Proposed amendment deemed harmful to small business

Prime IT contractors for the Pentagon would be much less likely to use subcontractors if a pricing amendment sponsored by Sen. Carl Levin (D-Mich.) is approved as part of the Defense authorization legislation, an Information Technology Association of America senior official said today.

"The unintended consequence would be a loss of business to small and mid-sized companies," said Olga Grkavac, executive vice president of enterprise solutions for the ITAA, an IT industry group. "It would be very detrimental."

Levin's expected amendment would require prime contractors engaged in time and materials contracts with federal agencies to pass through subcontractor rates for firms added to a program after contract award.

Time and materials contracts have been controversial. The Government Accountability Office recently reported that proper surveillance of contractor performance is especially critical in time and materials contracts, in which services are billed on the basis of direct labor hours at specified fixed hourly rates, which include wages, overhead, general and administrative expenses, and profit.

"According to the Federal Acquisition Regulation, time and materials contracts require appropriate government oversight because there is no incentive for the contractor to control costs or be efficient," the GAO said in the April 2005 report.

Currently, prime contractors on time and materials contracts are allowed to "blend" rates, for firms added to a program after the initial award, "in a manner that reflects prime contractor risk and overhead," the ITAA said in a news release.

ITAA is urging its membership to oppose the Levin amendment.

"If this amendment goes forward, we're looking at a potential disaster for small and mid-size businesses in the federal marketplace," ITAA President Harris N. Miller said in a release.

"Time and materials contracts are used when the nature of the work makes the outcome difficult or impossible to assign a fixed price. These contracts are freighted with risk?risk that can be played out over a number of years," he said.

Prime contractors will not accept the work of subcontractors if they cannot properly price risk, Harris said.

"Asking prime contractors to assume this risk is simply unrealistic, and the consequence will be far fewer opportunities for smaller business participation in federal contracts," he said.

Levin, the top-ranked Democrat on the Senate Armed Services Committee, is expected to offer the amendment during debate on the bill this week. Levin was not immediately available for comment.