Contract Management
Minimal Compliance with New Safeguards for Time-and-Materials Contracts for Commercial Services and Safeguards Have Not Been Applied to GSA Schedules Program Gao ID: GAO-09-579 June 24, 2009Federal agencies have used time-and-materials (T&M) contracts to purchase billions of dollars in services. These contracts are risky because the government bears the risk of cost overruns. Effective February 2007, the Federal Acquisition Regulation (FAR) was revised, pursuant to a statutory change, to allow T&M contracts to be used to acquire commercial services under FAR Part 12, which uses a streamlined procurement process. Certain safeguards were included in FAR Part 12, including a requirement that contracting officers prepare a detailed determination and findings (D&F) that no other contract type is suitable. Based on a mandate to review the use of T&M contracts for commercial services, we assessed (1) agencies' reported use of such contracts and what they acquired, (2) the degree to which agencies complied with the new safeguards, and (3) the applicability of the safeguards to General Services Administration (GSA) schedule contracts. GAO reviewed contracts and orders at DOD and civilian agencies and spoke with contracting officials.
From February 2007 to December 2008, agencies reported using commercial item procedures under FAR Part 12 to buy a variety of services through T&M contracts; examples include emergency nursing services on Indian reservations and gunsmith services for the FBI. The reported value of these contracts was $4.4 billion--or less than 1 percent of the total federal dollars obligated for services during this period. Of the $4.4 billion, $3.1 billion had gone through GSA's schedules program. GAO identified about another $6 billion, in addition to the $3.1 billion, in T&M obligations for commercial services under GSA schedule contracts. The reliability of the data reported as T&M contracts using FAR Part 12 procedures is questionable. Of the 149 contracts GAO reviewed, 28 had been miscoded as acquiring commercial services or as T&M contracts. Another issue that indicates a potential underreporting of T&M contracts for commercial services is that contracting officials across the agencies had the mistaken impression that the fixed labor rate in T&M contracts makes these contracts fixed-price. GAO raised this issue with officials from the Office of Federal Procurement Policy (OFPP)--chair of the federal acquisition regulatory council--who agreed that clarification on what constitutes a fixed-price versus labor hour contract would be beneficial. Further, GAO found that contracting officials had different opinions of what generally constitutes a commercial service. Some viewed services intended to meet a specific government requirement as noncommercial, while others viewed similar services as commercial. The Part 12 D&F was rarely used for the contracts GAO reviewed. The D&F must incorporate four elements, such as a description of the market research conducted. Of 82 contracts reviewed that were explicitly subject to this D&F requirement, only 5 included all the required elements, and 9 partially met the requirement. Of the remaining contracts, 33 had no D&F at all and 35 included the less stringent D&F applicable to noncommercial T&M services. GAO found a general lack of awareness of the Part 12 D&F requirement at the agencies in this review. Agencies' internal management and legal reviews generally did not detect the failure to include the D&F. OFPP officials expressed concern about the lack of compliance with the D&F requirement. The Part 12 D&F requirement has not been applied to the GSA schedules program. GSA officials stated that the GSA Administrator has discretion about what procedures apply to the program. In a legal opinion to GAO on whether the statutory changes regarding T&M contracts for commercial services apply to the schedules program, GSA concluded that the applicability is uncertain but stated that existing regulations satisfy concerns about use of T&M under the schedules program. GAO notes that these regulations do not require the same level of detailed analysis as does the Part 12 D&F. Further, there is no indication that the statutory requirements cannot apply to items or services under the schedules program. GSA officials said they are in the process of developing a Part 12 D&F for the entire schedules program, but it is not clear how this D&F will act as a safeguard when T&M orders are used.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-09-579, Contract Management: Minimal Compliance with New Safeguards for Time-and-Materials Contracts for Commercial Services and Safeguards Have Not Been Applied to GSA Schedules Program
This is the accessible text file for GAO report number GAO-09-579
entitled 'Contract Management: Minimal Compliance with New Safeguards
for Time-and-Materials Contracts for Commercial Services and Safeguards
Have Not Been Applied to GSA Schedules Program' which was released on
June 24, 2009.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to Congressional Committees:
United States Government Accountability Office:
GAO:
June 2009:
Contract Management:
Minimal Compliance with New Safeguards for Time-and-Materials Contracts
for Commercial Services and Safeguards Have Not Been Applied to GSA
Schedules Program:
GAO-09-579:
GAO Highlights:
Highlights of GAO-09-579, a report to congressional committees.
Why GAO Did This Study:
Federal agencies have used time-and-materials (T&M) contracts to
purchase billions of dollars in services. These contracts are risky
because the government bears the risk of cost overruns. Effective
February 2007, the Federal Acquisition Regulation (FAR) was revised,
pursuant to a statutory change, to allow T&M contracts to be used to
acquire commercial services under FAR Part 12, which uses a streamlined
procurement process. Certain safeguards were included in FAR Part 12,
including a requirement that contracting officers prepare a detailed
determination and findings (D&F) that no other contract type is
suitable. Based on a mandate to review the use of T&M contracts for
commercial services, we assessed (1) agencies‘ reported use of such
contracts and what they acquired, (2) the degree to which agencies
complied with the new safeguards, and (3) the applicability of the
safeguards to General Services Administration (GSA) schedule contracts.
GAO reviewed contracts and orders at DOD and civilian agencies and
spoke with contracting officials.
What GAO Found:
From February 2007 to December 2008, agencies reported using commercial
item procedures under FAR Part 12 to buy a variety of services through
T&M contracts; examples include emergency nursing services on Indian
reservations and gunsmith services for the FBI. The reported value of
these contracts was $4.4 billion”or less than 1 percent of the total
federal dollars obligated for services during this period. Of the $4.4
billion, $3.1 billion had gone through GSA‘s schedules program. GAO
identified about another $6 billion, in addition to the $3.1 billion,
in T&M obligations for commercial services under GSA schedule
contracts. The reliability of the data reported as T&M contracts using
FAR Part 12 procedures is questionable. Of the 149 contracts GAO
reviewed, 28 had been miscoded as acquiring commercial services or as
T&M contracts. Another issue that indicates a potential underreporting
of T&M contracts for commercial services is that contracting officials
across the agencies had the mistaken impression that the fixed labor
rate in T&M contracts makes these contracts fixed-price. GAO raised
this issue with officials from the Office of Federal Procurement Policy
(OFPP)”chair of the federal acquisition regulatory council”who agreed
that clarification on what constitutes a fixed-price versus labor hour
contract would be beneficial. Further, GAO found that contracting
officials had different opinions of what generally constitutes a
commercial service. Some viewed services intended to meet a specific
government requirement as noncommercial, while others viewed similar
services as commercial.
