10.24.11

"New Time-and-Materials Proposed Rule"

by Jason Levin and Spencer Marusco

To better accommodate the authorization to use Time-and-Materials and Labor-Hour contract payment provisions, the Federal Acquisition Regulation (FAR) Council on July 27, 2011 proposed a rule change to amend the FAR.  The proposed rule will impact government contractors’ administrative and payment responsibilities pertaining to Time and Material (T&M) and Labor-Hour Contracts and will more closely align T&M contracts with cost-reimbursement contracts.

The proposed rule includes several key elements, of which contractors should be aware.  These include:

• Establishing consistency for termination provisions among T&M and Labor-Hour contracts regardless of whether the contracts are for non-commercial or commercial items;
• Requiring the incorporation of the Allowable Cost and Payment Clause (FAR 52.216-7) in T&M contracts (does not apply for Labor-Hour contracts);
• Authorizing bi-weekly invoicing for T&M contracts, which is consistent with cost-reimbursement contracts (does not apply for Labor-Hour contracts); and
• Mandating close-out of T&M contracts within 120 days of finalizing rates, similar to cost-reimbursement contracts (does not apply for Labor-Hour contracts).

The proposed rule, if accepted without major changes, would represent a significant change for contractors who currently do not have cost-reimbursable contracts, but instead provide services - particularly non-commercial services - on a T&M basis. 

By requiring the inclusion of the Allowable Cost & Payment Clause in all new T&M contracts, contractors with T&M contracts would be required to prepare a full incurred cost proposal, even if they do not have cost-reimbursable contracts.  

Recent changes to the Allowable Cost and Payment Clause require that incurred cost proposals must contain both direct and indirect cost schedules, consistent with the Defense Contract Audit Agency’s Incurred Cost Electronically (ICE) model in order to be considered adequate. (See Federal Acquisition Circular 2005-52, FAR Case 2008-020 as published in the Federal Register on May 31, 2011) 

While contractors will be able to enjoy the benefits of improved cash-flow under bi-weekly invoicing on their T&M contracts if the proposed rule becomes final; the same contractors will be faced with increased compliance risk if they lack the processes, systems and controls historically associated with cost-reimbursable contracts.  These traditional T&M contractors will face more stringent administrative and compliance requirements on their T&M contracts than they are otherwise accustomed.  These include processes, systems and controls enabling them to prepare incurred cost proposals.  While at first, this may not seem overly onerous, these contractors are at a disadvantage because they most likely would not have gone through a review of their accounting systems (i.e., a Pre-Award Survey), which is a pre-requisite for contractors who have cost-reimbursable contracts.  If the proposed rule becomes final, it is feasible that the T&M contracts would eventually become subject to same pre-award review requirements as cost-reimbursable contracts. 

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