Defense Contracting
Improved Insight and Controls Needed over DOD's Time-and-Materials Contracts
Gao ID: GAO-07-273 June 29, 2007
Under time-and-materials contracts, payments to contractors are made based on the number of labor hours billed at hourly rates and, if applicable, other direct costs. Because of the risk they pose to the government, their use is supposed to be limited to cases where no other contract type is suitable. GAO was asked to identify trends in the Department of Defense's (DOD) obligations under time-and-materials contracts; analyze what DOD is buying under these contracts; assess why DOD is using them and whether actions are being taken to ensure that they are used only when no other contract type is suitable; evaluate DOD's monitoring of contractor performance; and determine the differences between the labor rates prime contractors bill DOD and the rates in their subcontracts. GAO reviewed 82 time-and-materials contracts, agreements, and orders and examined prime contract and subcontract labor rates on 12 additional contracts or agreements.
DOD's reported obligations under time-and-materials contracts increased from almost $5 billion in 1996 to about $10 billion in 2005. But this dollar amount is understated because DOD has not been coding contract type for orders placed under federal schedules (e.g., General Services Administration's schedule contracts). The accuracy of reported time-and-materials dollars should improve starting with fiscal year 2007 because DOD transitioned to the federal government's procurement information system, which requires contract type to be coded for every order. Over 75 percent of DOD's reported time-and-materials obligations are concentrated in three service categories: professional, administrative, and management support services; information technology and communications; and equipment maintenance and repair. Over 80 percent of these obligations are against task orders. DOD is also using time-and-materials contracts to acquire contract services to supplement the government workforce. Examples include intelligence support, advisory and assistance services, and systems engineering. DOD is turning to time-and-materials contracts because they can be awarded quickly and labor hours or categories can be adjusted if requirements are unclear or funding uncertain. Contracting officers' written determinations almost never included a rationale as to why a less risky contract type could not be used, and little attempt was made to convert follow-on work to a different contract type. Recent changes to federal acquisition regulations to allow for commercial services to be procured on a time-and-materials basis impose more stringent justification requirements, but most of the revisions do not apply to non-commercial procurements. Even though time-and-materials contracts call for appropriate government monitoring of contractor performance, there were wide discrepancies in the rigor with which monitoring was performed and most of the contracts and orders GAO reviewed did not include documented monitoring plans. In general, monitoring was based on contractor-provided monthly status reports showing the contractor's activities and amount of funds expended. Under some time-and-materials contracts, the prime contractor charged DOD at prime contract hourly rates for subcontracted labor. According to the Defense Contract Audit Agency, this practice can result in the prime contractor earning additional profits. GAO's analysis of billing rates under 13 contracts and agreements showed that when the prime contractor charged prime contract hourly rates for subcontracted labor, the difference between the prime's rates and those in their subcontracts ranged from negative 40 percent to 192 percent, with most in the 6 to 53 percent range. Recent revisions to federal acquisition regulations will mitigate this practice for certain types of acquisitions.
Recommendations
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GAO-07-273, Defense Contracting: Improved Insight and Controls Needed over DOD's Time-and-Materials Contracts
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Report to the Committee on Armed Services, U.S. Senate:
United States Government Accountability Office:
GAO:
June 2007:
DEFENSE CONTRACTING:
Improved Insight and Controls Needed over DOD's Time-and-Materials
Contracts:
DOD Time-and-Materials Contracts:
GAO-07-273:
GAO Highlights:
Highlights of GAO-07-273, a report to the Committee on Armed Services,
U.S. Senate.
Why GAO Did This Study:
Under time-and-materials contracts, payments to contractors are made
based on the number of labor hours billed at hourly rates and, if
applicable, other direct costs. Because of the risk they pose to the
government, their use is supposed to be limited to cases where no other
contract type is suitable. GAO was asked to identify trends in the
Department of Defense‘s (DOD) obligations under time-and-materials
contracts; analyze what DOD is buying under these contracts; assess why
DOD is using them and whether actions are being taken to ensure that
they are used only when no other contract type is suitable; evaluate
DOD‘s monitoring of contractor performance; and determine the
differences between the labor rates prime contractors bill DOD and the
rates in their subcontracts. GAO reviewed 82 time-and-materials
contracts, agreements, and orders and examined prime contract and
subcontract labor rates on 12 additional contracts or agreements.
What GAO Found:
DOD‘s reported obligations under time-and-materials contracts increased
from almost $5 billion in 1996 to about $10 billion in 2005. But this
dollar amount is understated because DOD has not been coding contract
type for orders placed under federal schedules (e.g., General Services
Administration‘s schedule contracts). The accuracy of reported time-and-
materials dollars should improve starting with fiscal year 2007 because
DOD transitioned to the federal government‘s procurement information
system, which requires contract type to be coded for every order.
Over 75 percent of DOD‘s reported time-and-materials obligations are
concentrated in three service categories: professional, administrative,
and management support services; information technology and
communications; and equipment maintenance and repair. Over 80 percent
of these obligations are against task orders. DOD is also using time-
and-materials contracts to acquire contract services to supplement the
government workforce. Examples include intelligence support, advisory
and assistance services, and systems engineering.
DOD is turning to time-and-materials contracts because they can be
awarded quickly and labor hours or categories can be adjusted if
requirements are unclear or funding uncertain. Contracting officers‘
written determinations almost never included a rationale as to why a
less risky contract type could not be used, and little attempt was made
to convert follow-on work to a different contract type. Recent changes
to federal acquisition regulations to allow for commercial services to
be procured on a time-and-materials basis impose more stringent
justification requirements, but most of the revisions do not apply to
non-commercial procurements.
Even though time-and-materials contracts call for appropriate
government monitoring of contractor performance, there were wide
discrepancies in the rigor with which monitoring was performed and most
of the contracts and orders GAO reviewed did not include documented
monitoring plans. In general, monitoring was based on contractor-
provided monthly status reports showing the contractor‘s activities and
amount of funds expended.
Under some time-and-materials contracts, the prime contractor charged
DOD at prime contract hourly rates for subcontracted labor. According
to the Defense Contract Audit Agency, this practice can result in the
prime contractor earning additional profits. GAO‘s analysis of billing
rates under 13 contracts and agreements showed that when the prime
contractor charged prime contract hourly rates for subcontracted labor,
the difference between the prime‘s rates and those in their
subcontracts ranged from negative 40 percent to 192 percent, with most
in the 6 to 53 percent range. Recent revisions to federal acquisition
regulations will mitigate this practice for certain types of
acquisitions.
What GAO Recommends:
GAO is recommending that DOD require more diligence in justifying the
use of certain types of time-and-materials contracts, analyze the use
of time-and-materials on indefinite-quantity contracts to ensure that
it does not become the default contract type, and require monitoring
plans to reflect the risks inherent in this contract type. In written
comments on a draft of this report, DOD concurred with the
recommendations.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-273]:
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Katherine V. Schinasi at
(202) 512-4841 or schinasik@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Overall Trend in Time-and-Materials Obligations Is Incomplete Because
of Missing Data:
Most of DOD's Time-and-Materials Obligations Are for Three Categories
of Services:
DOD Frequently Did Not Justify Why Time-and-Materials Contracts Needed
but Used Them for Ease and Flexibility:
Contractor Performance Monitoring Often Did Not Reflect Inherent Risks
of Time-and-Materials Contract Type:
DOD Is Paying More Than Actual Costs for Subcontracted Labor on Some
Contracts:
Conclusions:
Recommendations:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Defense:
Appendix III: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Categories of Services Acquired Most Using Time-and-Materials
Contracts, Fiscal Year 2005:
Table 2: Reported Time-and-Materials Obligations by Contract/Order Type
for Service Acquisitions, Fiscal Year 2005:
Table 3: Contract Types Used for Largest Dollar Value Contracts in Our
Sample:
Table 4: Selected Examples of Differences in Labor Rates between Prime
Contracts and Subcontracts:
Table 5: Governmentwide Provisions and Those in DOD's Interim Rule
Regarding Billing for Subcontracted Labor under Time-and-Materials
Contracts:
Table 6: Characteristics of GAO's Sample of 28 Contracts, Agreements,
and Orders:
Figures:
Figure 1: Contract Types:
Figure 2: DOD Reported Obligations against Service Contracts:
Figure 3: Percentage of DOD Reported Obligations, Sorted by Contract
Type, for Service Acquisitions, Fiscal Years 1996 through 2005:
Figure 4: Percentage Differences between Prime Contract and Subcontract
Labor Rates for 628 Labor Categories on 13 Contracts or Agreements:
Figure 5: Range of Percentage Differences between Prime Contract and
Subcontract Labor Rates for 628 Labor Categories in 24 Orders:
Abbreviations:
COR: Contracting Officer's Representative:
DCAA: Defense Contract Audit Agency:
DCMA: Defense Contract Management Agency:
DFARS: Defense Federal Acquisition Regulation Supplement:
DFAS: Defense Finance and Accounting Service:
DIA: Defense Intelligence Agency:
DISA: Defense Information System Agency:
DOD: Department of Defense:
FAR: Federal Acquisition Regulation:
FASA: Federal Acquisition Streamlining Act of 1994:
GSA: General Services Administration:
NIH: National Institutes of Health:
United States Government Accountability Office:
Washington, DC 20548:
June 29, 2007:
The Honorable Carl Levin:
Chairman:
The Honorable John McCain:
Ranking Member:
Committee on Armed Services:
United States Senate:
The Department of Defense (DOD) uses time-and-materials and labor-hour
contracts to acquire billions of dollars in services annually. Under
these contracts, payments to contractors are based on the number of
labor hours billed at a fixed hourly rate--which includes wages,
overhead, general and administrative expenses, and profit--and the cost
of materials if applicable. Services acquired under time-and-materials
and labor-hour contracts span a breadth of activities--from
administrative support and intelligence analysis to the installation of
data and communications networks and maintenance of multimillion-dollar
DOD weapon systems. These services can be provided by a single
individual from a company or by companies utilizing scores of
subcontractors. Time-and-materials and labor-hour contracts are
considered high risk for the government because they provide no
positive profit incentive to the contractor for cost control or labor
efficiency. A contractor operating under a time-and-materials contract
could conceivably work less efficiently so that more hours could be
charged to the government. Thus, the onus is on the government to
prevent wasteful spending by monitoring contractor performance to
ensure that the contractor is efficiently performing the work and
effectively controlling costs. Even with appropriate monitoring,
however, the government is not fully protected because contracting
officers may not reduce payments for hours actually worked when, in
their opinion, the work was performed inefficiently. Finally, federal
regulations require contracting officers to justify in writing that no
other contract type is suitable before using a time-and-materials
contract.
At your request, we reviewed DOD's use of time-and-materials contracts.
Specifically, we (1) identified the overall trends in DOD obligations
under time-and-materials and labor-hour contracts; (2) analyzed what
DOD is buying under these contracts; (3) assessed the factors
contributing to the department's use of time-and-materials and labor-
hour contracts and whether actions are being taken to ensure that they
are only used when no other contract type is suitable; (4) evaluated
DOD's monitoring of contractor performance; and (5) for selected
contracts, determined the differences between the labor rates prime
contractors charged DOD and the labor rates in their subcontracts. In
this report, we use the term "time-and-materials contract" to refer to
both time-and-materials and labor-hour contracts and
agreements,[Footnote 1] unless otherwise noted.
To identify trends in the use of time-and-materials contracts, we
analyzed data on all obligations for fiscal years 1996 through 2005
from DOD's procurement information system--the DD350 database. The 2005
data was the most recent available when we performed our analysis.