The Part 12 D&F was rarely used for the contracts GAO reviewed. The D&F
must incorporate four elements, such as a description of the market
research conducted. Of 82 contracts reviewed that were explicitly
subject to this D&F requirement, only 5 included all the required
elements, and 9 partially met the requirement. Of the remaining
contracts, 33 had no D&F at all and 35 included the less stringent D&F
applicable to noncommercial T&M services. GAO found a general lack of
awareness of the Part 12 D&F requirement at the agencies in this
review. Agencies‘ internal management and legal reviews generally did
not detect the failure to include the D&F. OFPP officials expressed
concern about the lack of compliance with the D&F requirement.
The Part 12 D&F requirement has not been applied to the GSA schedules
program. GSA officials stated that the GSA Administrator has discretion
about what procedures apply to the program. In a legal opinion to GAO
on whether the statutory changes regarding T&M contracts for commercial
services apply to the schedules program, GSA concluded that the
applicability is uncertain but stated that existing regulations satisfy
concerns about use of T&M under the schedules program. GAO notes that
these regulations do not require the same level of detailed analysis as
does the Part 12 D&F. Further, there is no indication that the
statutory requirements cannot apply to items or services under the
schedules program. GSA officials said they are in the process of
developing a Part 12 D&F for the entire schedules program, but it is
not clear how this D&F will act as a safeguard when T&M orders are
used.
What GAO Recommends:
GAO recommends that OFPP take steps to clarify the FAR regarding labor-
hour contracts and to explicitly apply the Part 12 safeguards to the
GSA schedules program, and that it provide guidance to contracting
officials on the Part 12 D&F. In oral comments, OFPP agreed with our
recommendations. The other six agencies in our review also concurred or
had no comment.
View [hyperlink, http://www.gao.gov/products/GAO-09-579] or key
components. For more information, contact John Hutton at (202) 512-4841
or huttonj@gao.gov.
[End of section]
Contents:
Letter:
Background:
Federal Agencies Have Reported Limited Use of T&M Contracts for
Commercial Services but Reliability of Data Is in Doubt:
FAR Safeguards for T&M Contracts for Commercial Services Rarely Used:
FAR Part 12 Safeguards Have Not Been Applied to GSA Schedules Program:
Conclusion:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from NASA:
Appendix III: Comments from the Department of Health and Human
Services:
Appendix IV: GAO Contact and Staff Acknowledgements:
Tables:
Table 1: Contract Types:
Table 2: Summary of Relevant FAR Provisions Pertaining to T&M Contracts
and to Orders Under the GSA Schedule Program.
Table 3: Top 10 Commercial Services Coded as Using T&M Contracts and
Orders to Acquire Commercial Items from February 12, 2007, to December
31, 2008:
Table 4: Contracts and Orders from our Sample Incorrectly Coded in FPDS-
NG as Having Acquired Commercial Services or as T&M:
Table 5: Number and Type of D&Fs for Non-GSA Contracts and Orders in
Our Sample Subject to the FAR Part 12 D&F Requirement:
Table 6: Number and Type of D&Fs for GSA Orders in our Sample Awarded
After the FAR Part 12 D&F Requirement Became Effective.
Table 7: GAO Sample of T&M Contracts and Orders for Commercial Services
Awarded Prior to and After the February 2007 FAR Change:
Figure:
Figure 1: Total Reported Obligations for Services Compared to
Obligations Coded as (1) Having Acquired Commercial Services, (2) as
T&M Contracts for Services, and (3) as T&M Contracts for Commercial
Services From February 12, 2007 to December 31, 2008:
Abbreviations:
ANPR: advanced notice of proposed rulemaking:
CMS: Centers for Medicare and Medicaid Services:
D&F: determination and findings:
DFARS: Defense Federal Acquisition Regulation Supplement:
DOD: Department of Defense:
DOJ: Department of Justice:
FAR: Federal Acquisition Regulation:
FASA: Federal Acquisition Streamlining Act:
FBI: Federal Bureau of Investigation:
FPDS-NG: Federal Procurement Data System-Next Generation:
GSA: General Services Administration:
HHS: Department of Health and Human Services:
NASA: National Aeronautics and Space Administration:
OFPP: Office of Federal Procurement Policy:
SARA: Services Acquisition Reform Act:
T&M: time-and-materials:
VA: Department of Veterans Affairs:
[End of section]
United States Government Accountability Office: Washington, DC 20548:
June 24, 2009:
Congressional Committees:
Time-and-materials (T&M) and labor-hour contracts are used to purchase
billions of dollars in services across the federal government. 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. These contracts are considered high risk
for the government because the contractor's profit is tied to the
number of hours worked. Thus, the government bears the risk of cost
overruns. The cost growth on T&M and labor-hour contracts can be
significant; we and agency inspectors general have reported numerous
instances in which the costs grew to more than double the original
value--in one case a contract increased to almost 19 times the original
price.[Footnote 1] Although these contracts may be appropriate in
certain circumstances, we reported in 2007 that contracting officers
used this contract type for ease and flexibility in the face of unclear
requirements or funding uncertainties and did not adequately determine,
as required, that no other contract type was suitable.[Footnote 2]
Until recently, the Federal Acquisition Regulation (FAR) prohibited use
of any other contract type except fixed-price for the acquisition of
commercial items. Under FAR procedures for acquisition of commercial
items and services, government agencies can acquire goods or services
via a streamlined procurement process based on the idea that market
forces will help ensure good prices. [Footnote 3] The question of
whether or not T&M contracts could be used for commercial services had
been the subject of debate and an issue of some contention. Proponents
believed that increased use of T&M contracts for commercial services
would encourage more commercial firms to compete for government
business, while others, such as the Department of Defense Inspector
General, opposed expanded use of this high-risk contract type. In 2003,
the Services Acquisition Reform Act[Footnote 4] (SARA) explicitly
provided that the FAR shall include authority for the use of T&M
contracts for the procurement of commercial services. Part 12 of the
FAR, "Acquisition of Commercial Items," was subsequently amended,
effective February 2007, to reflect this change.
The FAR Part 12 revisions included procedural safeguards to ensure that
T&M contracts for commercial services are used only when no other
contract type is suitable and that cost growth is monitored due to the
inherent risks to the government of this contract type.[Footnote 5]
Contracting officers using FAR Part 12 procedures to buy commercial
services under T&M contracts are required to conduct additional, more
detailed analysis than is required when buying noncommercial services
using T&M contracts.[Footnote 6] For example, the contracting officer
must prepare a detailed justification, called a determination and
findings (D&F), to explain why no other contract type is suitable for
the procurement. The justification is required to contain several
elements, including a discussion of market research conducted for the
procurement and a description of actions planned to maximize the use of
fixed-price contracts on future acquisitions for the same requirements.
Additionally, the contracting officer is to include in the contract a
ceiling price, which the contractor exceeds at its own risk, and any
subsequent change in the ceiling price may be made only after the
contracting officer determines that such a change is in the best
interest of the procuring agency.
