Ring in the New Year with revised T&M payment rules

Infotech & the law | Legal insights for today's market

John Jensen

Rick Steele

Long-awaited rules affecting time-and-materials contracting go into effect Feb. 12. Where the procuring agency makes appropriate findings, the rules will allow use of T&M contracts for any type of service procured as a commercial item.

Perhaps the greatest impact on contractors will be the rules' resolution, for both new commercial and noncommercial-item T&M contracts, of how much a contractor may charge for subcontract labor.

Most fundamentally, the final rules abandon a previously proposed approach that would have required listing subcontractors by name in the contract before being allowed to charge for their labor at the contract rates.

Instead, the rules will let contractors bill for subcontract labor at the contract rates as long as the personnel meet the contract labor qualifications. This fundamental principle will be in revised Federal Acquisition Regulation "Payments under Time-and-Materials and Labor-Hour Contracts" and "Contract Terms and Conditions ? Commercial Items" clauses.

Offerers will soon see three implementing solicitation provisions, which will set forth different ways to be paid for subcontract labor:
  • For noncommercial-item procurements based on adequate price competition, the general rule, at least for civilian agencies, will be that the offerer may elect to propose, for any labor category: separate labor rates for its own employees, each subcontractor and any affiliate; a blended rate applicable to its own employees and all subcontractors and affiliates; or a combination of separate and blended rates.
  • For noncommercial-item procurements not based on adequate price competition, the offerer must propose separate labor rates for its own employees, each subcontractor and any affiliate.
  • For all commercial-item procurements, the offerer must specify whether the labor rates apply to its own employees, subcontractors and affiliates.
The Defense Department already has eliminated the flexibility afforded under the first situation, noncommercial-item procurements based on adequate price competition. DOD issued a companion interim rule, which is still open to public comment, that for all noncommercial-item procurements, requires the offerer to propose separate labor rates for its own employees, each subcontractor and any affiliate.

Any subcontract labor that does not meet the contract labor qualifications and, thus is not chargeable at contract rates, is classified as "materials."

Materials, which includes other direct costs that the contractor provides will be reimbursed in accordance with standard cost reimbursement rules of the FAR.

Allowable indirect costs may be charged as a part of material costs, but not fee or profit. Materials that qualify as commercial items are chargeable at catalog prices. For commercial item contracts, indirect costs are to be expressed as fixed prices to be charged pro rata over the course of the contract.

Among other key payment provisions, subcontractors will have more explicit recordkeeping responsibilities to substantiate vouchers that are based on contract labor rates. Subcontractors must keep timekeeping records and evidence that their employees met the labor category qualifications. Subcontractor personnel even may be interviewed, for both non-commercial and commercial-item contracts.

Subcontract consent will be essential to ensure entitlement to payment. Where consent is required, an agency will not be obligated to pay a contractor for subcontract labor rendered before the subcontractor was approved. Subcontract consent will not be required for commercial-item contracts.

The new rules also will apply the interest provisions of the Prompt Payment Act to payments made under T&M contracts, but apparently only for the services portion of the invoice.

The rules were published on Dec. 12, 2006, at 71 Fed. Reg. 74469, 74656 and 74667.

John Jensen is a partner in the government contracts practice at Pillsbury Winthrop Shaw Pittman LLP in McLean, Va. He can be reached at john.jensen@pillsburylaw.com.

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