During the course of our review, we discovered a potentially
significant underreporting of time-and-materials contracts in this
database. To address this limitation, we developed a methodology to
estimate the magnitude of the gap. The other key DD350 contract
information that we used to select our contracts for review was present
in the contract files we examined. The system's information, except for
the time-and-materials coding issue, was deemed sufficiently reliable
for our purposes. We also used DD350 data to analyze what types of
services DOD is buying under time-and-materials contracts. To obtain
more detailed information on services procured under specific
contracts, to assess the factors contributing to DOD's use of this
contract type, and to evaluate DOD's monitoring of contractor
performance, we conducted an in-depth review of 28 time-and-materials
contracts, agreements, and orders from among those identified in DOD's
database as active in fiscal years 2004 and/or 2005. Twenty of the 28
were DOD contracts and the remaining 8 were under other agencies'
contracts. None were coded as commercial acquisitions, but DD350 data
for three of the non-DOD contracts did not indicate whether they were
commercial or non-commercial acquisitions. We made our selection taking
into account dollar value, military organization, location of the
buying activity, and type of contract. For contracts or agreements that
allowed DOD to place individual orders for services (such as the
General Services Administration's (GSA) federal supply schedules or
multiple award schedules),[Footnote 2] we also selected time-and-
materials orders for review. In many cases, these contracts also
permitted orders to be issued using contract types other than time-and-
materials. In all, we reviewed a total of 82 contracts, agreements, and
orders. For each, we reviewed the contract file and collected
documentation related to the choice of contract type and monitoring of
contractor performance. We interviewed the contracting officer and the
individual responsible for the monitoring. Although our sample size did
not allow us to develop statistical estimates that would enable us to
project our results to the entire universe of DOD's time-and-materials
contracts, we identified recurring issues related to DOD's use and
management of time-and-materials contracts, regardless of the contract
dollar value or buying activity.
To determine the differences between the rates prime contractors
charged the government for subcontracted labor and their own prime
contract rates, we selected, in addition to 1 blanket purchase
agreement from our sample of 28 contracts, agreements, and orders that
permitted this billing practice, an additional 12 (6 blanket purchase
agreements and 6 large service contracts) for further review. In all,
we analyzed 24 orders and 628 associated labor rates under these 13
contracts and agreements. We reviewed contract clauses, contractor
proposals, subcontracts, and other documents related to the contracts
and contacted prime contractor representatives to obtain more
information on the subcontract labor rates. We also examined Defense
Contract Audit Agency (DCAA) audit reports issued between December 2004
and November 2006 that are related to DOD's use of this billing
practice.
Appendix I contains additional details on our scope and methodology. We
conducted our review between February 2006 and May 2007 in accordance
with generally accepted government auditing standards.
Results in Brief:
DOD's reported obligations under time-and-materials contracts have
nearly doubled, from almost $5 billion in fiscal year 1996 to about $10
billion in 2005. This increase was at a somewhat greater rate than the
overall rise in DOD's spending on services. But the dollar amount is
understated because the reported dollars did not include DOD's time-
and-materials orders placed under federal schedules, such as GSA's
schedules program. Because DOD spends billions of dollars a year on
schedule orders, the unreported time-and-materials dollars are likely
to be substantial. The data were not available because defense
acquisition instructions and procedures, starting in 1997, directed
officials not to specify contract type--such as time-and-materials--for
schedule orders in DOD's procurement information system. The accuracy
of reported time-and-materials dollars should be improved starting in
fiscal year 2007, because that is when DOD transitioned to the federal
government's procurement information system, under which users are
required to code contract type for schedule orders.
Over 75 percent of DOD's time-and-materials obligations, as reported in
DOD's procurement information system, are concentrated in three service
categories: professional, administrative, and management support
services; information technology and communications; and maintenance,
repair, and rebuilding of equipment. Our reviews of contract files and
discussions with DOD officials showed that DOD is also using time-and-
materials contracts to acquire contract services to supplement the
government workforce. Examples included subject matter experts in the
intelligence field, systems engineering support, and advisory and
assistance services. The workforce increasingly reflects a "blend" of
government and contractor personnel. Government personnel are finding
themselves working side-by-side with contractors, often performing
similar roles.
Contracting and program officials frequently failed to ensure that time-
and-materials contracts were only used when no other contract type was
suitable. According to DOD officials, the main reasons time-and-
materials contracts are used are the speed with which contracts can be
awarded and the flexibility they provide in adjusting labor hours or
labor categories in light of changing priorities, unclear requirements,
or funding uncertainties. Most of the written determinations we
examined did not include a rationale showing why another contract type
could not be used instead. For some task orders, no determination had
been prepared when required by ordering guidance for the underlying
contract. Further, with a few exceptions--such as a Navy contract for
aircraft upgrades that changed from time-and-materials to fixed-price
once sufficient knowledge about costs was attained--we found that
little effort had been made to convert follow-on work to a less risky
contract type when historical pricing data existed, despite guidance to
do so. In February 2007, federal acquisition regulation revisions
implementing the new provisions in the Services Acquisition Reform Act
of 2003 pertaining to the use of time-and-materials contracts for
commercial acquisitions went into effect. The revisions require more
stringent justifications for the use of time-and-materials contracts,
including a requirement to justify their use at the task order level,
but most of the changes apply only to commercial acquisitions.
Even though time-and-materials contracts call for appropriate
government monitoring of contractor performance, we found
inconsistencies in the rigor with which the monitoring occurred. Most
of the contracts and orders we reviewed did not include documented
plans for monitoring, as required. Such plans are intended to assist
program officials and contracting officers' representatives in knowing
what contractor activities they should be monitoring and how they
should monitor them. In general, contracting officers' representatives
performed their monitoring based on information that contractors
provided about the status of ongoing work and "burn rates," or how
quickly the money was being spent. In a few instances though, we found
plans and reporting requirements, designated performance monitors, or
evidence that program officials had actively monitored spending in
labor categories. Some contracting officers obtained timesheets along
with billing submissions, providing program managers with the necessary
information to closely monitor labor hours according to specific labor
categories.
DOD time-and-materials contracts typically allow prime contractors to
bill DOD in one of four ways for subcontracted labor, one of which
involves the prime charging the government for subcontract labor at the
prime contract labor rate. According to DCAA, this practice can result
in the prime contractor earning additional profit. Indeed, our analysis
of billing rates under 13 contracts showed that when the contract
allowed the prime to charge its own hourly rates for subcontracted
labor, the differences between the prime contract rates and those in
subcontracts ranged from negative 40 percent to 192 percent, with most
in the 6 to 53 percent range. In addition, DCAA has questioned costs
pertaining to subcontractor billing. In one case, DCAA found a prime
contractor billed DOD for subcontracted labor at rates that ranged from
20 to 95 percent higher than the rates the primes paid their
subcontractors. An interim rule to DOD's acquisition regulations
supplement effective in February 2007 requires the prime contractor to
propose separate labor rates for itself and its subcontractors for non-
commercial, competitively awarded acquisitions under time-and-
materials contracts, but--like new federal acquisition regulation
provisions that apply governmentwide--does not require separate rates
for commercial acquisitions.
We are recommending that the Secretary of Defense direct the Director
of Defense Procurement and Acquisition Policy to require a similar
level of justification for use of time-and-materials for non-commercial
services as is now required for commercial acquisitions. We are also
recommending that DOD analyze the use of time-and-materials orders
under indefinite-quantity contracts to ensure that it does not become
the default contract type when other types of orders are also allowed.
Finally, we recommend that plans outlining government monitoring of
contractor performance under time-and-materials contracts should
include specific activities needed to ensure adequate oversight under
this contract type. In its written comments on a draft of this report,
DOD concurred with the recommendations. DOD's comments are printed in
their entirety in appendix II of this report.
Background:
Federal agencies, including DOD, can choose among different contract
types or pricing arrangements, including time-and-materials contracts,
to acquire products and services. This choice is the principal means
that agencies have for allocating cost risk between the government and
the contractor. Various contract types can be employed to meet the
government's needs. For example, time-and-materials can be used in
conjunction with stand-alone contracts; indefinite-quantity contracts,
including those under GSA schedules; blanket purchase agreements; or
basic ordering agreements. These choices are illustrated in figure 1.
Figure 1: Contract Types:
[See PDF for image]
Sources: FAR, Defense Federal Acquisition Regulation Supplement, DOD
Contract Pricing Guide (data); GAO (presentation and analysis):
[End of figure]
Time-and-materials contracts comprise the highest contract type risk to
the government, according to the organizations who are responsible for
promulgating federal acquisition regulations. Like cost-reimbursable
contracts, they require that the contractor use its best efforts to
provide the goods or services at the stated ceiling price.[Footnote 3]
If the contractor performs work pursuant to the contract, the
contractor is entitled to be reimbursed for labor at agreed-upon rates,
which include wages, overhead, general and administrative expenses, and
profit; and for materials purchased at cost. If the services delivered
do not meet contract requirements and the government exercises its
right to have the contractor correct the deficiencies, the government
pays the additional labor and material costs to do so, excluding the
portion of the labor rate attributable to profit.[Footnote 4]
Because of the risks involved, the Federal Acquisition Regulation (FAR)
directs that time-and-materials contracts should only be used when it
is not possible at the time of award to estimate accurately the extent
or duration of the work or to anticipate costs with any reasonable
degree of confidence.[Footnote 5] The regulation also states that this
type of contract may only be used after the contracting officer
executes a written justification, known as a determination and
findings, that no other contract type is suitable. Time-and-materials
contracts also must include a ceiling price that the contractor exceeds
at its own risk. In addition, because these contracts do not include a
positive profit incentive for the contractor, appropriate government
monitoring of contractor performance is required to give reasonable
assurance that efficient methods and effective cost controls are being
used. Documentation that the monitoring occurred is required by the
FAR.[Footnote 6]
The question of whether time-and-materials contracts could be used for
commercial acquisitions has been an issue of some contention. During
discussion of proposed provisions in the Services Acquisition Reform
Act of 2003,[Footnote 7] which explicitly authorized the use of time-
and-materials contracts to purchase commercial services under certain
circumstances, a former Administrator of the Office of Federal
Procurement Policy noted that the issue of whether time-and-materials
contracts should be authorized under the FAR's commercial acquisition
procedures appeared to trigger more public dialogue than any other
provision of the act. While some believed that increased use of time-
and-materials contracts would encourage more commercial firms to
compete for government business, others, such as the DOD Inspector
General, opposed the idea of expanding use of this contract type for
commercial item purchases. In fact, although the FAR explicitly
prohibited agencies from purchasing commercial items or services using
time-and-materials contracts until February 2007 when it implemented
the act's provisions, government agencies were doing so under GSA
schedule contracts. According to GSA officials, this practice was
allowed based on the agency's interpretation of the Federal Acquisition
Streamlining Act of 1994 (FASA)[Footnote 8], which required that fixed-
price contracts be used to the "maximum extent practicable" for
commercial acquisitions and remained silent on whether time-and-
materials contracts were allowed. Viewing the FAR as more restrictive
than FASA, in March 1998 GSA executed a FAR deviation to allow for the
use of time-and-materials contracts for commercial services. But this
deviation applied only to Information Technology Schedule 70, one of
the many GSA schedules. GSA officials were unable to provide us with
additional FAR deviations that allowed time-and-materials orders under
the other GSA schedules, such as those with contracts for professional,
administrative, and management services, despite our requests.
Commercial companies avoid time-and-materials contracts in most
situations. In a prior review,[Footnote 9] we surveyed 23 companies--22
of which used time-and-materials contracts in their commercial
practices, either as a buyer or a seller. The companies represented 18
different industries. They reported using time-and-materials contracts
when they could not complete a well-defined scope of work and when risk
could be managed by monitoring costs and contractor performance.
Company representatives told us they use this contract type in the
early stages of projects, in situations when work is not easily
definable (such as emergency repairs) or is prone to change because of
unforeseen conditions. One representative response from industry was
that they use time-and-materials only when the risk and cost of the
deal is low and/or they truly do not know what they want.
