must, to the maximum extent practical, structure the contract to allow for issuance of firm fixed price and/or firm fixed price with economic price adjustment orders, in addition to T&M. • In such cases, a D&F is required for each order placed on a T&M basis. • A D&F is not required for orders placed on an FFP or FFP with EPA basis. • If the Contracting Officer does not include FFP or FFP with EPA as an option for issuing orders, approval for the contract structure must be obtained one level above the Contracting Officer.

8. Reimbursement for Nonconforming Work • Noncommercial T&M Contracts. Reimbursed at actual cost (excluding profit). • Commercial T&M Contracts. Reimbursed at the standard hourly rate, reduced by ten percent to reflect the removal of profit, unless the parties agree to a different amount.

9. Subcontracts • All T&M Contracts. Subcontract costs may be reimbursed at a fixed hourly rate.

10. Subcontracts – Commercial Items • Commercial T&M Contracts. The contract may use: • A single rate for each labor category. • Separate rates for the contractor and each subcontractor. • A combination of the first two methods.

11. Subcontracts – Noncommercial Items • Noncommercial T&M Contracts - Noncompetitive: • The contract must have separate rates for the contractor and each subcontractor. • Noncommercial T&M Contracts – Competitive: • The FAR allows the same methods as for commercial items unless otherwise specified in agency regulations. • DoD Contracts: DoD has specified that the contract must have separate rates for the contractor and each subcontractor.

12. Materials and Other Direct Costs • All T&M Contracts. If materials meet the definition of a commercial item, reimbursed at the established catalog or market price. • All T&M Contracts. If materials do not meet the definition of a commercial item, reimbursed based on actual cost.

13. Other Direct Costs • All T&M Contracts. If the other direct cost meets the definition of a commercial item, reimbursed at the established catalog or market price. • All T&M Contracts. If the other direct cost does not meet the definition of a commercial item, reimbursed based on actual cost. • Commercial T&M Contracts. Payment is made only if the contract specifies reimbursement for that element of other direct costs (e.g., travel, computer usage, charges, etc.).

14. Indirect Costs • Noncommercial T&M Contracts. Reimbursed at the actual indirect rate, provided the indirect rates include only those costs that are clearly excluded from the hourly rate and are allocated using the contractors established accounting practices. Indirect costs are not applicable to subcontract costs reimbursed at the hourly rate. • Commercial T&M Contracts. For indirect costs, the contract must specify the fixed amount that will be reimbursed for indirect costs. That fixed amount is paid pro-rata over the period of contract performance.

15. Government Oversight • Noncommercial T&M Contracts. The Government has the standard access to records clause. • Commercial T&M Contracts. The Government has access to records necessary to verify: • That the employee met the specifications for the labor categories for which they have been billed; • The employee worked the hours shown on the invoice; and • Amounts paid, when actual costs are the basis for reimbursement.

16. Withholds • Noncommercial T&M Contracts.The Contracting Officer may issue a unilateral modification withholding up to the lesser of 5% of the contract value or $50,000 if the Contracting Officer believes it is necessary to protect the Government interest. • Commercial T&M Contracts. No similar provision.

17. Consent to Subcontract • Noncommercial T&M Contracts. Subcontract costs incurred prior to the date the required consent is obtained shall be at the sole discretion of the Government. • Commercial T&M Contracts. No similar provision.

18. Cost Accounting Standards (CAS) • Commercial T&M Contracts. On July 3, 2007, the CAS Board issued a final rule that exempts T&M contracts for commercial items from the application of CAS. The rule is effective July 3, 2007. • A proposed rule was published January 4, 2006.

