Infotech and the Law: T&M services contracting takes center stage

Walter Zenner

Over the past year, several government agencies have voiced concerns about using General Services Administration schedule contracts, particularly for buying services on a time-and-materials basis.

These concerns apparently stem from a sense that contracting officers could strike better deals if they better understood the limits of the proposition, set forth by the Federal Acquisition Rules, that GSA schedules have been awarded competitively and at fair and reasonable prices.

Since enactment of the Federal Acquisition Streamlining Act of 1994, annual sales under GSA schedule contracts have increased from $4.9 billion to $32.5 billion.

This growth focuses attention on the extent to which contracting officers should compete time-and-materials task orders and scrutinize their pricing. The concept behind commercial items was that contracting officers need not do cost analyses when purchasing items sold at prices determined by the competition of the commercial market place. The acquisition act drifted away from this by expanding the definition of a commercial item.

First, the definition was expanded beyond items actually sold in the commercial market place, at prices determined by market forces, to encompass items merely offered for sale in the commercial market, for which no competitively determined price yet exists.

Second, as applied by GSA for pricing purposes, the acquisition act effectively broadened the universe of commercial customers to encompass a unique market: higher-tier government contractors purchasing for government use.

As a result, a contractor may obtain a schedule contract for time and materials services by showing sales of almost any services, to almost anyone, at hourly rates. The contractor need not show an overall price to anyone for any particular task.

Necessarily, GSA determines only that the hourly rates are fair and reasonable for some type of services. It does not -- nor can it -- determine that the hourly rates or the proposed labor hours and labor mix for any specific task order are fair and reasonable, though some measure of competition or price and cost analysis might do so.

Recent developments suggest that some government officials are concerned by the apparent tendency of contracting officers to overlook these nuances. For example:

  • In July 2004, GSA and the Defense Department announced the "Get It Right" program, which aims in part to foster greater competition under schedule contracts, particularly in connection with blanket purchase agreements.

  • In January 2005, DOD issued a memorandum reminding defense contracting officers of the limitations inherent in GSA's predetermination of the fairness and reasonableness of hourly rates under time and materials contracts.

  • In February, the Government Accountability Office reported to Congress that GSA's use of pre-award defective pricing audits, typically an extremely effective pricing tool, had declined precipitously since 1997 even as sales volume skyrocketed.

  • In July, the GSA inspector general reported to Congress that GSA had formed a working group charged with reversing that decline, and it expected such audits to increase sharply.

Given these and other developments in this area, time-and-materials schedule contractors can expect to see more competition and more pricing scrutiny than in the past.

Walter Zenner is in the government contracts group of Pillsbury Winthrop Shaw Pittman LLP in McLean, Va. E-mail him at Walter.Zenner@PillsburyLaw.com.

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