The Part 12 D&F requirement is not explicitly mentioned in FAR Subpart
8.4, which sets forth procedures pertaining to the General Services
Administration's (GSA) federal supply schedules program. Under the
schedules program, GSA establishes long-term, governmentwide contracts
for commercially available goods and services, under which federal
agencies can issue orders. Even prior to the February 2007 changes to
the FAR, GSA had schedule contracts under which agencies were issuing
T&M orders for commercial services. According to GSA, it allowed this
practice based on its interpretation of the Federal Acquisition
Streamlining Act of 1994 (FASA), which provided that fixed-price
contracts be used to the "maximum extent practicable" for acquisition
of commercial items and was silent on whether T&M contracts could be
used.[Footnote 7]
The Conference Report for the National Defense Authorization Act for
Fiscal Year 2004 directed us to report on the use of T&M contracts for
commercial services across government agencies.[Footnote 8]
Accordingly, we (1) identified the extent to which agencies have
reported using T&M contracts and GSA schedule T&M orders for commercial
services and what they are acquiring using this contract type, (2)
evaluated the degree to which agencies complied with the FAR Part 12
safeguards, and (3) determined the applicability of the safeguards to
the GSA schedules program.
To identify the extent to which agencies have acquired commercial
services under T&M contracts and orders and to determine what services
they are buying, we analyzed obligations coded in the Federal
Procurement Data System-Next Generation (FPDS-NG) as having used
commercial item procedures, i.e., FAR Part 12 procedures.[Footnote 9]
We selected those agencies with the greatest reported use of this
contract type during the period from October 1, 2001, to June 30, 2008.
Our primary focus was on contracts outside of the GSA schedules program
because the FAR Part 12 D&F requirement was explicitly applicable to
those contracts. However, because the FPDS-NG data showed that a large
percentage of the reported dollars and actions were through GSA
schedule orders (under FAR Subpart 8.4), we also reviewed T&M orders
issued under GSA schedule contracts at each agency in our review.
Further, based on data reported in FPDS-NG, we reviewed a limited
number of T&M contracts for commercial services that had been awarded
prior to the February 2007 changes to FAR Part 12 commercial procedures
to better understand the circumstances of those procurements. In total,
we reviewed 149 contract files. At the Department of Defense (DOD), we
selected one location for each military service with high reported
obligations for T&M commercial services. Our sample represents all of
the T&M contracts for commercial services reported in FPDS-NG at the
Departments of Justice (DOJ), Health and Human Services (HHS), and
Veterans Affairs (VA), as well as the National Aeronautics and Space
Administration (NASA) during the October 2001 to June 2008 time period.
These 5 agencies represent 97 percent of obligations coded as T&M
contracts awarded using commercial item procedures from October 2001 to
June 2008.
To corroborate that the contracts in our sample were T&M and that
commercial services were acquired as indicated in FPDS-NG, we reviewed
the contracts and orders for commercial or T&M clauses and other
contract documentation as necessary, or, when documentation was not
sufficient, spoke with the contracting officer. To determine the
government's use of T&M contracts for commercial services relative to
its obligations for services as a whole, we analyzed FPDS-NG data from
February 12, 2007 (when the new FAR rule was implemented) to December
31, 2008.
To determine the degree to which agencies' use of T&M contracts for
commercial services complied with the FAR Part 12 D&F requirement, we
reviewed contract files and interviewed over 100 contracting and
procurement policy officials. We requested and received a legal opinion
from GSA as to whether the statutory change allowing the use of T&M
contracts for commercial services and the FAR D&F requirement are
applicable to the GSA schedules program.[Footnote 10] Appendix I
contains additional details on our scope and methodology and our
sample. We conducted this performance audit from September 2008 to June
2009, in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
Background:
Federal agencies can choose from among several different contract
types, including T&M 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. The government's basis
for payments, contractor's obligations, and the party assuming more
risk for cost overruns changes depends upon the type of contract used-
-fixed-price, T&M, or cost-reimbursement.
Table 1: Contract Types:
Fixed-price:
Government pays a fixed price and is guaranteed an end item or service
whether actual total cost of product or service falls short of or
exceeds the contract price. May also pay an award or incentive fee
related to performance; Contractor provides an acceptable deliverable
at the time, place, and price specified in the contract; Who assumes
risk of cost overrun? Contractor.
T&M:
Government pays fixed per-hour labor rates that include wages,
overhead, general and administrative costs, and profit; government may
reimburse contractor for other direct costs, such as travel and
materials costs. Government is not guaranteed a completed end item or
service within the ceiling price; Contractor makes good faith effort to
meet government's needs within the ceiling price; Who assumes risk of
cost overrun? Government.
Cost-reimbursement:
Government pays contractor's allowable costs, which do not include
profit. Also pays a fee, which may be related to performance.
Government is not guaranteed a completed end item or service within the
estimated cost; Contractor makes good faith effort to meet government's
needs within the estimated cost; Who assumes risk of cost overrun?
Government.
Sources: FAR, Defense Federal Acquisition Regulation Supplement, DOD
Contract Pricing Preference Guide (data); GAO (presentation and
analysis).
[End of table]
T&M contracts constitute a high risk to the government.[Footnote 11]
The contractor provides its best efforts to accomplish the objectives
of the contract up to the maximum number of hours authorized under the
contract. Each hour of work authorizes the contractor to charge the
government an established labor rate which includes profit. These
contracts are considered high risk for the government because the
contractor's profit is tied to the number of hours worked. Thus, the
government bears the risk of cost overruns. Therefore the FAR provides
that appropriate government monitoring of contractor performance is
required to give reasonable assurance that efficient methods and
effective cost controls are being used. Further, because of the risks
involved, the FAR directs that T&M contracts may 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 12] For many years, federal regulations
have required contracting officers to justify in writing that no other
contract type (such as fixed-price) is suitable before using a T&M
contract.[Footnote 13]
Commercial services comprise services for support of commercial items
and services of a type offered and sold competitively in substantial
quantities in the commercial marketplace based on established catalog
or market prices.[Footnote 14] During the 1990s, Congress enacted a
number of laws to increase the government's use of commercial practices
to make government buying more efficient. The benefits of using
commercial practices were seen as creating greater access to commercial
markets (products and service types) with increased competition, better
prices, and new market entrants and/or technologies. Commercial
acquisition practices also present several advantages to contractors
when doing business with the government, such as generally not being
required to submit cost or pricing data. While the acquisition
procedures in FAR Part 12 for purchasing commercial services allow for
a streamlined process, prices are accepted based on competition and
availability in the marketplace rather than the government's review of
a contractor's cost and pricing data. Improperly classifying an
acquisition as commercial can leave the government vulnerable to
accepting prices that may not have been established by the marketplace.
[Footnote 15]
FASA authorized the use of fixed-price contracts for the acquisition of
commercial items, but it did not explicitly authorize the use of T&M
contracts for such acquisitions.[Footnote 16] SARA specifically
authorized the use of T&M contracts for the acquisition of commercial
services with certain safeguards to ensure proper use of these
contracts.[Footnote 17] The implementing regulations included
additional requirements as safeguards under FAR Part 12.[Footnote 18]
Table 2 summarizes the FAR safeguards when using T&M contracts under
FAR Part 12 acquisition procedures for commercial items; under FAR Part
16, acquisition procedures for noncommercial services; and under FAR
Subpart 8.4, GSA schedule contracts.