The Acquisition Advisory Panel, which the Services Acquisition Reform
Act established to review acquisition laws and regulations regarding
many different acquisition issues--including time-and-materials
contracts--issued its draft report to the Office of Federal Procurement
Policy and the Congress in December 2006. The panel expressed concern
about risks associated with the time-and-materials contract type,
particularly in the areas of price and contract management. The panel's
Commercial Practices Working Group noted that commercial buyers who
spoke to the panel provided many sound reasons not to use time-and-
materials contracts, but when they do use this contract type, they
"endeavor to maintain tight controls over the contracting process,
costs, and levels of effort." The panel made several recommendations
regarding time-and-materials contracts, including (1) current policies
limiting their use should be enforced; (2) whenever practicable,
procedures should be established to convert work to a performance-based
effort; and (3) the government should not award time-and-materials
contracts unless the overall scope of the effort, including the
objectives, has been sufficiently defined to allow for efficient
practices and effective government oversight.
Overall Trend in Time-and-Materials Obligations Is Incomplete Because
of Missing Data:
From fiscal years 1996 through 2005, DOD's obligations against time-
and-materials contracts rose from almost $5 billion to over $9.6
billion, according to DD350 data. This rate of increase was somewhat
greater than the increase in DOD's overall service spending. Not shown
in DD350 data, however, is DOD's spending through time-and-materials
contracts for orders placed against GSA and other federal schedules.
The data gap is the result of DOD instructions and procedures that
directed users not to code contract type when the action was an order
under a federal schedule. These instructions were in effect from fiscal
year 1997 until fiscal year 2007. Reporting should improve starting in
fiscal year 2007, with DOD's transition to the government's Federal
Procurement Data System-Next Generation. In that system, a contract
type is identified for all orders, including those under GSA schedule
contracts.
Figure 2 illustrates the growth rate of DOD's reported time-and-
materials obligations and the growth rate of DOD's overall service
contract obligations.
Figure 2: DOD Reported Obligations against Service Contracts:
[See PDF for image]
Sources: DOD DD350 database (data); GAO (analysis and presentation):
[End of figure]
When comparing contract types, DOD's reported use of time-and-materials
for service acquisitions has remained relatively steady over the past
10 years. Contracts reported as time-and materials ranged from 5.9
percent to 6.8 percent of service contract dollars. Figure 3 depicts
the obligations coded as time-and-materials as well as those where
contract type was not coded--i.e., schedule orders.
Figure 3: Percentage of DOD Reported Obligations, Sorted by Contract
Type, for Service Acquisitions, Fiscal Years 1996 through 2005:
[See PDF for image]
Sources: DOD DD350 database (data); GAO (analysis and presentation):
[End of figure]
As the use of GSA schedules has grown, so has the size of DOD's
knowledge gap. Reported data on DOD's schedule orders for services show
an increase of almost 200 percent over the past 10 years, from $2.4
billion in fiscal year 1996 to $6.9 billion in 2005. None of these
entries include a contract type. To shed light on the potential
magnitude of the missing data, we calculated the percentage of
obligations with a reported contract type of time-and-materials for
each of the 24 categories of services in the DD350 database. We then
applied this same percentage, for each service category, to the dollars
that were uncoded--i.e., schedule orders. For example, in fiscal year
2005, contract type was not coded for $3.4 billion in obligations
related to the acquisition of professional, administrative, and
management support services. Of reported obligations in this service
category for which DOD did record a contract type, almost 17 percent
was obligated against time-and-materials contracts. We applied the 17
percent to the $3.4 billion to estimate that $570 million of
obligations in this service category was likely to be time-and-
materials. In looking at a single year, fiscal year 2005, our
conservative estimate is that over $1 billion of the $6.9 billion in
services acquired through federal schedules was obligated against time-
and-materials contracts. For fiscal year 2005, this would represent an
over 10 percent increase in the dollars attributed to time-and-
materials contracts. Estimates from others place the amount higher. The
GSA Inspector General in 2003 reported that use of time-and-materials
was prevalent under schedule contracts and that 65 percent of the 1,976
task orders for professional services purchased by several agencies
under the schedules it surveyed were priced on a time-and-materials
basis.[Footnote 10] In 2005, the GSA Assistant Inspector General for
Auditing told the Acquisition Advisory Panel that recent studies of 523
GSA Federal Technology Service contract awards, valued at over $5.4
billion, found over 60 percent of all orders were awarded on a time-
and-materials basis.
Most of DOD's Time-and-Materials Obligations Are for Three Categories
of Services:
Over 75 percent of DOD's reported time-and-materials purchases are for
professional, administrative, and management support services;
information technology and communications; and maintenance, repair, and
rebuilding of equipment. These are three of the largest and among the
fastest growing categories of DOD service acquisitions. Obligations for
professional, administrative, and management support services, for
example, increased 161 percent from 1996 to 2005. Table 1 shows the
percentage of DOD contract dollars spent using time-and-materials
contracts for these three categories.
Table 1: Categories of Services Acquired Most Using Time-and-Materials
Contracts, Fiscal Year 2005:
Type of service: Professional, administrative, and management support
services; DOD obligations in fiscal year 2005: $28.3 billion; DOD
obligations using time-and-materials contracts in fiscal year 2005:
$4.2 billion; Time-and-materials obligations as a percentage of DOD's
total fiscal year 2005 obligations: 15 percent.
Type of service: Information technology and communications; DOD
obligations in fiscal year 2005: 10.3 billion; DOD obligations using
time-and-materials contracts in fiscal year 2005: 1.8 billion; Time-
and-materials obligations as a percentage of DOD's total fiscal year
2005 obligations: 18 percent.
Type of service: Maintenance, repair, and rebuilding of equipment; DOD
obligations in fiscal year 2005: 11.4 billion; DOD obligations using
time-and-materials contracts in fiscal year 2005: 1.3 billion; Time-
and-materials obligations as a percentage of DOD's total fiscal year
2005 obligations: 12 percent.
Sources: DOD DD350 database (data); GAO (presentation and analysis).
Note: Percentages may not calculate within table due to rounding.
[End of table]
Table 2 shows that DOD is most often making its time-and-materials
purchases by issuing task orders under indefinite-delivery contracts,
according to reported obligations.
Table 2: Reported Time-and-Materials Obligations by Contract/Order Type
for Service Acquisitions, Fiscal Year 2005:
Dollars in billions: Contract/order type: Order under an indefinite-
delivery contract; DOD obligations in fiscal year 2005: $7.928;
Percentage of obligations: 82.
Dollars in billions: Contract/order type: Definitive contract; DOD
obligations in fiscal year 2005: 0.832; Percentage of obligations: 9.
Dollars in billions: Contract/order type: Blanket purchase agreement
order under federal schedule; DOD obligations in fiscal year 2005:
0.761; Percentage of obligations: 8.
Dollars in billions: Contract/order type: Order under an agreement; DOD
obligations in fiscal year 2005: 0.066; Percentage of obligations: less
than 1.
Dollars in billions: Contract/order type: All other contracts; DOD
obligations in fiscal year 2005: 0.099; Percentage of obligations: 1.
Sources: DOD DD350 database (data); GAO (analysis).
Notes: Reported information does not include orders placed off federal
schedules (e.g., GSA schedule contracts). "All other contracts" include
letter contracts, orders from Federal Prison Industries or the Javits-
Wagner-O'Day Program for the blind or severely disabled, and awards
under FAR Part 13 simplified acquisition procedures.
[End of table]
In addition to reported data in DOD's procurement information system,
our analysis of contract files and discussions with DOD officials
showed that the department is using time-and-materials contracts and
orders to acquire contract services to supplement the government's
workforce. For example, under one of the contracts we reviewed, the
Defense Intelligence Agency (DIA) hired subject matter experts in the
intelligence field for such things as assisting in the implementation
of defense intelligence operational planning, including identifying
requirements; establishing an in-theater contract management branch to
oversee contractor personnel acquisitions, performance, and training;
research and analysis in support of human intelligence collection
operations; and serving as a security officer. According to a DIA
official, contractor personnel were needed to backfill the government
workforce in light of changing and increased operational requirements.
Many of these contractor personnel were former DIA employees. In
another case, the Air Force signed a 1-year contract to acquire
advisory and assistance services[Footnote 11]--specifically, 27
contract employees to provide systems engineering and technical
assistance--to support the Air Force Deputy Chief of Staff for
Warfighter Integration. During a pre-award review of the statement of
work, the contracting specialist indicated that it was necessary to use
the word "assist" to describe certain activities, such as acquisition
strategy development, so that the statement of work did not show the
contractor performing inherently governmental functions.
Government personnel are increasingly finding themselves working side-
by-side with contractors, often performing similar roles. The
Acquisition Advisory Panel, in its December 2006 draft report, found
that, as the workforce increasingly reflects a "blend" of government
and contractor personnel, issues have arisen with respect to the proper
roles and relationships of federal employees and contractors. It
pointed in particular to uncertainties about the scope and application
of what are "inherently governmental" functions, the practical
difficulties of enforcing the current FAR prohibition on personal
services contracts,[Footnote 12] and the increasing probability of, and
need to protect against, organizational conflicts of interest. The
report also noted that, with the growth of a workforce in which
contractor employees are working alongside federal employees,
performing identical functions, questions have been raised about
whether the contractor employees should be required to comply with
certain ethics rules that apply to government personnel. It made a
number of recommendations pertaining to these issues.
DOD Frequently Did Not Justify Why Time-and-Materials Contracts Needed
but Used Them for Ease and Flexibility:
DOD contracting and program officials frequently did not justify why
time-and-materials contracts were the only contract type suitable for
the procurement. The main reasons time-and-materials contracts are
used, according to the officials we interviewed, are the speed with
which contracts can be awarded and the flexibility they provide in
adjusting labor hours or labor categories in light of changing
priorities--often as a result of requirements that are not firm--or
funding uncertainties. Existing management controls, such as
contracting officers' written justifications and acquisition plans,
could help decision makers to ensure that time-and-materials contracts
are used only when appropriate. However, for most of the contracts we
reviewed, the justifications did not include a rationale showing why no
other contract type was suitable, nor did the acquisition plans. With a
few exceptions, little attempt was made to convert follow-on contracts
or task orders to a different contract type, even when historical data
existed. Recent revisions to the FAR implement a number of stricter
requirements for contracting officers to justify use of time-and-
materials contracts, but most pertain only to commercial acquisitions.
Lack of Firm Requirements, Funding Uncertainties, and Pressure to Award
Contracts Drive Use of Time-and-Materials:
Contracting and program officials told us that their decisions to use
time-and-materials contracts were driven by the flexibility this
contract type provides to deal with unknowns related to the
acquisition--particularly a lack of firm requirements--and the ability
to award these contracts quickly, not because this contract type was
the only one suitable. The combination of indefinite-quantity contracts
and time-and-materials allows contracting officers to get new work on
contract quickly, because labor rates have been pre-negotiated. In
fact, based on DD350 data, for the five largest contracts we examined-
-each with obligations of more than $250 million through fiscal year
2005--that permitted various contract types,[Footnote 13] time-and-
materials was by far the predominant type used, as shown in table 3.
Table 3: Contract Types Used for Largest Dollar Value Contracts in Our
Sample:
Dollars in thousands: Contract 1; Fixed price: $456, 0.03%; Cost
reimbursable: 0, 0; Time-and-materials: $1,510,146, 99.97%; Total:
$1,510,602, 100.00%.
Dollars in thousands: Contract 2; Fixed price: 2,053, 0.15%; Cost
reimbursable: 0, 0; Time-and-materials: 1,341,109, 99.85%; Total:
1,343,161, 100.00%.
Dollars in thousands: Contract 3; Fixed price: 43,558, 6.59%; Cost
reimbursable: $4,906, 0.74%; Time-and-materials: 612,213, 92.66%;
Total: 660,677, 100.00%.
