Contractors, Others Spar Over Proposed Acquisition Rule Change

In September, two councils in charge of acquisition policy, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council, posted proposed changes to the Federal Acquisition Regulation, which governs how executive agencies buy supplies and services. If adopted, the new rules would allow agencies to award time and materials contracts or labor-hour contracts for commercial services under certain circumstances.

Those include other types of contracts that are not appropriate because the costs and duration of the project cannot be easily estimated, and when the contracting officer includes a ceiling price above which the agency will not pay. The use of time and materials or labor-hour contracts for commercial services is prohibited under FAR rules.

The recently published public responses to the change illustrate the passionate - and widely divergent - views on contracting regulation. John Gage, president of the American Federation of Government Employees, said the proposed rule "opens billions of taxpayer dollars to fraud, waste and abuse at the hands of federal contractors that choose to bill by the hour for their services."

The problem, he explained, is that contracts based on time and materials or labor-hours do not reward contractors for quality, but rather focus only on the time they spend on the projects. He also doubted that the private sector uses time and materials and labor-hours contracts as widely as proponents of the proposed rules suggest.

Many contractors favored the proposed rule. Paul Parry, chief technology officer for Xcalibur Software, Inc., a small, Herndon, Va.-based software and consulting firm, wrote that "long-standing fears about [time and materials] contracts are unrealistic. There would be little opportunity to take unfair advantage of a client."

He added that time and materials contracts are cheaper administratively and improve employee productivity.

"If you have a small government business, it's very expensive to set up a special system," said Steve Kelman, former OFPP administrator and a professor at Harvard's Kennedy School of Government, referring to accounting requirements for cost-reimbursement contracts, one alternative to contracts based on time and materials or labor hours.

Simpler accounting practices can attract more companies to bid on government contracts, which creates a more competitive environment and keeps costs down for the government. At the same time, Kelman explained, these kinds of contracts lack incentives for keeping costs low, since companies bill only for the time they spend on the project.

While contracts based on time and materials or labor hours are required to have a price ceiling, above which the contractors are not guaranteed payment, AFGE and outside experts said the ceiling does not guarantee quality.

"The idea that a 'ceiling price' somehow protects taxpayers is ludicrous," said Jacque Simon, director of AFGE's public policy department. Using the example of a $1 million price ceiling, she said, "After the $1 million is gone, there is no guarantee that the job will be done - only that the contractor will have spent the $1 million."

Contractors can increase their profit margin by finding an inexperienced, lower paid employee to do the work, said Chip Mather, co-founder of Acquisition Solutions, Inc., which consults with federal agencies on acquisition issues. Then, Mather explained, the contractor can keep the difference between the employee's salary and the labor rate set by the contract.

"[Time and materials and labor hour contracts] are used too much currently...because they're easy," he said.

In testimony before the House Government Reform Committee last year, former Federal Procurement Policy administrator Angela Styles warned that contractors could pad contracts that based on time and other expenses. She urged limits on the use of those kinds of contracts.

Rep. Tom Davis, R-Va., chairman of the Government Reform Committee, originally introduced the use of time and material and labor-hour contracts as an amendment to the fiscal 2004 Defense Authorization Act; the proposed FAR rule implements that aspect of the legislation.

One factor working in the government's favor is, regardless of the type of contract, private contractors want to protect their reputation. "If the contract is for $1 million and if they bill $1 million and didn't do the work, it would count against future performance," said Kelman.

But AFGE's Simon said even that is not enough. Time and materials and labor-hours contracts legally bind the contractor only to use its "best efforts," and not to complete the project, which means agencies cannot give a contractor a formal poor performance score for failing to complete the job, she said.

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