Table 2: Summary of Relevant FAR Provisions Pertaining to T&M Contracts
and to Orders Under the GSA Schedule Program.
Justification for using T&M:
Requirements for T&M contracts for commercial services. FAR Section
12.207(b): The contracting officer must; execute a D&F for the contract
that no other contract type is suitable; At a minimum, the D&F shall:
(i) Include a description of the market research conducted; (ii)
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; (iii)
Establish that the requirement has been structured to maximize the use
of firm-fixed-price or fixed-price with economic price adjustment
contracts on future acquisitions for the same or similar requirements;
and; (iv) Describe actions planned to maximize the use of firm-fixed-
price or fixed-price with economic price adjustment contracts on future
acquisitions for the same requirements. The D&F shall be signed by the
contracting officer prior to the execution of the base period or any
option periods of the contracts and approved by the head of the
contracting activity prior to the execution of the base period when the
base period plus any option periods exceeds three years; Requirements
for T&M contracts for noncommercial services. FAR Section 16.601(d):
The contracting officer must prepare a D&F that no other contract type
is suitable. The D&F shall be signed by the contracting officer prior
to the execution of the base period or any option periods of the
contracts and; approved by the head of the contracting activity prior
to the execution of the base period when the base period plus any
option periods exceeds three years; Requirements when ordering off the
GSA schedule. FAR Section 8.405-2(e): The ordering activity shall
document the rationale for using other than a firm-fixed-price order.
Ceiling Prices:
Requirements for T&M contracts for commercial services. FAR Section
12.207(b): The contracting officer must include a ceiling price in the
contract or order that the contractor exceeds at its own risk and;
authorize any subsequent change in the ceiling price only upon a
determination, documented in the contract file, that it is in the best
interest of the procuring agency to change the ceiling price;
Requirements for T&M contracts for noncommercial services. FAR Section
16.601(d): The contract must include a ceiling price that the
contractor exceeds at its own risk. The contracting officer shall
document the contract file to justify the reasons for and amount of any
subsequent change in the ceiling price; Requirements when ordering off
the GSA schedule. FAR Section 8.405-2(e): No requirement specified.
Source: FAR.
Note: It is important to note that, as of November 24, 2008, T&M
contracts for noncommercial services awarded by DOD require similar
procedures, including the more detailed D&F described in FAR Part 12,
as that required for T&M contracts using acquisition procedures for
commercial items and services. DFARS § 216.601. This requirement went
into effect after the time frame of our contract sample for this
review. It has not been applied to civilian agencies with respect to
T&M contracts for noncommercial services.
[End of table]
The FAR Part 12 revisions also added safeguards for agencies using T&M
pricing on indefinite-delivery contracts for commercial services.
[Footnote 19] Specifically, indefinite-delivery contracts for
commercial services awarded using Part 12 procedures may allow for the
use of fixed-price or T&M orders, and contracting officers are required
to execute the Part 12 D&F for each order placed on a T&M basis. If the
contract only allows for the issuance of orders on a T&M basis, the
Part 12 D&F is required to be executed to support the basic contract
and also explain why using an alternative fixed-price structure is not
practicable. The D&F for this type of contract is required to be
approved one level above the contracting officer. By contrast, the
section of FAR Part 16 pertaining to T&M services does not explicitly
address the D&F requirement for indefinite-delivery contracts.[Footnote
20]
Concerns by DOD and Congress over the increased use of T&M contracts
have sparked some actions to curb DOD's use of T&M in general and for
the acquisition of commercial services in particular. In June 2007, we
reported that DOD's use of T&M contracts had steadily increased and
that contracting officials frequently failed to ensure that this
contract type was used only when no other contract type was suitable.
[Footnote 21] 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. Based on our recommendations for improved
oversight, DOD's Defense Procurement and Acquisition Policy office, in
March 2008, began requiring military departments and defense agencies
to establish procedures for analyzing whether T&M contracts and orders
under indefinite-delivery contracts are used when other contract types
are suitable. Each department or agency was to provide an assessment of
the appropriate use of T&M contracts for any contracting activity that
obligated more than 10 percent of its total fiscal year 2007
obligations for services using T&M contracts or orders. The assessment
was to include actions that will be taken to reduce the use of T&M
contracts whenever possible.
Further, the Acquisition Improvement and Accountability Act of 2007
required DOD to revise its acquisition regulation to require
contracting officers to determine in writing that the offerer has
submitted sufficient information to evaluate price reasonableness for
commercial services that are not offered and sold competitively in
substantial quantities in the commercial marketplace but are "of a
type" offered and sold competitively in substantial quantities in the
commercial marketplace. The act also specifies that DOD's revised
regulation shall ensure that the procedures applicable to T&M contracts
for commercial services may be used only for the following:
* services procured for support of a commercial item;
* emergency repair services;
* any other commercial services only to the extent that the head of the
agency approves a determination in writing by the contracting officer
that:
- the services to be acquired are commercial services;
- the offeror has submitted sufficient information to evaluate the
price reasonableness of the services, if they are not offered and sold
competitively in substantial quantities in the commercial marketplace;
- such services are commonly sold to the general public through use of
T&M or labor-hour contracts; and:
- the use of a T&M or labor-hour contract type is in the best interest
of the government.[Footnote 22]
We did not assess DOD's compliance with these provisions because they
have not yet been implemented. [Footnote 23]
Federal Agencies Have Reported Limited Use of T&M Contracts for
Commercial Services but Reliability of Data Is in Doubt:
Federal agencies have reported relatively limited use of T&M contracts
and GSA schedule T&M orders to purchase commercial services, based on
those obligations coded in FPDS-NG as using T&M contracts and orders
under commercial item procedures. From February 12, 2007, when the FAR
change that allowed T&M acquisitions for commercial services was
implemented, to December 31, 2008, $4.4 billion--less than 1 percent of
total federal obligations for services--was reported.
Figure 1 presents information on the total reported obligations for
services (i.e., commercial and noncommercial) compared to obligations
coded as (1) having acquired commercial services, (2) as T&M contracts
for services, and (3) as T&M contracts for commercial services from
February 12, 2007, to December 31, 2008.
Figure 1: Total Reported Obligations for Services Compared to
Obligations Coded as (1) Having Acquired Commercial Services, (2) as
T&M Contracts for Services, and (3) as T&M Contracts for Commercial
Services From February 12, 2007 to December 31, 2008:
[Refer to PDF for image: illustration]
Total reported for services: $562.5 billion;
Obligations coded as commercial services: $50.6 billion (9.0% of total);
Obligations coded as T&M contracts: $47.6 billion (8.5% of total);
Obligations coded as T&M contracts for commercial services $4.38 billion
(0.8% of total).