Dollars in thousands: Contract 4; Fixed price: 118,539, 36.77%; Cost
reimbursable: 3,494, 1.08%; Time-and-materials: 200,360, 62,15%; Total:
322,393, 100.00%.
Dollars in thousands: Contract 5; Fixed price: 24,634, 9.29%; Cost
reimbursable: 22,493, 8.48%; Time-and-materials: 218,014, 82.23%;
Total: 265,141, 100.00%.
Note: Totals may not add due to rounding.
Sources: DOD DD350 database (data); GAO (analysis).
[End of table]
Use of time-and-materials under indefinite-quantity contracts also
allows contracting officers to keep adding work to the orders, since
hours and funds are only limited by the ceiling price of the contract.
For example:
* The original value of a Defense Information System Agency (DISA) task
order for installation, de-installation, and maintenance services
related to the Defense Information System Network was $20.7 million for
a 1-year period. The value of the order has grown to over $386 million
and has been in place for over 5 years. According to a DISA official,
instead of issuing a new task order, the task order is "renewed" on a
yearly basis.[Footnote 14]
* The value of a 1-year task order under the Air Force's Contractor
Field Team contract for the maintenance of aircraft deployed to support
Operation Iraqi Freedom increased from $23.9 million to over $221
million.
Contracting and program officials also noted that time-and-materials
contracts provide DOD the flexibility to shift the skill sets being
acquired by adjusting the distribution of hours between labor
categories. However, this type of flexibility is only needed if DOD is
unable to define its requirements in terms of outcomes. The need for
improved requirements definition was also addressed by the Acquisition
Advisory Panel in its December 2006 draft report. The panel found that
the government fails to invest in the acquisition planning phase of
procurement, focusing on rapid awards rather than on defining
requirements. The testimony the panel heard was consistent in
identifying the major contributors to this problem as the cultural and
budgetary pressure to quickly award contracts or orders, combined with
a lack of market expertise in an already-strained acquisition workforce.
The pressure to get to award was evident in several of the contracts we
examined and contributed to the use of time-and-materials contracts
over other contract types. According to the contracting officers, this
pressure was the result of such factors as the need to get supplemental
funding on contract, the expiration of an existing contract, or urgent
customer demands. They told us they turned to time-and-materials
contracts or orders in these situations because they require less up-
front effort than cost-reimbursable contracts to determine that prices,
in the form of labor rates, are fair and reasonable; require less
specific requirements than are needed to support a fixed-price bid; or
had been previously used. For example, the Air Force had been acquiring
advisory and assistance services under a time-and-materials contract
when it determined that the work was out of the contract's scope. It
quickly put in place a new contract, again under a time-and-materials
arrangement even though there was historical data available, because,
according to an Air Force official, it was expedient and the customer
was comfortable with this contract type.
According to contracting and program officials, budget pressures are
also driving contracting officers to accept more risk by using time-
and-materials contracts. Army officials told us that cost-reimbursable
and time-and-materials contracts are being chosen over fixed-price
contracts in part because of the way funding is allocated. They stated
that funding is being allocated to Army programs and offices on a
quarterly basis, based on shifting priorities. Without a stable funding
stream with which to fully fund fixed-price contracts, contracting
officers are looking to the flexibility provided by time-and-materials
contracts, which allow them to take actions such as adjusting the
number of hours being purchased. Similarly, Air Force officials told us
that when the military service was directed to cut spending on
contractor support services by 29 percent in 2006, it was easier and
less costly to change or eliminate requirements on time-and-materials
contracts than on fixed-price contracts.
Contracts and Orders Lacked Justifications or Rationale Showing Why
Time-and-Materials Was Needed:
When choosing to use time-and-materials contracts, the FAR requires
contracting officers to provide a written justification, known as a
determination and findings, that no other contract type is suitable for
the acquisition.[Footnote 15] The determination and findings is
required to set forth enough facts and circumstances to clearly and
convincingly justify the determination made.[Footnote 16] Contract type
is also addressed in acquisition plans, which set forth the overall
strategy for managing the acquisition.[Footnote 17] These management
controls are designed to help decision makers ensure that a time-and-
materials contract is appropriate.[Footnote 18] In most cases, however,
the justifications and plans we examined did not include a rationale
showing why less risky contract types could not be used for the
procurement. The GSA and DOD Inspectors General have also reported on a
lack of determinations and findings and contract files with minimal
information to support the use of time-and-materials
contracts.[Footnote 19]
We found that some contracting officers' justifications for use of time-
and-materials contracts quoted language from the FAR[Footnote 20]-
-such as stating that it was not possible at the time of awarding the
contract to estimate accurately the extent or duration of the work or
to anticipate costs with any reasonable degree of confidence and that
time-and-materials was the only suitable contract type--and did not set
forth the rationale for why other contract types could not be used. In
several of these cases, the determinations and findings did not include
specifics related to the acquisition at hand.
We also found two indefinite-quantity contracts, both of which allowed
for only time-and-materials orders, that completely lacked written
determinations and findings justifying the use of time-and-materials.
One was a Navy contract for ongoing support related to F/A-18s sold
through the foreign military sales program, and the other was a Navy
contract for technical and engineering services regarding the
maintenance of aging aircraft. The contracting officers said they were
unaware of the FAR requirement to prepare a determination and
findings.[Footnote 21]
As shown above in table 3, the vast majority of DOD's reported time-
and-materials obligations are against orders under indefinite-quantity
contracts. At the time of our review, the FAR did not require
determinations and findings for task orders issued under indefinite-
quantity contracts. Consequently, many of the time-and-materials orders
we reviewed--even those issued under contracts that allowed for
multiple order types--did not have a determination and findings showing
why no contract type other than time-and-materials was suitable. On
some of the contracts we reviewed, the contracting officers relied on
the initial determination and findings for the indefinite-quantity
contract to justify subsequent time-and-materials orders, even when the
scope of work allowed under the contract was very broad. For example,
the Army's Communications-Electronics Command prepared a class
determination and findings for the use of time-and-materials under a
contract for equipment and engineering services. The document noted
that the statement of work included many tasks, including research and
development, systems integration and engineering, test and evaluation,
studies, logistics support, training, and acquisition support. It
stated that "Due to the complexity and variety of tasks available to
Federal customers, it is impossible to estimate the duration of work or
to anticipate costs with any reasonable degree of certainty."
We also found cases where ordering guides for specific contracts
required a determination and findings before time-and-materials orders
were used; in some of these cases, the contracting officers had not
complied with the requirement.
* The Army placed an order for network and systems engineering services
under a National Institutes of Health (NIH) governmentwide acquisition
contract. The Army contracting officer did not complete a determination
and findings for the order, stating that this was the responsibility of
the NIH contracting officer. The NIH contracting officer told us that
executing a determination and findings is normally the responsibility
of the ordering agency. According to NIH's ordering guide for this
governmentwide acquisition contract, in the event that a time-and-
materials order was contemplated, the customer (in this case, the Army)
was required to follow the FAR requirements for completing a
determination and findings.
* The DISA ordering guide for one of the indefinite-quantity contracts
in our sample stated that a time-and-materials contract could only be
used after the contracting officer executed a determination and
findings that no other contract type was suitable. Such a determination
had not been made for all three time-and-materials orders we reviewed
under the contract.
Finally, we found two cases where agencies had issued time-and-
materials orders under blanket purchase agreements based on GSA
schedule contracts, but had not prepared determinations. GSA's schedule
ordering guidance, under "frequently asked questions" on the agency's
Web site, states that time-and-materials orders under schedule
contracts require a determination that it was not possible at the time
of placing the order to estimate accurately the extent or duration of
the work or to anticipate cost with any reasonable degree of
confidence. According to a GSA official, this guidance was posted in
March 2005. Of the nine orders discussed below, six were issued prior
to this guidance; however, three were issued after it was posted.
* DIA awarded two blanket purchase agreements against GSA schedule
contracts, one for three orders totaling $1.6 million for
administrative operational support in the intelligence area and the
other for three orders totaling $23 million for information technology
engineering and intelligence support. A determination had not been
prepared for any of the orders.
* The Defense Contract Management Agency (DCMA) issued a blanket
purchase agreement and three subsequent task orders under a GSA
schedule contract for information technology services. The contract
files did not contain a determination justifying the use of the time-
and- materials orders. For one order, the price negotiation memorandum
stated that the decision to use a time-and-materials contract was
driven by the customer (i.e., program officials). The document did not
discuss the customer's rationale for why no other contract type was
suitable.
Acquisition officials at DCMA and DIA respectively attributed the lack
of documentation to an understaffed acquisition workforce and
inadequate agency acquisition policies.
Little Attempt to Change Contract Type for Follow-on Efforts:
One way to decrease the risks inherent in time-and-materials contracts
is to convert to a less risky contract type for follow-on efforts. In
fact, a September 2004, Defense Procurement and Acquisition Policy
memorandum directed that, when preparing the requirements for a follow-
on contract to an existing time-and-materials or cost-reimbursable
service contract, program officials should work with the contracting
officer to determine if any portion can be broken out and ordered on a
fixed-price basis.[Footnote 22] The memorandum notes that the
experience gained on the prior contract may serve as a basis to
reasonably price similar future efforts on a fixed-price basis. The
FAR, too, states that:
In the course of an acquisition program, a series of contracts, or a
single long-term contract, changing circumstances may make a different
contract type appropriate in later periods than that used at the
outset. In particular, contracting officers should avoid protracted use
of a cost-reimbursement or time-and-materials contract after experience
provides a basis for firmer pricing.[Footnote 23]
We found little evidence, however, that efforts are being made to
convert time-and-materials to fixed-price for follow-on efforts or
recurring services, even when historical information existed. Examples
follow.
* The Army has continued to use a time-and-materials order under a GSA
governmentwide acquisition contract to acquire information technology
services to support an online educational contest for middle school
students in the areas of science, math, and technology. According to
the acquisition plan, the original directive for the program was
neither detailed nor specific. The effort has now been ongoing for 4
years and is still priced on a time-and-materials basis.
* In 1998, the Air Force signed a 10-year contract for B-52 engineering
services that was a sole-source follow-on to a previously issued time-
and-materials contract. Overall, the contractor had been providing
similar support for the B-52 program since 1963. During the development
of the acquisition strategy, the Assistant Secretary of the Air Force
for Acquisition initially rejected the program's plan to award a time-
and-materials contract for this effort, advocating a cost-plus award
fee contract instead. Eventually it was agreed that the time-and-
materials portion of the work would be limited to 50 percent. For the
first year, under monitoring by Air Force headquarters, this target was
met. In fiscal year 2000, the percentage of time-and-materials
obligations was 59 percent before decreasing back to 49 percent in
fiscal year 2001. However, the level of monitoring slackened after
2001, and for 2006, nearly all of the work was on a time-and-materials
basis.
* In 2005, DISA issued a request for proposal for Encore II, a follow-
on to its Encore I indefinite-quantity contract. Encore I offered a
variety of information technology services to organizations throughout
DOD and other federal agencies.[Footnote 24] Although orders can be
issued using various contract types, the contracting officer told us
that most of the orders issued have been time-and-materials. The DOD
Inspector General found that Encore II also allows for a significant
portion of time-and-materials task orders and raised concerns about
contractors not being motivated to increase efficiency and maximize
performance. In response, DISA plans to implement goals to decrease the
time-and-materials orders over the life of the contract. However, the
Inspector General noted that these goals are based on a percentage of
total dollars awarded in a calendar year. Therefore, DISA will not be
able to determine whether it is meeting the established goal until the
end of the year.