19. UPDATE ON RELATED ACTIONS • 2/13/07: FAR Technical Amendments published • 6/29/07: GAO Report: “Improved Insight and Controls Needed on DoD T&M Contracts” [GAO 07-273] Recommends DoD require more diligence in justifying the use of T&M contracts, analyze the use of T&M on ID/IQ contracts to ensure it does not become the “default” contract type, and require monitoring plans to reflect the risks inherent in this contract type. • 7/3/07: CAS Board Final Rule to provide an exemption from CAS for T&M/L-H contracts for commercial items. • July 2007: S 1547, Senate Reported FY 08 National Defense Authorization Act. Section 823 limits DoD’s use of T&M to the purchase of services in support of commercial items or for emergency services.

20. QUESTIONS? ALAN CHVOTKIN SENIOR VICE PRESIDENT AND COUNSEL PROFESSIONAL SERVICES COUNCIL (703) 875-8059 CHVOTKIN@PSCOUNCIL.ORG WWW.PSCOUNCIL.ORG

21. T&M Contracts for Non-Commercial Services

22. Establishing Labor Category Qualifications • Implicit in the new rules is a requirement for the Government to set such qualifications. • Must be balanced with use of performance based contracting and procurements being made on a best value basis. • Must ensure consistency with FAR 39.104 which prohibits such practices in regard to IT services except in enumerated circumstances. [See also P.L. 106-398, §813.]

23. Implications of Including FAR 52.216-7 (AC&P) in the Contract • The new T&M Payments clause, 52.232-7(a), Hourly rate, permits contractors to submit vouchers for labor monthly unless the contracting officer agrees to a more frequent schedule. • 52.216-7(a) applies only to materials, and permits large businesses to be paid every two weeks, whereas 52.216-7(c) permits small businesses to be paid more frequently than every two weeks. • Interim vouchers under AC&P clause are to be “in such form and reasonable detail as [contracting officer’s authorized] representative may require.” • DFARS 242.803 makes DCAA the authorized representative for receipt of interim vouchers.

24. Implications of Including FAR 52.216-7 (AC&P) in the Contract • 52.216-7(a)(2) states interim payments are financing payments not subject to the Prompt Payment Act (“PPA”) unless 52.232-25 Alt I is included in the contract. • New T&M Payments clause, para. (i) ostensibly makes interim payments on contracts for services subject to the PPA but does not incorporate 52.232-25 Alt I. • Be alert to the possibility of a conflict regarding the application of the interest penalty to interim payments under contracts for services, particularly in regard to materials.

25. Implications of Including FAR 52.216-7 (AC&P) in the Contract • If the contractor must produce the materials to be provided under the contract, the AC&P clause permits the contractor to bill for the direct labor cost incurred before payment is made to the employees. • The T&M Payments clause only permits the contractor to be reimbursed for direct labor after payment of employees. • Be alert to the possibility of a conflict if the labor required to produce the material is performed by individuals who fall within the labor categories listed in the contract.

26. Implications of Including FAR 52.216-7 (AC&P) in the Contract • The T&M Payments clause does not require submission of an incurred cost proposal. • The AC&P clause requires the contractor to submit an “adequate final indirect cost rate proposal” within 6 months following the end of the contractor’s fiscal year. • What is “adequate” for a contractor that has only T&M contracts should be different from one that is adequate for cost type contracts. However, DCAA may insist upon a full incurred cost submission.

27. Implications of Including FAR 52.216-7 (AC&P) in the Contract • Incurred cost submissions under the AC&P clause must be certified and are subject to penalties for inclusion of unallowable costs. • There is no time limit within which the Government must audit the submission. • AC&P clause requires contractor to submit completion voucher within 120 days after settlement of final indirect cost rates. • T&M Payments clause requires submission of final voucher within one year after the contract is completed.

28. Implications of Including FAR 52.216-7 (AC&P) in the Contract • AC&P clause permits use of quick closeout procedures in FAR 42.708. • DCAA and DCMA did not believe quick closeout applies to T&M contracts. [See Audit Guidance on Low Risk Time and Material/Labor Hour Contract Closeout Initiative (MRD 05-PPD-037(R)), May 17, 2005.] Will it be changed?