Source: FPDS-NG for data; GAO for presentation.
Note: T&M dollars include labor-hour contracts and orders.
[End of figure]
The vast majority of the $4.4 billion in obligations coded as T&M for
commercial services were for services actually acquired under GSA
schedule contracts ($3.1 billion). The FPDS-NG user manual defines
commercial item procedures as those that use FAR Part 12 acquisition
procedures, but our analysis of FPDS-NG data showed that these orders
had been issued through FAR Subpart 8.4, pertaining to GSA schedule
contracts, and thus had been miscoded based on the definition in the
user manual.[Footnote 24] Although our overall focus was on nonschedule
T&M orders for commercial services, we identified additional
obligations under T&M orders placed on GSA schedule contracts. From
February 2007 to December 2008, approximately $6 billion of the $47.6
billion in obligations coded as T&M contracts were through the GSA
schedule program, in addition to the $3.1 billion that had been
miscoded as having used FAR Part 12. Thus, the full picture of the
government's use of T&M for commercial services for this time period
was approximately $10.4 billion--about 90 percent of which was under
GSA schedule contracts.
Agencies reported purchasing a variety of commercial services using T&M
contracts and orders during this time period. The top 10 types of
commercial services reported as purchased using T&M contracts were as
shown in table 3.
Table 3: Top 10 Commercial Services Coded as Using T&M Contracts and
Orders to Acquire Commercial Items from February 12, 2007, to December
31, 2008:
Type of commercial services: Other Automatic Data Processing &
Telecommunications Services;
Dollars obligated: $686,044,403;
Percent of total dollars obligated under T&M contracts and orders for
commercial services: 15.7.
Type of commercial services: Engineering and Technical Services;
Dollars obligated: $647,682,748;
Percent of total dollars obligated under T&M contracts and orders for
commercial services: 14.8.
Type of commercial services: Other Professional Services;
Dollars obligated: $478,541,816;
Percent of total dollars obligated under T&M contracts and orders for
commercial services: 10.9.
Type of commercial services: Program Management/Support Services;
Dollars obligated: $357,981,397;
Percent of total dollars obligated
under T&M contracts and orders for commercial services: 8.2.
Type of commercial services: Automated Information System Services;
Dollars obligated: $225,187,839;
Percent of total dollars obligated under T&M contracts and orders for
commercial services: 5.1.
Type of commercial services: Management Services/Contract and
Procurement Support;
Dollars obligated: $201,641,198;
Percent of total dollars obligated under T&M contracts and orders for
commercial services: 4.6.
Type of commercial services: Logistics Supports Services;
Dollars obligated: $189,831,359;
Percent of total dollars obligated under T&M contracts and orders for
commercial services: 4.3.
Type of commercial services: Other Management Support Services;
Dollars obligated: $186,479,109;
Percent of total dollars obligated under T&M contracts and orders for
commercial services: 4.3.
Type of commercial services: Automatic Data Processing Systems Analysis
Services;
Dollars obligated: $182,481,817;
Percent of total dollars obligated under T&M contracts and orders for
commercial services: 4.2.
Type of commercial services: Automatic Data Processing Systems
Development Services;
Dollars obligated: $120,849,955;
Percent of total dollars obligated under T&M contracts and orders for
commercial services: 2.8.
Source: FPDS-NG for data; GAO for presentation.
[End of table]
Our sample of 149 contracts and orders provides additional details on
the variety of commercial services procured under T&M contracts. For
example:
* The Army purchased patent legal services for inventions resulting
from biomedical, chemical, and other research.
* The Indian Health Service, within HHS, entered into a contract for
emergency nursing services and inpatient nursing services for a
healthcare center.
* The Navy contracted for repair services for a Navy vessel undergoing
overhaul at the Norfolk Naval Shipyard.
* The VA purchased project management services for its MyHealtheVet Web
site, which provides access to health information, tools, and services.
* The Federal Bureau of Investigation (FBI) purchased certified
gunsmith services to repair and perform preventative maintenance on
firearms.
* NASA entered into a contract for translation, interpretation, visa
processing, and logistical support services.
Errors, Misunderstandings, and Differing Opinions Cast Doubt on
Reliability of Reported Data:
Maintaining accurate data is an essential component of good oversight
and helps lead to informed decisions. In our sample of T&M contracts
for commercial services, we found that the quality of the data reported
in FPDS-NG was compromised in several ways.
First, 28 of the 149 contracts and orders in our sample from October 1,
2001, to June 30, 2008, were incorrectly coded in FPDS-NG. Our review
of the contract files revealed that 19 were coded as having acquired
commercial services when they did not, and 10 were coded as T&M
contracts when they were fixed-price, as shown in table 4.[Footnote 25]
Table 4: Contracts and Orders from our Sample Incorrectly Coded in FPDS-
NG as Having Acquired Commercial Services or as T&M:
Agency: Air Force;
Miscoding Type: Incorrectly coded as having acquired commercial
services: 9;
Miscoding Type: Incorrectly coded as T&M: 0.
Agency: Army;
Miscoding Type: Incorrectly coded as having acquired commercial
services: 0;
Miscoding Type: Incorrectly coded as T&M: 0.
Agency: Navy;
Miscoding Type: Incorrectly coded as having acquired commercial
services: 0;
Miscoding Type: Incorrectly coded as T&M: 6.
Agency: DOJ;
Miscoding Type: Incorrectly coded as having acquired commercial
services: 4;
Miscoding Type: Incorrectly coded as T&M: 1.
Agency: HHS;
Miscoding Type: Incorrectly coded as having acquired commercial
services: 4;
Miscoding Type: Incorrectly coded as T&M: 1.
Agency: NASA;
Miscoding Type: Incorrectly coded as having acquired commercial
services: 1;
Miscoding Type: Incorrectly coded as T&M: 0.
Agency: VA;
Miscoding Type: Incorrectly coded as having acquired commercial
services: 1;
Miscoding Type: Incorrectly coded as T&M: 2.
Agency: Total[A];
Miscoding Type: Incorrectly coded as having acquired commercial
services: 19;
Miscoding Type: Incorrectly coded as T&M: 10.
Source: GAO file reviews.
Note: This table does not address the overall coding errors, discussed
above, where GSA schedule orders had been coded as using FAR Part 12
procedures.
Twelve of the 28 contracts or orders were awarded prior to the February
2007 FAR change pertaining to the use of T&M contracts for commercial
services.
[A] One contract at DOJ was incorrectly coded as both T&M and as having
acquired commercial services.
[End of table]
Several of the contracting officers we interviewed attributed these
miscodings to errors made during input of data into the federal
procurement data system. For example, the Air Force had planned to
establish indefinite-delivery/indefinite-quantity contracts for
advisory and assistance services using FAR Part 12 acquisition
procedures for commercial services. However, because cost-
reimbursement orders were contemplated under the contracts--which the
FAR prohibits for commercial services--the Air Force decided not to
award the contracts using FAR Part 12 acquisition procedures. Agency
officials stated that the contracts were then mistakenly coded as
having used acquisition of commercial item procedures.