We found one case in which the Navy specified that a contract for
aircraft structural inspections and repairs could be changed from time-
and-materials to fixed price once sufficient knowledge about costs was
attained. Under this contract, the Navy agreed that the contractor
would perform structural inspection and repairs on one aircraft and use
the data it collected, along with the cost history for similar efforts,
to better define the extent, costs, and duration of the work so that
the remaining work could be completed on a fixed-price basis. As it
turned out, the Navy was able to use the data from the previous effort
to convert all service and repair work to fixed price shortly after the
contract was signed.
New Rules Implementing Provisions in Services Acquisition Reform Act
Strengthen Justifications for Time-and-Materials Contracts for
Commercial Acquisitions:
On December 12, 2006, the Civilian Agency Acquisition Council and the
Defense Acquisition Regulations Council (the Councils) agreed on a
final rule amending the FAR to implement section 1432 of the Services
Acquisition Reform Act of 2003.[Footnote 25] The act authorized the use
of time-and-materials contracts for the following categories of
commercial services: (1) commercial services procured for support of a
commercial item[Footnote 26] and (2) any other category of commercial
services that is designated by the Administrator of the Office of
Federal Procurement Policy on the basis that:
* the commercial services in such category are of a type of commercial
services that are commonly sold to the general public through use of
time-and-materials contracts and:
* it would be in the best interests of the federal government to
authorize use of time-and-materials contracts for purchase of the
commercial services in such category.
The final rule includes a number of stricter requirements for
contracting officers that directly address many of the problems we
found with the use of time-and-materials contracts. For example,
contracting officers' written justifications must describe actions
planned to maximize the use of fixed-price contracts on future
acquisitions for the same requirements, and they must be prepared for
task orders. However, most of the revisions pertain to commercial
acquisitions only. In responding to public comments on the proposed
regulations, the Councils acknowledged that the rule contained more
requirements for commercial determinations and findings than for non-
commercial. Their rationale was that the additional requirements were
needed to encourage the preference for fixed-price contracts for
commercial items. At the same time, though, the Councils stated that
they believe additional controls are needed to ensure both commercial
and non-commercial time-and-materials contracts are only used when no
other contract type is suitable. The DOD Acquisition Regulations
Council chair at the time this FAR rule was being considered told us
that discussions focused mostly on commercial acquisitions because the
belief was that this was the area where tighter controls were needed.
We note that none of the 28 time-and-materials contracts, agreements,
and orders we selected for review were coded as commercial acquisitions
in DOD's procurement information system.[Footnote 27]
The new provisions pertaining to commercial acquisitions of services on
a time-and-materials basis include the following:
* The determinations and findings must at a minimum (1) describe market
research conducted; (2) establish that it is not possible at the time
of placing the contract or order to accurately estimate the extent or
duration of work or to anticipate costs with any reasonable degree of
certainty; (3) establish that the requirement has been structured to
maximize the use of fixed-price contracts on future acquisitions for
the same or similar requirements (e.g., by limiting the value or length
of the time-and-materials contract or order or establishing fixed
prices for portions of the requirement); and (4) describe actions
planned to maximize the use of fixed-price contracts on future
acquisitions for the same requirements.
* Indefinite-delivery contracts must be structured to the maximum
extent practicable to allow the use of fixed-price orders. For these
contracts, each time-and-materials order under an indefinite-delivery
contract must have a separate determination and findings.
* If an indefinite-delivery contract only allows for time-and-materials
orders, a determination and findings shall be executed to support the
basic contract and shall also explain why providing for a fixed-price
alternative is not practicable. Further, the determination and findings
must be approved one level above the contracting officer.
One new provision applies to all time-and-materials acquisitions--
commercial and non-commercial. It requires the determinations and
findings to be signed before the execution of the base period and any
option periods. If the period of performance exceeds 3 years, the
determination and findings must be approved by the head of the
contracting activity. According to the Councils, this provision is also
intended to help avoid protracted use of non-commercial time-and-
materials contracts after experience provides a basis for firmer
pricing.
Contractor Performance Monitoring Often Did Not Reflect Inherent Risks
of Time-and-Materials Contract Type:
The FAR calls out the need for appropriate government oversight on time-
and-materials contracts to give reasonable assurance that efficient
methods and effective cost controls are being used, because this
contract type provides no incentive for the contractor to control costs
or be efficient. In addition, DOD guidance requires adequate monitoring
of contractor performance. This monitoring is to be properly
documented, including a plan setting forth the required activities and,
if applicable, specific performance measures. For time-and-materials
contracts, the plans could include activities such as ensuring that the
labor categories and rates in the contract match those provided by the
contractor. Monitoring of performance is typically performed by a
contracting officer's representative (COR), who is designated as such
by the contracting officer.[Footnote 28] Duties associated with the
monitoring include reviewing contractor costs to determine if there are
variances from the budgeted or anticipated costs, such as by labor
category. The COR is also responsible for assuring that the contract
performance is consistent with the description and scope of the
contract.[Footnote 29]
Although we found that CORs were assigned in most cases, many of the
contract files we reviewed did not include plans setting forth how the
monitoring was to be accomplished, and we found wide discrepancies in
the rigor with which monitoring was performed. For example, on the
Army's $17 million Omnibus 2000 logistics support services contract,
CORs told us that no monitoring plans or records were required and that
they did not review invoices.[Footnote 30] Further, some CORs had a
limited background in acquisition issues or were new to the role. A DIA
COR, who was accustomed to working on contracts for goods and supplies,
not services, told us the COR training received was not adequate and,
as a result, it took some time to learn how to do the job. An Army
customer on an Air Force maintenance contract hired a contractor to
perform day-to-day monitoring. The official stated that between
promotions and a lack of experience, the Army lacked in-house
government capability to provide adequate oversight. In general, on the
contracts we reviewed, CORs performed their monitoring role based on
information in monthly progress reports from the contractor that
provided a status of ongoing work and information on how fast money was
being spent, known as "burn rates."
On the other hand, we found a case in which DOD generated regular
reports of contractor performance, based on a documented monitoring
plan. An Air Force contract to meet surge requirements for field
maintenance used a management plan that outlined monitoring
responsibilities for contracting staff, required formal delegation of
these responsibilities, and provided a standard government form for
monthly reporting on all task orders. We also found a number of cases
in which contracting officers obtained timesheets and other supporting
documentation along with billing submissions. Doing so meant the
program managers had the necessary information to closely monitor
contractor performance using labor hours according to specific labor
categories. On one DIA task order, the program manager used the
information from invoices to monitor the charges in program management
labor categories for the contractor. The program manager stated that if
these costs exceeded 5 percent of the value of the hours billed during
the period, the contractor would be questioned about the reasons for
those charges.
DOD Is Paying More Than Actual Costs for Subcontracted Labor on Some
Contracts:
We found that contracts specified various ways prime contractors can be
reimbursed for subcontracted labor. Some required the prime contractor
to be reimbursed for the actual costs it paid for the subcontracted
labor, others set forth separate rates for subcontractors, some
contained "blended" prime and subcontract rates, and some permitted the
prime contractor to be reimbursed for subcontracted labor at the
prime's own rates. The last category in particular has caused some
concern within DOD. For example, DCAA audit reports have questioned
costs under this billing arrangement, claiming the differential to be
additional profit to the prime contractor. On the contracts we reviewed
that allowed the prime contractor to bill DOD for subcontractor labor
using its own prime rates[Footnote 31], we found a wide range of
differences between prime contract and subcontract labor rates. New FAR
provisions and a Defense Federal Acquisition Regulation Supplement
(DFARS) interim rule set forth different rules about how prime
contractors are to be reimbursed for subcontracted labor under
competitive versus non-competitive, and commercial versus non-
commercial, procurements.
Prime Contract Labor Rates Were Usually Higher Than Subcontract Rates
on Contracts We Reviewed:
We analyzed the differential between 628 prime and subcontract labor
rates within 13 contracts or agreements we reviewed that allowed the
prime contractor to bill DOD for subcontracted labor using prime
contract rates. The differential ranged from negative 40 percent to 192
percent, with most falling in the 6 to 53 percent range. Figure 4 shows
these differences under the 628 different labor rates. Each rate is
associated with a labor category (e.g., program manager, systems
engineer, or senior analyst) that includes a description of the
position, along with minimum education and experience requirements.
Figure 4: Percentage Differences between Prime Contract and Subcontract
Labor Rates for 628 Labor Categories on 13 Contracts or Agreements:
[See PDF for image]
Sources: Prime contracts, proposals, and subcontracts (data); GAO
(analysis and presentation).
Note: The figure reflects a break in percentage ranges between 111% and
170% because there were no instances of rate differentials within these
ranges.
[End of figure]
In most of these cases, the prime contract's labor rates were higher
than the rates in subcontracts; therefore, the prime contractor could
realize additional profit by using these subcontractors. One contractor
representative told us that the rate differential for his company,
which ranged from 2 to 14 percent, consisted of overhead, material
handling costs, and subcontract administration costs, as well as
profit. In another case, a contractor representative told us that the
labor rate in the prime contract for a systems engineer was 108 percent
more than the subcontract rate because the subcontractor provides
temporary labor with a lower benefits package.
The prime contract's labor rates did not exceed the subcontract rate in
all instances. In limited circumstances, we found that the subcontract
rate for a given labor category was lower than the rate in the prime
contract. For example, under one task order, the prime contractor was
billing the government 38 to 40 percent less for one labor category
than it was paying its subcontractors. In this instance, subcontract
labor hours represented less than 6 percent of total labor hours
associated with the task order. Most of the contractor representatives
told us that the subcontract rates were established by negotiating with
the subcontractors or after accepting bids. However, one representative
told us that some larger subcontractors are unwilling to accept lower
labor rates.
Of the 13 contracts and agreements we reviewed, all allowed task orders
to be issued under them. In total, we reviewed 24 task orders
associated with these contracts and agreements. While prime contract
labor rates were almost always higher than subcontract rates, the
magnitude of this difference varied, even within the same task order.
Figure 5 shows the range of labor rate differentials within each of the
24 orders we reviewed.
Figure 5: Range of Percentage Differences between Prime Contract and
Subcontract Labor Rates for 628 Labor Categories in 24 Orders:
[See PDF for image]
Sources: Prime contracts, proposals, and subcontracts (data); GAO
(analysis and presentation).
Note: The range for each order is shown as a solid line, but is made up
of multiple observations. So even though 7 of the 24 orders show
instances in which the prime contract rate was less than the
subcontract rate, these instances are still rare among the 628 labor
categories for which we collected this information.
[End of figure]
In some cases, the subcontract rates showed wide differences when
compared to the prime contract rate, even within the same labor
category. Table 4 provides examples of variations within and among
labor categories.
Table 4: Selected Examples of Differences in Labor Rates between Prime
Contracts and Subcontracts:
Contract: A; Labor category: Senior Analyst (Subcontractor 1); Rate
difference: $11.23; Percent difference: 16.48.
Contract: A; Labor category: Senior Analyst (Subcontractor 2); Rate
difference: - 10.43; Percent difference: -11.61.
Contract: A; Labor category: Senior Analyst (Subcontractor 3); Rate
difference: 12.73; Percent difference: 19.10.
Contract: B; Labor category: Technician; Rate difference: -7.92;
Percent difference: -15.70.
Contract: B; Labor category: Technical Editor; Rate difference: 19.34;
Percent difference: 75.19.
Contract: B; Labor category: Engineer/Analyst; Rate difference: 10.17;
Percent difference: 20.16.
Contract: C; Labor category: Program Manager Level 4; Rate difference:
16.16; Percent difference: 14.70.
Contract: C; Labor category: Systems Engineer Level 4; Rate difference:
5.39; Percent difference: 6.30.
Contract: C; Labor category: Systems Engineer Level 3; Rate difference:
1.11; Percent difference: 1.59.
Contract: C; Labor category: Systems Engineer Level 2 (Subcontractor
1); Rate difference: 2.55; Percent difference: 4.41.