29. Implications of Including FAR 52.216-7 (AC&P) in the Contract • Para. (h)(2) of the AC&P clause requires the contractor to give the Government an assignment of rebates and refunds as a precondition to final payment. • This assignment is open-ended with no time limits. • Para. (g) of the T&M Payments clause is captioned Assignment and Release of Claims, but contains no language requiring an assignment of refunds or rebates.

30. D&Fs • Before award of a T&M contract, the contracting officer must execute a D&F stating that no other contract type is suitable. • For commercial services, FAR 12.207(b)(2) provides that the D&F must state that the requirement has been structured to provide for maximum use of FP contracts and for transitioning from a T&M contract to a FP contract. • The content of the D&F for non-commercial items is not specified.

31. D&Fs • A D&F is required before award of a contract and exercise of an option. • Additionally, for commercial services, a D&F is generally required for each order under an indefinite quantity contract, including GSA schedules. • If the contract, including any option years, will exceed three years, the D&F must be approved by the head of the contracting activity.

32. Subcontracting • The normal consent to subcontract requirements apply to contracts for non-commercial items. • Because subcontract labor can now be billed at contract rates, it is advisable to get PCO approval of subcontracts in the contract formation stage rather than take a chance that the ACO will not grant approval. • The contracting officer has discretion to pay for subcontract labor hours incurred before consent to subcontract is obtained, but is not required to pay for such hours.

33. Payment for Labor • Contractors will be paid at the rate prescribed in the contract for labor that meets the labor category qualifications specified in the contract. • Contractors must “substantiate” vouchers for hours billed at the hourly rate, including subcontractor hours, by evidence of actual payment. • For subcontract hours, it is unclear if this means payment of the subcontractor employees by the subcontractor or payment of the subcontractor by the prime.

34. Payment for Labor • In addition to evidence of payment, the contractor must further substantiate vouchers by (i) individual daily job timekeeping records, (ii) records that verify the employees meet the qualifications for the labor categories specified in the contract, or (iii) other substantiation approved by the contracting officer. • This requirement in regard to subcontractors now gives DCAA explicit authority to question subcontractor costs on vouchers that the prime cannot support with subcontractor timekeeping records. Should primes obtain such records from their subs?

35. Payment for Labor • A contractor is not entitled to be paid for any labor that is incurred to perform tasks for which labor qualifications were specified in the contract, but is performed by individuals who do not meet those qualifications, unless specifically authorized by the contracting officer. • The premium portion of overtime rates is only allowable if the overtime is approved by the contracting officer. • Services for which there is no labor category specified in the contract are termed incidental services and will be paid for at actual allowable cost, including allocable indirect costs, as determined by the applicable cost principles.

36. Materials • The new clause defines materials to include: • Direct materials, i.e., those materials that enter directly into the end product, or that are used directly in connection with the furnishing of the end product or service. • Subcontracts for supplies and incidental services. • Other Direct Costs such as incidental services, travel, computer usage charges, etc. • Applicable indirect costs.

37. Materials • Material is paid for at the actual allowable cost as determined by the cost principles in effect on the date of the contract. • Payment for materials is subject to the Allowable Cost and Payment clause. • If the contractor furnishes its own material that meets the definition of a commercial item, the price to be paid for that material cannot exceed the contractor’s established catalog or market price for the material. • Material is not subject to the “Paid Cost” rule.

38. Prompt Payment • 52.232-7(h) provides that interim payments on contracts for other than services are not subject to the Prompt Payment interest penalty. • Agencies are required to insert the number of days, usually 30, within which the paying office must make payment after the billing office receives a proper payment request. • If “an audit or other review of a specific payment request” is required, payment does not have to be made by the specified due date. • Some people are interpreting this to apply to the material portion of all contracts.