In addition, we found that T&M contracts for commercial services may be
underreported based on a misunderstanding about contract type among
contracting officials in most of the government agencies in our review.
Some contracting officers had the incorrect belief that the fixed labor
rate component of T&M contracts renders them fixed-price. [Footnote 26]
In fact, some contracts in our sample were referred to in the contract
file as "firm fixed price labor hour," a contract type that does not
exist. Despite the fact that labor rates are fixed under T&M contracts,
the overall ceiling price is not a firm, fixed price because the
contractor will be paid based on the number of hours worked (up to the
ceiling price). Some contracting officers acknowledged having coded
other similar contracts outside of those in our sample as fixed-price,
thus potentially understating the use, and correlated risk to the
government, of T&M contracts. Following are some examples that
highlight contracting officials' confusion about fixed-price versus
labor-hour contracts (even though these contracts in our sample had
been correctly coded as labor-hour).
* Contracting officers at HHS's Indian Health Services stated that
although a few of their contracts for medical professionals had been
coded as labor-hour, these contracts were typical of the contracts they
usually code as fixed-price. One contracting officer explained that if
the hours are reasonably well known in advance--"shift labor," for
example--then the estimated hours written into the contract are
considered fixed-price. However, another contracting officer explained
that Indian Health Services pays contractors for actual hours worked,
regardless of the estimate written into the contract.
* A contracting officer at HHS's Program Support Center told us that a
contract in our sample, for maintenance and repair services, had
mistakenly been entered as a labor-hour contract in FPDS-NG. He
believed it should have been coded as fixed-price because the dollars
obligated reflected a fixed hourly rate multiplied by the hours worked,
but later conceded that the contract was actually a labor-hour
contract.
* An FBI contracting officer maintained that a labor-hour contract in
our sample, for gunsmith services, should have been coded as fixed-
price because the labor rate was fixed. The contract purchases the
services of one person to repair and maintain firearms for FBI training
teams. Although the contract requires these services during "normal
business hours" 5 days a week, it also allows the contractor to bill
for preapproved overtime when necessary and includes a maximum number
of hours to be billed on the contract.
When we raised this confusion about contract type with officials from
the Office of Federal Procurement Policy (OFPP), they agreed that
clarification to the contracting community on what constitutes a fixed
price versus a labor hour contract would be beneficial.[Footnote 27]
We also spoke with contracting officers about how they generally define
a service as commercial and found that individuals had different
opinions about whether or not certain services are commercial, which
may be contributing to issues with data reliability in FPDS-NG.
[Footnote 28] Many contracting officers defined a commercial service as
being readily available in the commercial marketplace. However, several
officials told us that in certain cases, a service could reasonably be
considered either commercial or noncommercial. For example, a DOD
official stated that a contract for aircraft repair services could be
considered either a commercial or noncommercial purchase depending on
the contracting officer's interpretation. On the other hand, Air Force
officials we spoke with view aircraft maintenance--even on military
aircraft--as predominantly commercial since aircraft mechanics are
broadly available commercially. Some contracting officers stated they
would consider services that require specific knowledge of government
requirements to be noncommercial. For example, a DOJ procurement policy
official told us that although a contracting officer used FAR Part 12
commercial acquisition procedures to award a contract for technical
services, including the installation of modules for DOJ's financial
management system (one of the T&M contracts in our sample), he did not
consider the service to be commercial because it was specific to DOJ's
needs. He cited a contract for trash pick-up as an example of a
commercial contract. In another example, a Navy contracting officer
explained that although the majority of her purchases are for
commercial items or services, if a purchase is completely exclusive to
the Navy--such as for equipment used on submarines or Navy ships--she
would consider it noncommercial.
In addition, although all services available on the GSA schedule are
described as commercial in the FAR, we found cases where agencies
ordering these services did not consider them to be commercial.
[Footnote 29] GSA officials confirmed that they consider everything
under the schedules program to be commercial, even if items or services
are slightly modified to meet specific requirements. However, they
acknowledged that if significant modifications are made, the items
ordered may be out of scope of the underlying GSA contract. The
following are some examples from our review where agency officials used
the GSA schedules program but considered the procurement to be
noncommercial.
* At one Air Force location, contracting officers told us that they did
not consider any of their seven GSA orders in our sample, such as an
order for program management and technical support for the Air Force's
telecommunications monitoring and assessment program, to be commercial.
They only discovered that these orders were being automatically coded
in FPDS-NG as having used commercial procedures when we identified them
in our sample for review.
* NASA had purchased environmental management and safety support
services under a GSA schedule contract, but, according to NASA
contracting officers, the actual services ordered were so technical and
specialized that they did not consider them to be commercial services.
They had used the GSA schedule primarily to identify qualified
commercial vendors who could perform this specialized work.
* The Centers for Medicare and Medicaid Services (CMS) at HHS issued an
order under a GSA schedule contract for the design and build of a
knowledge management system for CMS's Center for Beneficiary Services.
According to the contracting officer, because the system was custom-
designed for CMS, it is not commercial.
FAR Safeguards for T&M Contracts for Commercial Services Rarely Used:
Under FAR Part 12, T&M contracts or orders may be used to acquire
commercial services if the contracting officer executes a D&F which
sets forth sufficient facts and rationale to justify that no other
contract type is suitable. At a minimum, the D&F must:
1. include a description of the 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 the
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 on future acquisitions for the same or similar
requirements; and:
4. describe actions planned to maximize the use of fixed-price
contracts on future acquisitions for the same requirements.
Of the 149 contracts and orders in our sample, 82 were subject to this
D&F requirement.[Footnote 30] Of these 82 contracts and orders, only 5
had a FAR Part 12 D&F that addressed each required element. No D&F had
been prepared for many of the contracts and orders. Further, for almost
half of the contracts and orders, contracting officials had improperly
used the less rigorous Part 16 D&F instead of the Part 12 D&F for
commercial services. We found a general lack of awareness of the Part
12 D&F requirement at the agencies in our review. Many contracting
officials, including some policy officials, across the agencies in our
review were unfamiliar with this Part 12 safeguard. We raised this
issue with officials from OFPP, who were concerned at the general lack
of compliance with this key safeguard pertaining to T&M contracts for
commercial services.
Table 5 sets forth the breakdown of D&Fs for the 82 contracts and
orders in our sample that were subject to the Part 12 D&F.
Table 5: Number and Type of D&Fs for Non-GSA Contracts and Orders in
Our Sample Subject to the FAR Part 12 D&F Requirement:
Agency: Air Force;
Non-GSA contracts and orders: Complete Part 12 D&F: 2;
Non-GSA contracts and orders: Partial Part 12 D&F: 1;
Non-GSA contracts and orders: Part 16 D&F: 5;
Non-GSA contracts and orders: No D&F: 0;
Total: 8.