Contract: C; Labor category: Systems Engineer Level 2 (Subcontractor
2); Rate difference: 31.39; Percent difference: 108.24.
Sources: Contractors and DOD (data); GAO (analysis).
[End of table]
Defense Contract Audit Agency Identified Additional Profits Related to
Subcontracted Labor:
At our request, DCAA queried its field offices to identify reports on
questioned costs pertaining to the subcontractor billing issue. The
query generated 11 audit reports that questioned over $4 million in
billings based on the rates subcontractors billed to prime contractors
under DOD contracts.[Footnote 32] The audit reports, issued between
December 2004 and November 2006, contain varying levels of detail and
reflect audits of incurred costs, final vouchers, and customer
requested evaluations of billed amounts. They cover five different
prime contractors. The audit agency, in accordance with the FAR
payments clause for time-and-materials contracts[Footnote 33] in effect
at that time, considers as unallowable costs the amount that the prime
contractor bills DOD in excess of the amount the subcontractor bills
the prime contractor. In one case, DCAA found that a prime contractor
realized profits ranging from 20 to 95 percent based on differences
between billed amounts and the actual costs of subcontract labor.
Debate Has Surrounded How Primes Should Be Reimbursed for Subcontracted
Labor, but New Regulations Enumerate Acceptable Billing Practices:
The issue of how the government should reimburse prime contractors for
subcontracted labor has been a matter of debate. For example, as noted
above, DCAA has questioned contractors' proposed costs or billings for
subcontracted labor at amounts other than the actual costs when the
standard time-and-materials payments clause was included in the
contract. In instances in which the contract specifically permitted the
prime to bill for subcontracted labor at the prime contract rates, DCAA
did not question those costs. In its official comments on proposed FAR
cases pertaining to time-and-materials contracts,[Footnote 34] DCAA
stated that such a practice places the government at a greater risk of
paying costs higher than what prime contractors actually pay without
receiving any additional benefits. DCAA noted that this practice will
incentivize prime contractors to maximize profits by subcontracting out
more work and that the government will have to expend additional
resources to monitor the quality and efficiency of the subcontracted
labor to ensure that it is receiving the level of service for which it
had contracted. DCAA has held that, if the FAR payments clause is in
the contract, it applies. Until recently, the payments clause stated
that:
the Government will limit reimbursable costs in connection with
subcontracts to the amounts paid for supplies and services purchased
directly for the contract when the Contractor has made or will make
payments determined due of cash, checks, or other forms of payment to
the subcontractor....[Footnote 35]
GSA has taken the position that prime contractors should bill for
subcontracted labor at their own prime GSA schedule rates, posting this
instruction on the agency's Web site. Industry associations have argued
that only reimbursing the prime contractors for the actual costs of
subcontracted labor (without profit) fails to recognize the risk that
prime contractors assume when they subcontract. These associations have
also indicated that requiring separate subcontract rates would be
administratively burdensome for the government and the contractor and
limit the ability to quickly bring on subcontractors.
Effective February 12, 2007, FAR provisions clarified under what
circumstances prime contractors can bill the government for
subcontractor labor at the prime contract's labor rates. This billing
practice is permitted now if the time-and-materials contract or order
was competitively awarded or for a commercial service, but separate
prime and subcontract rates are required if the contract was not
competitively awarded.[Footnote 36] An interim rule to DOD's supplement
to the FAR is stricter, requiring prime contractors to charge at
separate prime and subcontractor rates for all non-commercial,
competitively-awarded contracts as well.[Footnote 37] Table 5
summarizes the new FAR rule[Footnote 38] and DOD's interim rule.
Table 5: Governmentwide Provisions and Those in DOD's Interim Rule
Regarding Billing for Subcontracted Labor under Time-and-Materials
Contracts:
Commercial contracts (governmentwide): Prime contractor is not required
to propose separate rates for prime and subcontractor labor[A].
Noncommercial contracts: Noncompetitive award: Governmentwide: Prime
contractor is required to propose separate rates for prime and
subcontractor labor;
Noncommercial contracts: Competitive award: Non-DOD: Prime contractor
is not required to propose separate rates for prime and subcontractor
labor[B];
Noncommercial contracts: Competitive award: DOD interim rule: Prime
contractor is required to propose separate rates for prime and
subcontractor labor.
Sources: FAR and Federal Register (data); GAO (presentation and
analysis).
Note: Orders issued under GSA schedule contracts or associated blanket
purchase agreements will fall into the commercial category.
[A] However, the prime contractor must specify whether the fixed hourly
rate for each labor category applies to labor performed by the prime
and/or subcontractors.
[B] However, for each category of labor, the prime contractor must
establish fixed hourly rates using one of three options: separate rates
for prime and subcontracted labor, blended rates, or a combination of
separate and blended; and the prime must specify whether the fixed
hourly rate for each labor category applies to labor performed by the
prime and/or subcontractors.
[End of table]
Prior to these changes, we found that the Defense Finance and
Accounting Service (DFAS) had acted proactively to limit the rate at
which prime contractors bill for subcontracted labor. On one blanket
purchase agreement under a GSA schedule contract, DFAS officials were
concerned that they were paying too much for subcontracted labor that
was billed at the prime contractor's labor rates. According to the DFAS
division chief for contract services, to mitigate this risk on other
blanket purchase agreements, DFAS now includes language in the terms
and conditions of the agreements specifying that the subcontractor's
actual costs shall be billed and that the labor rates in the blanket
purchase agreement shall be used for prime contractor labor only.
Conclusions:
While time-and-materials contracts are appropriate when specific
circumstances justify the risks, our findings indicate that they are
often used as a default for a variety of reasons--ease, speed, and
flexibility--and that the risk posed to the government is not fully
taken to heart by contracting and program officials. In our view, these
reasons can also be seen as symptomatic of broader problems related to
requirements and a focus on awarding contracts quickly. Heightened
management controls are needed, including thorough justifications
specific to the individual procurements that provide insight to
management about why time-and-materials contracts are being used and
continue to be used for recurring efforts, even when adequate
information is available to convert to a less risky contract type. The
FAR Council has recognized the need for more controls to address risks.
While we understand that the focus of the new rules was commercial
acquisitions, the conditions that called for the stricter controls also
apply to non-commercial acquisitions, based on our findings. In
addition, without appropriate monitoring of contractor performance when
time-and-materials contracts are used, the risk of wasted government
dollars is increased.
Recommendations:
To help ensure that all time-and-materials acquisitions receive the
appropriate level of oversight, we recommend that the Secretary of
Defense direct the Director of Defense Procurement and Acquisition
Policy to amend the DFARS to require a similar level of justification
for using time-and-materials for non-commercial services as that in the
FAR for commercial services by taking the following four actions with
regard to non-commercial acquisitions:
1. Require the contracting officer to execute written justifications
for each time-and-materials task order issued under an indefinite-
quantity contract.
2. Require that written justifications be prepared for indefinite-
quantity contracts that allow only for time-and-materials orders.
3. Require that written justifications for the use of time-and-
materials contracts and task orders:
* contain sufficient facts and rationale to justify that no other
contract type authorized is suitable;
* address the specific characteristics of the acquisition that prevent
the use of either a cost-reimbursable or fixed-price contract;
* establish that the requirement has been structured to maximize the
use of fixed price contract type on future acquisitions for the same or
similar requirements; and:
* describe actions planned to maximize the use of fixed-price contracts
on future acquisitions for the same requirements.
4. Require that contracting officers, to the maximum extent
practicable, structure indefinite-quantity contracts to allow issuance
of fixed- price or cost-reimbursable orders, so that time-and-materials
is not the only option.
To monitor and minimize DOD's use of time-and-materials contracts, we
recommend that the Secretary of Defense direct the Director of Defense
Procurement and Acquisition Policy to take the following two actions:
1. For indefinite-quantity contracts that permit time-and-materials
orders, require heads of contracting activities to analyze on an annual
basis whether time-and-materials is being used as a default contract
type when other pricing arrangements may be appropriate. The Secretary
will need to determine appropriate risk-based criteria to select the
contracts for such analysis.
2. Direct that monitoring plans for time-and-materials contracts
recognize the risks inherent in this contract type and set forth
specific activities to address these risks to the extent feasible.
Agency Comments and Our Evaluation:
DOD's Office of Defense Procurement and Acquisition Policy provided
written comments on a draft of this report. These comments are
reprinted in appendix II.
DOD concurred with all six recommendations and has initiated two DFARS
cases to consider changes to DOD's acquisition regulations. DOD also
stated that it will require military departments and defense agencies
to develop plans for analyzing whether time-and-materials contracts are
being used as a default contract type. In its response to the
recommendations on amending its acquisition regulations to require a
similar level of justification as is contained in federal acquisition
regulations for commercial services, DOD stated that it would evaluate
or consider our recommendations during the defense acquisition
regulation rulemaking process. While we understand DOD cannot commit to
implementing our recommendations in advance of the public comment
process, we would expect that the recommendations would be used as the
basis for any proposed rules it offers.
We are sending copies of this report to interested congressional
committees; the Secretary of Defense; the Secretaries of the Air Force,
the Army, and the Navy; the Administrators of the General Services
Administration and Office of Federal Procurement Policy; and the
Directors of the Defense Contract Audit Agency, Defense Contract
Management Agency, Defense Information Systems Agency, Defense
Intelligence Agency, and Office of Management and Budget. We will
provide copies to others on request. This report will also be available
at no charge on GAO's Web site at http://www.gao.gov.
If you or your staff have any questions about this report or need
additional information, please contact me at (202) 512-4841 or
schinasik@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. Staff acknowledgments are listed in appendix III.
Signed by:
Katherine V. Schinasi:
Managing Director:
Acquisition and Sourcing Management:
[End of section]
Appendix I: Scope and Methodology:
Our objectives were to (1) identify the overall trends in Department of
Defense (DOD) obligations under time-and-materials contracts; (2)
analyze what DOD is buying under time-and-materials contracts; (3)
assess the factors leading to DOD's use of this contract type and
whether actions are being taken to use it only when no other contract
type is suitable; (4) evaluate DOD's monitoring of contractor
performance under time-and-materials contracts; and (5) determine the
differences between the labor rates prime contractors used to bill DOD
and the labor rates in their subcontracts, for selected contracts.
To identify trends in the use of time-and-materials contracts, we
analyzed obligation data from DOD's DD350 database for service
contracts that were identified as either time-and-materials or labor
hour contracts between fiscal year 1996 and 2005. The 2005 data was the
most recent available. For this period, we examined trends in the
contract types used for service acquisitions overall and for specific
types of services. During our initial review of the DD350 data, we
found that orders under federal schedules did not designate a contract
type--a potentially significant limitation for this objective. To
address this limitation, we developed an approach to estimate the
percentage of these uncoded federal schedule orders that were time-and-
materials and labor hour actions. We applied the proportion of
obligations reported as time-and-materials for each of the 24 service
categories in the DD350 database to the obligations that were missing a
contract type (i.e., federal schedule orders). We believe this
methodology is conservative because it is likely to underestimate the
obligations associated with time-and-materials contracts. Orders for
services under federal schedules must be priced on a fixed-price or
time-and-materials basis. However, cost-reimbursable contracts comprise
16 percent and 57 percent, respectively, (adjusted to exclude contract
dollars in these categories with a missing contract type) of the two
service categories--professional services and information technology
services--that account for the large majority of contract dollars (78
percent or $5.4 billion) where contract type is not coded. In
developing our estimate, we did not adjust the percentages to account
for the fact that cost-reimbursable contracts cannot be used for
schedule orders.
To determine the major categories of services where DOD has obligated
time-and-materials dollars and the growth in these categories of
services over time, we analyzed data from the DD350 database from
fiscal year 1996 through fiscal year 2005. We also used information
from the DD350 database for fiscal year 2005 to determine the extent to
which DOD is obligating time-and-materials dollars under various types
of contracts (such as indefinite-quantity contracts). To provide
examples of types of services DOD is procuring under time-and-materials
contracts, apart from that reported in the DD350 system, we analyzed
documents in the contract files, such as statements of work and
contractor proposals, for the contracts and orders in our review. We
also interviewed contracting and program officials.