39. Prompt Payment • 52.232-7(i) addresses interim payments on contracts for services (new section). • This provision does not reference the Prompt Payment clause, 52.232-25, but states that “the Government will make payment in accordance with the Prompt Payment Act (31 U.S.C. 3903) and prompt payment regulations at 5 CFR 1315.” • The contract should also contain the Prompt Payment clause which considers interim payments on T&M contracts for services as financing payments not subject to the interest penalty. • Thus, it is unclear as to whether the Prompt Payment interest penalty applies to interim payments on T&M service contracts.

40. T&M Contracts for Commercial Services

41. Commercial Services • Contracts for commercial services are subject to the terms of a new 52.212-4, Alternate I (“Alt I”). • Alt I substitutes new paragraphs (a) Inspection/Acceptance, (e) definitions, (i) Payment and (l) Termination for Convenience for those contained in the basic Contract Terms & Conditions – Commercial Items clause when a T&M Contract is issued. • Alt I, para. (a) is similar to provisions contained in 52.246-6, Inspection –Time-and-Material and Labor-Hour.

42. Commercial Services • Under para.(a) the Government has the right to inspect work under the contract at all places, including subcontractor locations, and times in a way that will not unduly delay the work. • Work is presumed accepted 60 days after delivery. • The Government can demand re-performance of services and correction or replacement of material for 6 months after acceptance of the last delivery. • Re-performance of services is at the hourly rate less profit (10% unless a different amount is stated in the contract).

43. Commercial Services • Under para. (a)(6) the Government may at any time require the Contractor to remedy by correction or replacement, without cost to the Government, any failure by the Contractor to comply with the requirements of this contract, if the failure is due to— • (i) Fraud, lack of good faith, or willful misconduct on the part of the Contractor's managerial personnel; or • (ii) The conduct of one or more of the Contractor’s employees selected or retained by the Contractor after any of the Contractor’s managerial personnel has reasonable grounds to believe that the employee is habitually careless or unqualified.

44. Commercial Services • Alt I, para. (e) essentially restates the definitions of direct materials, hourly rate and materials found in 52.232-7. • Alt I para. (i) is similar to the payment provisions in 52.232-7 with some exceptions. • The contractor can submit invoices on a monthly basis (or more frequently if approved by the contracting officer, but only for accepted services. These invoices are subject to the Prompt Payment Act. • Invoices usually do not have to be substantiated, but the contracting officer or authorized representative may require it.

45. Commercial Services • When requested by the Contracting Officer or the authorized representative, the Contractor shall substantiate invoices (including any subcontractor hours reimbursed at the hourly rate in the schedule) by evidence of actual payment, individual daily job timecards, records that verify the employees meet the qualifications for the labor categories specified in the contract, or other substantiation specified in the contract.

46. Commercial Services • If the contractor provides material that meets the definition of a commercial item, the contractor can charge the catalog or market price for that material. • All other material will be reimbursed at “actual cost” to the contractor, but not subject to the cost principles. • However, indirect costs will be reimbursed at a fixed amount, not rate, prorated over each payment as specified in the contract. So the contractor is not reimbursed at “actual” cost. • Other direct costs are reimbursed at actual cost, but the ODC must be listed in the contract to be reimbursable. [This is a new provision.]

47. Commercial Services • If a contract is terminated for convenience, subject to the other terms of the contract, the contractor is entitled to be paid the hourly rate for all hours expended before the effective date of the termination, plus reasonable charges the Contractor can demonstrate to the satisfaction of the Government using its standard record keeping system that have resulted from the termination. • Termination costs are not subject to the CAS or cost principles and the Government has no right to audit the contractor’s records under this paragraph.

48. Commercial Services • Material costs are not addressed in Alt I para. (l).

49. GSA Schedule Contracts • Current GSA schedule contracts usually permit T&M orders for commercial services. • Current schedule contracts contain a version of the T&M Payments clause currently in the FAR. • When will GSA “refresh” the contracts to incorporate the new Commercial Services clause? • Regardless of which clause is in schedule, requirement for a D&F before awarding each T&M order is applicable. • Normal procedures for award of task orders off schedule apply to T&M task orders for commercial services.

50. Audits