Agency: Army;
Non-GSA contracts and orders: Complete Part 12 D&F: 0;
Non-GSA contracts and orders: Partial Part 12 D&F: 2;
Non-GSA contracts and orders: Part 16 D&F: 18;
Non-GSA contracts and orders: No D&F: 8;
Total: 28.
Agency: Navy;
Non-GSA contracts and orders: Complete Part 12 D&F: 2;
Non-GSA contracts and orders: Partial Part 12 D&F: 2;
Non-GSA contracts and orders: Part 16 D&F: 8;
Non-GSA contracts and orders: No D&F: 4;
Total: 16.
Agency: DOJ;
Non-GSA contracts and orders: Complete Part 12 D&F: 0;
Non-GSA contracts and orders: Partial Part 12 D&F: 2;
Non-GSA contracts and orders: Part 16 D&F: 3;
Non-GSA contracts and orders: No D&F: 2;
Total: 7.
Agency: HHS;
Non-GSA contracts and orders: Complete Part 12 D&F: 1;
Non-GSA contracts and orders: Partial Part 12 D&F: 2;
Non-GSA contracts and orders: Part 16 D&F: 0;
Non-GSA contracts and orders: No D&F: 14;
Total: 17.
Agency: NASA;
Non-GSA contracts and orders: Complete Part 12 D&F: 0;
Non-GSA contracts and orders: Partial Part 12 D&F: 0;
Non-GSA contracts and orders: Part 16 D&F: 1;
Non-GSA contracts and orders: No D&F: 0;
Total: 1.
Agency: VA;
Non-GSA contracts and orders: Complete Part 12 D&F: 0;
Non-GSA contracts and orders: Partial Part 12 D&F: 0;
Non-GSA contracts and orders: Part 16 D&F: 0;
Non-GSA contracts and orders: No D&F: 5;
Total: 5.
Agency: Total;
Non-GSA contracts and orders: Complete Part 12 D&F: 5;
Non-GSA contracts and orders: Partial Part 12 D&F: 9;
Non-GSA contracts and orders: Part 16 D&F: 35;
Non-GSA contracts and orders: No D&F: 33;
Total: 82.
Source: GAO analysis of data from agency contract files.
Note: We determined that a D&F was complete if it made reference to FAR
Section 12.207 and at least mentioned all of the four required elements
of the D&F. For example, if a D&F stated the outcomes of the market
research conducted but did not describe the research conducted, we
still gave credit for having addressed the requirement in FAR Section
12.207(b)(1) to describe the market research conducted. A partial Part
12 D&F included some but not all of the four required elements.
Sixteen of the contracts and orders in our Army sample had the same
Part 16 D&F that was used to award a multiple award contract for patent
legal services.
[End of table]
In some cases, contracting officers had incorrectly concluded that a
D&F was not necessary. For example, two contracting officers at the
Navy told us that they did not complete a D&F because they did not
believe contracts below the simplified acquisition threshold required a
D&F--which is inconsistent with the FAR. [Footnote 31] In another
instance, an Air Force contracting officer who had included Part 12
D&Fs in two contracts in our sample executed only a Part 16 D&F for a
third contract because he believed that a Part 12 D&F was not required
for a simplified acquisition.
The nine D&Fs in our sample that had some but not all of the discrete
elements required by FAR Part 12 typically omitted a description of the
market research conducted or actions planned to maximize use of fixed-
price contracts for future acquisitions for the same or similar
services. For example, one D&F for a DOJ contract for consulting
services for the National Prison Rape Elimination Commission, awarded
on a sole-source basis, included information on the services needed but
did not describe the market research conducted. The D&F states that
neither the scope of work nor the contractor's level of effort can be
determined with a degree of accuracy necessary to develop a reliable
cost estimate on which to base a fixed-price award. It further states
that the work entails professional and other administrative services
for which no reliable specifications exist, and the precise method of
accomplishment cannot be established in advance. However, the D&F does
not describe actions planned to maximize the use of fixed-price
contracts on future acquisitions for the same requirements.
The five FAR Part 12 D&Fs we found that addressed all the required
elements included the rationale for a T&M contract and discussed how
future requirements could potentially shift to a fixed-price contract.
For example, in preparing a D&F for a Navy contract for the overhaul
and repair of naval vessels, contracting officials not only described
the market research, but thoroughly documented the market survey
performed, including a description of applicable services provided by
potential bidders in the marketplace. They also described how they
would employ fixed pricing for stable labor expenses and monitor the
volatility of other labor categories to determine if the services could
be purchased on a fixed-price basis in the future. In another example,
at HHS, a contracting officer completed a Part 12 D&F for a contract
for less than 6 months of network administrative support services. The
D&F stated that the market research had identified an 8(a) company to
provide the services.[Footnote 32] It also explained that the
requirement had been structured to maximize fixed pricing by limiting
the period of performance and that there was no anticipated need for
this service to continue in the future. In yet another example, at the
Air Force, the contracting officer prepared a complete Part 12 D&F for
a contract for intelligence support services that addressed all of the
required elements. The D&F explained that a small business was
identified as the best option for the procurement and described the
outcome of the market research conducted. Further, the D&F stated that
information obtained from the procurement would be used to develop
fixed pricing for future procurements, which would be better defined
and more concise.
In addition to a more detailed D&F, the FAR also requires the
contracting officer to document that each change to the ceiling price
of a T&M contract for commercial services is in the best interest of
the procuring agency. In general, the contracts in our sample that were
subject to the FAR Part 12 requirements did not have increases in the
ceiling price. However, in the instances where an increase did occur,
contracting officers did not always follow the FAR requirement. A
contract at HHS for financial services management more than doubled in
value over the original "estimated not-to-exceed" cost. No written
justification was provided for why this increase was in the best
interest of the procuring agency. The contracting officer stated that
the not-to-exceed amount on the contract was only an estimate and had
not identified a separate ceiling price--which is required by the FAR
Part 12. On the other hand, some contracts with ceiling price increases
did include a description of why the increase was necessary.[Footnote
33] For example, we reviewed three orders at the Army for patent legal
services that documented why ceiling price increases were necessary--
which was essentially due to a change in the acquisition strategy for
obtaining these services. After establishing a multiple award contract
with 23 vendors, contractors were asked to submit proposals to complete
ongoing work that, according to contracting officials, was previously
purchased on government credit cards. In one case, a task order
increased from approximately $100,000 to $500,000 because the
contractor had initially misunderstood the request for proposals and
submitted a proposal for only a limited scope of work; it subsequently
revised its proposal to address all of the Army's stated requirements.
In another example at the U.S. Marshals Service, the ceiling price on a
contract for aircraft maintenance services increased from $250,000 to
$400,000 through three successive modifications, and all the
modifications included a detailed description of the need for
additional funds.