We derived our sample of 28 contracts, agreements, and orders, analysis
of which was used in developing the third and fourth objectives, as
follows. During the design phase of our review, we extracted
information from the DD350 database on all DOD actions in fiscal years
2004 and 2005 with obligations coded as time-and-materials or labor-
hour. This analysis yielded a total of 4,785 actions. We selected seven
contracts from this group, taking into account the location of the
buying activity and type of contract (e.g., stand-alone, indefinite-
quantity, or blanket purchase agreement). We subsequently selected 21
additional contracts and agreements for further detailed review in two
steps. First, we selected the three time-and-materials contracts with
the most reported obligations in fiscal year 2005. Each of these had
over $300 million in fiscal year 2005 obligations. Second, we selected
an additional 18 contracts and agreements from a smaller population of
559 contracts that were coded as time-and-materials and had over $1
million in cumulative obligations for fiscal year 2005. We made these
selections randomly within groups based on type of contract/order,
origin of contract, location of buying activity, and military service
or "other DOD" organization.
Of the 28 contracts and agreements in our sample, 21 used orders as the
mechanism for putting work on contract.[Footnote 39] For 18 of the 19,
we chose 3 orders to analyze as well. For the other, we examined the
one order with time-and-materials obligations recorded in fiscal years
2004 and 2005. To further verify the DD350 data for the contracts we
reviewed, we compared the reported information with documents in the
contract files and found one order that had been miscoded as time-and-
materials. We removed this order from the sample. Cumulatively, we
reviewed a total of 82 contracts, agreements, and orders.
The following table presents basic information about the 28 contracts,
agreements, and orders in our sample.
Table 6: Characteristics of GAO's Sample of 28 Contracts, Agreements,
and Orders:
Organizations; Air Force: Number in our sample; 7:
Organizations; Army: Number in our sample; 8:
Organizations; Defense Contract Management Agency: Number in our
sample; 1:
Organizations; Defense Information Systems Agency: Number in our
sample; 2:
Organizations; Defense Intelligence Agency: Number in our sample; 2:
Organizations; Navy: Number in our sample; 8.
Obligated dollars through fiscal year 2005; Over $1 billion: Number in
our sample 2:
Obligated dollars through fiscal year 2005; $1 billion to $500 million:
Number in our sample; 1:
Obligated dollars through fiscal year 2005; $500 million to $100
million: Number in our sample; 3:
Obligated dollars through fiscal year 2005; $100 million to $50
million: Number in our sample; 5:
Obligated dollars through fiscal year 2005; $50 million to $10 million:
Number in our sample; 8:
Obligated dollars through fiscal year 2005; Less than $10 million:
Number in our sample; 9.
Types of services; Engineering and technical support: Number in our
sample; 12:
Types of services; Information technology: Number in our sample; 11:
Types of services; Maintenance of equipment: Number in our sample; 3:
Types of services; Miscellaneous professional, administrative, and
management support: Number in our sample; 2.
Types of contract vehicles; Indefinite-quantity contract: Number in our
sample; 13:
Types of contract vehicles; Standalone contract; Number in our sample;
5:
Types of contract vehicles; Order off a schedule or governmentwide
acquisition contract: Number in our sample; 4:
Types of contract vehicles; Blanket purchase agreement: Number in our
sample; 4:
Types of contract vehicles; Basic ordering agreement; Number in our
sample; 1:
Types of contract vehicles; Requirements contract; Number in our
sample: 1.
Sources: Contract file documentation and DOD DD350 database (data); GAO
(analysis).
[End of table]
To assess the actions DOD officials have taken to ensure time-and-
materials contracts are only used when no other contract type is
suitable, we reviewed applicable acquisition policies and regulations
to identify governmentwide and DOD-specific criteria on when and how
they should be used. We also held discussions with acquisition policy
officials at the Air Force, Army, Navy, Defense Information Systems
Agency, Defense Intelligence Agency, and Defense Contract Management
Agency to determine how each organization commonly utilized time-and-
materials contracts and how they monitored the extent of their use. In
addition, for each of the contracts in our sample, we reviewed
acquisition documentation including the determination and findings, if
available; acquisition plans; and business clearance memorandums to
assess what factors were considered to determine and justify the use of
the contract type. We also interviewed contracting officers and, in
some cases, program officials to discuss the rationale used to support
the decision to use a time-and-materials contract and the reasons this
contract type was eventually chosen.
To evaluate the government's monitoring of contractor performance, we
reviewed documentation of contract monitoring for each of our sample
contracts. This documentation included monitoring plans, contractor-
generated monthly status reports, government-generated contractor
performance reports, and sample invoices. We used these documents to
assess what measures were taken to monitor contractor performance and
to what extent those measures were executed and documented in the
contract file. We also interviewed the designated contracting officer's
representative and/or other individuals responsible for monitoring to
corroborate and supplement the information in the contract file.
To collect contract file documents and conduct interviews related to
the use and monitoring of the time-and-materials contracts in our
sample (our third and fourth objectives), we visited the following
locations:
Air Force:
Air Force 11th Contracting Wing, Bolling Air Force Base, Washington,
D.C.
Air Force 554th Electronic Systems Group, Wright-Patterson Air Force
Base, Dayton, Ohio:
Air Force 951st Electronic Systems Group, Hanscom Air Force Base, Mass.
Air Force Aeronautical Systems Center, Wright-Patterson Air Force Base,
Dayton, Ohio:
Air Force Air Logistics Center, Tinker Air Force Base, Oklahoma City,
Okla.
Air Force Cost Analysis Agency, Arlington, Va.
National Air and Space Intelligence Center, Wright-Patterson Air Force
Base, Dayton, Ohio:
Army:
Army Aviation and Missile Command, Redstone Arsenal, Huntsville, Ala.
Army Communications-Electronic Command, Fort Monmouth, N.J.
Army Communications-Electronics Research, Development and Engineering
Center, Fort Belvoir, Va.
Army Contracting Center of Excellence, Washington, D.C.
Army Information Technology, E-Commerce and Commercial Contracting
Center, Alexandria, Va.
Department of the Army, G-8 Programs and Priorities, Washington, D.C.
Navy:
Naval Air Systems Command, Patuxent River, Md.
Naval Sea Systems Command, Washington Navy Yard, D.C.
Naval Surface Warfare Center Carderock Division, West Bethesda, Md.
Other DOD:
Defense Contract Management Agency, Springfield, Va.
Defense Intelligence Agency, Washington, D.C., and Arlington, Va.
We were able to obtain contract files from the Defense Information
Systems Agency electronically. We conducted additional interviews by
video conference or telephone.
For the final objective on prime contract labor rates billed for
subcontracted labor, we first analyzed the 28 contracts, agreements,
and orders in our sample to determine which permitted prime contractors
to charge the government for subcontracted labor using their own, prime
contract rates. We collected information on the difference between the
prime and subcontract labor rates for one of the blanket purchase
agreements in our sample. We then selected an additional 12 contracts
and agreements for further, detailed review of the labor rates, based
on congressional interest, for a total of 13 contracts and agreements
to address this objective. We identified these additional 12 contracts
and agreements from two sources. First, since the Defense Contract
Audit Agency had identified this billing practice as an issue primarily
with orders under General Services Administration schedule contracts,
we examined DOD's blanket purchase agreements under schedule contracts
as reported in the DD350 database and selected six for further
analysis. Second, we analyzed contracts that had been reviewed by DOD
as a result of Sections 801 and 802 of the National Defense
Authorization Act for Fiscal Year 2002 to identify those that had
reported time-and-materials obligations, and selected six of these for
further analysis. Because all 13 contracts and agreements we reviewed
under this objective were structured to allow task orders to be issued
under them, we selected orders from each to analyze. In all, we
assessed the differential between the prime and subcontract labor rates
for 24 task orders and 628 different labor categories within those
orders. We analyzed contract documentation and interviewed prime
contractors about the labor rates used to bill DOD for subcontracted
labor. We queried Defense Contract Audit Agency about audit assignments
it has conducted where it found this billing practice. We also reviewed
recent revisions to the Federal Acquisition Regulation and DOD's
supplement pertaining to how prime contractors can bill the government
for subcontracted labor and discussed these revisions with officials
from DOD's Procurement and Acquisition Policy office.
We performed our review from February 2006 to May 2007 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the Department of Defense:
[See PDF for image]
[End of figure]
Acquisition, Technology And Logistics:
Office Of The Under Secretary Of Defense:
3000 Defense Pentagon:
Washington, Dc 20301-3000:
JUN 29 2007:
Ms. Katherine V. Schinasi:
Managing Director, Acquisition and Sourcing Management:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Ms. Schinasi:
This is the Department of Defense (DoD) response to the GAO draft
report, GAO-07-273, "DEFENSE CONTRACTING: Improved Insight and Controls
Needed over DoD's Time-and-Materials Contracts," dated June 1, 2007,
(GAO Code 120512).
I appreciate the opportunity to comment on the draft report. I concur
with the GAO recommendations as discussed in the enclosure. I have
opened two Defense Federal Acquisition Regulation Supplement (DFARS)
cases to develop necessary changes to the DFARS and any additional
supplemental guidance that may be appropriate for procedures, guidance,
and information. I anticipate issuance of the proposed rules and/or
supplemental guidance within 180 days.
Additionally, I will issue direction within the next 60 days to require
the military departments and other defense agencies to develop plans
for analyzing whether time-and-materials contracts are being used as a
default contract type when other pricing arrangements may be
appropriate.
If you have any questions or require additional information, please
contact Ms. Robin Schulze, 703-602-0326, robin.schulze@osd.mil,.
Sincerely,
Signed by:
Shay D. Assad:
Director, Defense Procurement:
and Acquisition Policy:
Attachments:
As stated:
GAO Draft Report Dated June 1, 2007:
GAO-07-273 (GAO CODE 120512):
"Defense Contracting: Improved Insight And Controls:
Needed Over Dod's Time-And-Materials Contracts"
Department Of Defense Comments:
To The Gao Recommendations:
Recommendation 1: The GAO recommends that the Secretary of Defense
direct the Director of Defense Procurement and Acquisition Policy to
amend the DFARS to require a similar level of justification for using
time-and-materials for non-commercial services as that in the FAR for
commercial services by requiring the contracting officer to execute
written justifications for each time-and-materials task order issued
under an indefinite-quantity contract.
Dod Response: Concur. The Department has opened a DFARS case to
evaluate, for T&M contracts for non-commercial services, whether the
DFARS should be amended to require a written determination and finding
(D&F) for each time-and-materials task order issued under an
indefinite-quantity contract that provides for orders priced on both a
time-and-materials basis and orders priced on another contract type
basis, i.e., fixed-price, cost reimbursement, and incentive contracts.
DPAP will keep the GAO apprised of the progress of this case as it
moves thru the regulatory process.
Recommendation 2: The GAO recommends that the Secretary of Defense
direct the Director of Defense Procurement and Acquisition Policy to
amend the DFARS to require a similar level of justification for using
time-and-materials for non-commercial services as that in the FAR for
commercial services by requiring that written justifications be
prepared for indefinite-quantity contracts that allow only for time-
and-materials orders.
Dod Response: Concur. As part of the DFARS case referenced in our
response to Recommendation 1, the Department will evaluate, for T&M
contracts for non-commercial services, whether the DFARS should be
amended to require D&Fs supporting basic indefinite-delivery contracts
that only provide for time-and-material orders to explain why it is not
practicable for the contract to also provide for orders on a fixed-
price, cost reimbursement, and/or incentive contract basis. The case
will also consider whether the DFARS should be amended to require that
the D&F to be approved one level above the contracting officer, for the
D&F to document why other pricing structures are not practicable, and
to require higher level approval to increase the emphasis on selecting
the appropriate contract type that results in reasonable contractor
risk and provides the contractor with the greatest incentive for
efficient and economical performance. DPAP will keep the GAO apprised
of the progress of this case as it moves thru the regulatory process.
