Infotech and the Law: Proposed contracting rule shifts risk to government

Jonathan Cain

Federal procurement officials have published a proposed rule that authorizes time-and-materials and labor-hour contracts for commercial services. The rule implements amendments to the Federal Acquisition Streamlining Act and benefits service contractors by shifting most of the risk to the government.

FASA's enactment in 1994 opened the door to less burdensome acquisition procedures for commercial items. One of the hurdles that Congress did not cross was to authorize agencies to acquire services using time-and-materials and labor-hour contracts. Acquiring commercial services through such contracts can eliminate incentives for the contractor to perform efficiently and shift the risk of cost overruns and incomplete performance to the government.

But in 2003, Congress amended FASA to allow the use of such high-risk service contracts.

The proposed rules let contracting officers use time-and-materials and labor-hour contracts for commercial services whenever the officer makes a finding that another type of contract, such as a fixed-price or fixed-price with price redetermination contract, is not suitable.

Such a determination may be expected where the contracting officer finds that he cannot accurately estimate the duration of the work required to a reasonable degree of certainty. Time-and-materials and labor-hour contracts must be awarded using competitive procedures, which merely means that prices from more than one vendor have to be compared.

There are a number of benefits that will be available to contractors using time-and-materials and labor-hour contracts.

The proposal eliminates any duty on the part of the services contractor to warrant the quality of the work provided. The government has the right to reject a contractor's performance within 60 days after the work is delivered. After 60 days, the work is presumed accepted.

After acceptance, the government has up to six months to require the contractor to repair or replace services that fail to meet contract requirements. But the government must pay the contractor to do the repair work, with payment set at the contract rates, less a presumed profit of 10 percent. The only exception to the rule is when the faulty performance is a result of fraud or willful misconduct by the contractor's management or where the work was done by an employee known to be "habitually careless or unqualified."

Thus, all of the risk of faulty performance falls on the government, not the contractor. This term is more favorable to contractors than what is found in most commercial IT services contracts, which generally contain warranties and indemnities to cover faulty performance.

Commercial services obtained under time-and-materials and labor-hour contracts also avoid most of the audit requirements that burden other services contracts. Auditors may get information to confirm hours worked and qualifications of employees doing the work.

Auditors may not investigate the basis of rates charged, termination costs or fixed-price subcontract costs.

Time-and-materials contracts also provide for acquisition of materials at cost as part of contract performance. The proposed rules eliminate any requirement for most-favored-customer pricing and do not require that the government get the benefit of discounts and rebates that might be offered to other customers. The contractor may charge its full catalog price for commercial items supplied in connection with the services.

Jonathan Cain is a member of the law firm Mintz Levin Cohn Ferris Glovsky & Popeo PC in Reston, Va. The opinions expressed in this article are his. He can be reached by e-mail at

About the Author

Jonathan Cain is a member of law firm Mintz Levin.

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