Proposed change rankles industry

Olga Grkavac

Prime IT contractors for the Pentagon would be much less likely to use subcontractors, and Defense Department contracting options would shrink if a pricing amendment sponsored by Sen. Carl Levin (D-Mich.) is approved as part of the defense authorization legislation, industry groups charged last week.

"The unintended consequence would be a loss of business to small and midsized companies," said Olga Grkavac, executive vice president of enterprise solutions for IT industry group Information Technology Association of America. "It would be very detrimental."

After contract award, a prime contractor may engage a subcontractor whose labor rates are lower than those of the prime, Grkavac said. Levin's expected amendment would require prime contractors engaged in time-and-materials contracts with federal agencies to pass on those rates.

The amendment would restrict the Defense Department's "ability to select the best contract type to meet its mission needs, and would adversely impact prime contractor-subcontractor relationships," said Stan Soloway, president of the Professional Services Council.

PSC urged the Senate to reject the amendment, which "would inappropriately dictate the method for pricing time-and-materials and labor-hour contracts and subcontracts on defense contracts and purchases through non-defense agencies," the industry group said in a prepared statement.

The proposed legislation is the latest dispute to arise over a contracting method that has long 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 fixed hourly rates, which include wages, overhead, general and administrative expenses, and profit.

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

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 Miller said in a release.

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