Recommendation 3: The GAO recommends that the Secretary of Defense
direct the Director of Defense Procurement and Acquisition Policy to
amend the DFARS to require a similar level of justification for using
time-and-materials for non-commercial services as that in the FAR for
commercial services by requiring that written justifications for the
use of time-and-materials contracts and task orders:
a) Contain sufficient facts and rationale to justify that no other
contract authorized is suitable;
b) Address the specific characteristics of the acquisition that prevent
the use of either a cost-reimbursable or fixed-price contract;
c) Establish that the requirement has been structured to maximize the
use of fixed price contract type on future acquisitions for the same or
similar requirements; and:
d) Describe actions planned to maximize the use of fixed-price
contracts on future acquisitions for the same requirements.
Dod Response: Concur. As part of the DFARS case referenced in our
response to Recommendation 1, the Department will consider, for T&M
contracts for non-commercial services, whether to amend the DFARS to
require D&Fs for time-and-materials contracts and task orders to:
a) Contain sufficient facts and rationale to justify that no other
contract type is suitable;
b) Establish that it is not possible at the time of placing the
contract or order to accurately estimate the extent or duration of the
work or to anticipate costs with any reasonable degree of certainty;
c) Establish that the requirement has been structured to maximize the
use of firmer pricing (i.e., cost-reimbursement, incentive, and fixed-
price contracts) on future acquisitions for the same or similar
requirements; and:
d) Describe actions planned to maximize the use of firmer pricing on
future acquisitions for the same requirements.
Recommendation 4: The GAO recommends that the Secretary of Defense
direct the Director of Defense Procurement and Acquisition Policy to
amend the DFARS to require a similar level of justification for using
time-and-materials for non-commercial services as that in the FAR for
commercial services by requiring the contracting officer, to the
maximum extent practicable, structure indefinite-quantity contracts to
allow issuance of fixed-price or cost reimbursable orders, so that
time-and-materials is not the only option.
Dod Response: Concur. As part of the DFARS case referenced in our
response to Recommendation 1, the Department will consider, for T&M
contracts for non-commercial services, amending the DFARS to require
indefinite-quantity contracts to be structured, to the maximum extent
practicable, to also provide for issuance of other contract types. The
Department agrees it may be appropriate to provide for multiple
contract types on indefinite-delivery contracts to ensure use of the
appropriate contract type for the unique circumstances of the
acquisition.
Recommendation 5: The GAO recommends that the Secretary of Defense
direct the Director of Defense Procurement and Acquisition Policy to
require heads of contracting activities to analyze on an annual basis
whether time-and-materials is being used as a default contract type
when other pricing arrangements may appropriate.
Dod Response: Concur. The Department will require the military
departments and other defense agencies to establish review plans for
analyzing whether time-and-materials contracts are being used as a
default contract type when other pricing arrangements may appropriate.
Recommendation 6: The GAO recommends that the Secretary of Defense
direct the Director of Defense Procurement and Acquisition Policy to
direct that monitoring plans for time-and-materials contracts recognize
the risks inherent in this contract type and set forth specific
activities to address these risk to the extent feasible.
Dod Response: Concur. The Department has opened a DFARS case to (a)
describe the roles and responsibilities of contracting officers
technical representatives (COTRs) for managing risks on time-and-
materials and other cost reimbursement contracts and (b) ensure
Government surveillance on time-and-materials contracts provides the
Government reasonable assurance that efficient methods and effective
costs controls are being used. DPAP will keep the GAO apprised of the
progress of this case as it moves thru the regulatory process.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Katherine V. Schinasi (202) 512-4841 or schinasik@gao.gov:
Acknowledgments:
In addition to the contact listed above, Michele Mackin, Assistant
Director; Ron Schwenn; Marie Ahearn; Nicholas Alexander; Elaine
Boudreau; Lily J. Chin; Paula J. Haurilesko; Art James; Matt Keeler;
Julia Kennon, and Patrick Peterson made key contributions to this
report.
FOOTNOTES
[1] Agreements include blanket purchase agreements and basic ordering
agreements.
[2] Under the GSA schedules program, GSA establishes long-term
governmentwide contracts with commercial firms, and agencies place
orders under these contracts.
[3] We note that time-and-materials contracts also exhibit
characteristics of fixed-price contracts. The labor rates in a time-
and-materials contract are similar to a fixed-price contract in that
these rates are fixed, regardless of the contractor's actual labor
costs or indirect expenses. The contractor assumes the cost risk
associated with these labor rates but can also maximize its profit by
finding individuals who meet the qualifications of a labor category at
the lowest possible cost.
[4] FAR Part 52.246-6(f), Inspection--Time-and-Material and Labor-
Hour. Additional provisions in FAR Parts 52.246-6(g) and (h) describe
alternate actions the government may take if the delivered services do
not meet contract requirements.
[5] FAR Part 16.601(b)(1).
[6] FAR 52.246-6(b), Inspection--Time-and-Material and Labor-Hour and
FAR 46.104, Contract Administration Office Responsibilities. The FAR
uses the term "surveillance"; however, for clarity we use the term
"monitoring" in this report.
[7] Services Acquisition Reform Act of 2003, Title XIV of National
Defense Authorization Act for Fiscal Year 2004, Pub. L. No. 108-136
(Nov. 24, 2003).
[8] Federal Acquisition Streamlining Act of 1994, Pub. L. No. 103-355
(Oct. 13, 1994).
[9] We presented a briefing entitled "Time and Materials Contracting:
Survey of Private Sector Practices" to the Office of Federal
Procurement Policy in January 2005.
[10] GSA Inspector General, Audit of Procurement of Professional
Services from the Federal Supply Service's Multiple Award Schedules,
Report Number A020243/F/A/V03009 (Arlington, Va.: July 31, 2003).
[11] Advisory and assistance services include services provided under
contract to support or improve such things as organizational policy
development, decision making, or management and administration. It can
also mean the furnishing of professional advice or assistance rendered
to improve the effectiveness of federal management processes or
procedures. All advisory and assistance services are classified in one
of the following definitional subdivisions: management and professional
support services; studies, analyses, and evaluations; or engineering
and technical services. FAR 2.101.
[12] The key indicator of a personal services contract is whether the
government exercises relatively continuous supervision and control over
the contractor personnel performing the services. The FAR lists
elements that may indicate whether a personal services contract exists.
FAR 37.104.
[13] Contracts may include various contract types for different line
items.
[14] According to a DISA official, DISA's legal office concurs that it
is administratively prohibitive to issue new task orders, in part due
to foreign logistics requirements.
[15] FAR 16.601(d)(1) and 1.701. Under the FAR, "contract" is defined
to include all types of commitments that obligate the government to an
expenditure of appropriated funds and that, except as otherwise
authorized, are in writing. In addition to bilateral instruments,
contracts include (but are not limited to) awards and notices of
awards; job orders or task letters issued under basic ordering
agreements; letter contracts; orders, such as purchase orders, under
which the contract becomes effective by written acceptance or
performance; and bilateral contract modifications. FAR 2.101.
[16] FAR 1.704.
[17] FAR 7.102 and 7.105(b)(4).
[18] An October 2, 2006, DOD policy implementing Section 812 of the
National Defense Authorization Act for Fiscal Year 2006 requires senior
DOD officials or their designees to review and approve the acquisitions
of services valued at $250 million or above for non-information
technology service acquisitions and $500 million and above for
information technology services. This review should consider the
anticipated pricing arrangement. We recently reported on DOD's review
structure in the context of the department's overall management of its
service acquisitions. See GAO, Defense Acquisitions: Tailored Approach
Needed to Improve Service Acquisition Outcomes, GAO-07-20 (Washington,
D.C.: Nov. 9, 2006).
[19] GSA Inspector General, Compendium of Audits of the Federal
Technology Service Regional Client Support Centers (Washington, D.C.:
December 2004); and DOD Inspector General, Contracts for Professional,
Administrative, and Management Support Services, D-2004-015 (Arlington,
Va.: October 2003).
[20] FAR 16.601.
[21] The FAR specifically required a determination and findings for
time-and-materials contracts, but was not explicit with respect to
indefinite-quantity contracts. The FAR was recently amended for
commercial acquisitions to require a determination and findings for
indefinite-quantity contracts that only provide for the issuance of
time-and-materials orders.
[22] The memorandum did not specifically reference orders; however, we
note that DOD is obligating most of its time-and-materials dollars
under orders.
[23] FAR 16.103(c).
[24] Encore I was a follow-on to DISA's Defense Enterprise Integration
Services I and II multiple-award, indefinite-quantity information
technology contracts.
[25] The changes went into effect in February 2007.
[26] As described in 41 U.S.C. 403(12)(E).
[27] The DD350 data for three non-DOD contracts in our review did not
indicate whether or not they were commercial.
[28] CORs are typically responsible for such things as verifying that
the contractor performs the technical requirements of the contract in
accordance with contract terms, monitoring the contractor's
performance, notifying the contractor of deficiencies, and directing
appropriate action to effect correction. They are not authorized to
modify the contract terms or conditions or to obligate the payment of
any money by the government.
[29] According to Defense Procurement and Acquisition Policy and DCAA
officials, oversight of contractor payment requests on time-and-
materials contracts is conducted by DCAA. The officials noted that CORs
are not responsible for certifying costs or performing cost
verifications, such as reconciling contractor labor cost records or
material cost invoices to amounts included on public vouchers.
[30] Some of the contracting officials said that monitoring under the
follow-on contract is more substantial.
[31] Among the 28 time-and-materials contracts, agreements, and orders
that we examined in depth, we reviewed one blanket purchase agreement
that demonstrated this billing practice. We collected information on
the difference between the prime and subcontract labor rates under this
agreement. Subsequently, we identified an additional 12 contracts and
agreements that allowed the prime contractor to bill the government for
subcontract labor using the prime contract labor rates.
[32] DCAA provided two additional audit assignments that raised the
issue of prime contractor billing for subcontracted labor without
specifically questioning costs. According to DCAA, one audit is in
process and the questioned costs will be reported when the report is
issued. The second assignment was cancelled at the customer's request.
[33] FAR 52.232-7(b)(4).
[34] FAR Cases 2004-015 "Payments under Time-and-Materials and Labor-
Hour Contracts" (70 Fed. Reg. 56,314 (Sept. 26, 2005)) and 2003-027
"Additional Contract Types" (70 Fed. Reg. 56,318 (Sept. 26, 2005)).
These FAR cases resulted in FAR amendments effective February 12, 2007
(71 Fed. Reg. 74,656 (Dec. 12, 2006) and 71 Fed. Reg. 74,667 (Dec. 12,
2006)), respectively.
[35] FAR 52.232-7 (3)(B)(4)(ii).
[36] 71 Fed. Reg. 74,656 (Dec. 12, 2006) and 71 Fed. Reg. 74,667 (Dec.
12, 2006). The revised FAR payments clause for time-and-materials
contracts conditions payment on hourly rates that meet the labor
qualifications as specified in the contract (FAR 52.212-4 and 52.232-
7).
[37] 71 Fed. Reg. 74,469 (Dec. 12, 2006) (to be codified at 48 C.F.R.
parts 216 and 252).
[38] A DCAA official said that, despite the concerns it expressed in
official comments on the proposed changes, DCAA concurred with the new
rules.
[39] Nineteen were DOD contracts, one was a General Services
Administration governmentwide acquisition contract, and one was a
National Institutes of Health governmentwide acquisition contract.
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