Agency Training and Contract Review Processes Did Not Include FAR Part
12 Safeguards:
Clear guidance and training are needed to successfully introduce and
implement changes to regulations. The DOD offices we visited were the
only locations in our review that provided general training seminars or
guidance on the changes to FAR Part 12 permitting the use of T&M
contracts for commercial services, but none provided written guidance
or training on the more detailed D&F requirement. Navy contracting
officials recognized this omission during our visit and subsequently
provided additional training to their contracting officials.[Footnote
34] Army officials told us that they had discussed the new D&F
requirement in a meeting with contracting officers but had not issued
any written guidance. None of the civilian agencies in our review had
provided formal guidance or training to their contracting officers on
the safeguards.
Officials who were aware of the Part 12 safeguards frequently found out
through their own initiative. For example, in our sample of 17 HHS
contracts subject to the FAR Part 12 D&F requirement, 2 contained
partial D&Fs and 1, issued by the Program Support Center, contained all
of the D&F elements. The contracting officer responsible for the
complete D&F indicated that he became aware of the D&F requirement
through his own FAR research and had not received guidance from
headquarters. The other 2 partial Part 12 D&Fs were issued by another
HHS component, the Food and Drug Administration. The head of
contracting who signed these D&Fs said that she had also learned of the
Part 12 D&F requirement by researching the FAR. At DOJ, officials at
the Office of Justice Programs explained that they became aware of the
FAR Part 12 D&F requirement through a paid subscription for updates to
a contract checklist from an outside vendor. When awarding a contract
for consulting services, a contracting officer from that office
prepared a Part 12 D&F in the file, but it did not address all of the
required elements. Several contracting officials at different agencies
noted that their contracting staff is very overworked or inexperienced,
which may have contributed to the general lack of awareness of the new
D&F requirement.
Internal controls, such as contract reviews, administered by informed
agency personnel can also help ensure that policies and processes are
translated into practice. In some cases, the contracts in our sample
had been reviewed by staff, including legal officials, who did not
detect that the required Part 12 D&Fs were missing. For example, while
six of the eight contracts at the Air Force were reviewed by attorneys
or contract management officials, five contract files still contained
the incorrect Part 16 D&F rather than the Part 12 D&F for commercial
acquisitions. At the Navy, one attorney reviewing a contract file
identified the need to include the Part 12 D&F, but another attorney
reviewing a different Navy contract failed to do so. In another example
at NASA, an attorney and associate division chief had reviewed the
contract and did not identify that the Part 12 D&F was missing, but the
associate division chief did inquire as to whether part of the work
could be fixed-price. In other cases, contract reviews either failed to
ensure that any D&F was included in the contract file or there was no
evidence that reviews of the acquisition approach had occurred. Four of
the five VA contracts we reviewed were subject to internal reviews by
VA technical and legal staff based on factors such as value and
contract type, yet none contained a D&F of any type. At the Army
location we visited, there was no indication that the contracts'
acquisition approach had been reviewed, and most of the contracts in
our sample contained the Part 16 D&F or had no D&F at all. However,
this Army contracting activity updated its internal contract review
checklist in December 2008, after our visit, to include a reference to
the Part 12 D&F requirement.
Our review of contract files and interviews with agency officials
further revealed that awareness of the new D&F requirement even varied
among the staff of a single contracting office. For example, three T&M
contracts for commercial services were issued during a 6-month period
by U.S. Marshals Service contracting officials for aircraft maintenance
and pilot services in Puerto Rico. One contract file contained a
partial Part 12 D&F, one contained a Part 16 D&F, which is less
rigorous, and the third had no D&F.
FAR Part 12 Safeguards Have Not Been Applied to GSA Schedules Program:
The vast majority of reported obligations for commercial services
acquired through T&M contracts went through GSA's schedules program
from February 2007 to December 2008, but the FAR Part 12 D&F
requirement has not been applied to the use of schedule contracts. The
February 2007 revisions to FAR Part 12 did not specifically address the
applicability of the D&F provisions to GSA schedule contracts or orders
issued under them.[Footnote 35] Further, the section of the FAR that
governs ordering procedures for GSA schedules contracts does not refer
to the Part 12 D&F requirement to either make it explicitly applicable
or inapplicable as it does with other FAR provisions. [Footnote 36] GSA
has not incorporated the D&F requirement in its own acquisition manual,
for use by its contracting officers, and has not instructed ordering
agencies to comply with the Part 12 D&F requirement when issuing T&M
orders under its schedule contracts. For example, the Part 12 D&F is
not discussed in GSA's ordering guidance for schedule contracts or in
the frequently asked questions on the schedules program Web site.
Accordingly, there is uncertainty in the contracting community about
the extent to which the Part 12 D&F is required for schedule orders.
Our file review revealed that only 2 of the 19 GSA orders we reviewed
that were awarded after the February 2007 FAR changes contained the
Part 12 D&F. Eleven of the orders contained the less rigorous FAR Part
16 version which would be properly used in conjunction with the
purchase of noncommercial services using T&M contracts, and 6 had no
D&F, as shown in table 6.
Table 6: Number and Type of D&Fs for GSA Orders in our Sample Awarded
After the FAR Part 12 D&F Requirement Became Effective.
Agency: Air Force;
GSA schedule orders: Complete Part 12 D&F: 0;
GSA schedule orders:
Partial Part 12 D&F: 0;
GSA schedule orders: Part 16 D&F: 0;
GSA schedule orders: No D&F: 0;
Total: 0.
Agency: Army;
GSA schedule orders: Complete Part 12 D&F: 0;
GSA schedule orders: Partial Part 12 D&F: 0;
GSA schedule orders: Part 16 D&F: 4;
GSA schedule orders: No D&F: 1;
Total: 5.
Agency: Navy;
GSA schedule orders: Complete Part 12 D&F: 0;
GSA schedule orders: Partial Part 12 D&F: 0;
GSA schedule orders: Part 16 D&F: 4;
GSA schedule orders: No D&F: 1;
Total: 5.
Agency: DOJ;
GSA schedule orders: Complete Part 12 D&F: 1;
GSA schedule orders: Partial Part 12 D&F: 0;
GSA schedule orders: Part 16 D&F: 0;
GSA schedule orders: No D&F: 0;
Total: 1.
Agency: HHS;
GSA schedule orders: Complete Part 12 D&F: 0;
GSA schedule orders: Partial Part 12 D&F: 0;
GSA schedule orders: Part 16 D&F: 0;
GSA schedule orders: No D&F: 0;
Total: 0.
Agency: NASA;
GSA schedule orders: Complete Part 12 D&F: 0;
GSA schedule orders: Partial Part 12 D&F: 0;
GSA schedule orders: Part 16 D&F: 0;
GSA schedule orders: No D&F: 0;
Total: 0.
Agency: VA;
GSA schedule orders: Complete Part 12 D&F: 1;
GSA schedule orders: Partial Part 12 D&F: 0;
GSA schedule orders: Part 16 D&F: 3;
GSA schedule orders: No D&F: 4;
Total: 8.
Agency: Total;
GSA schedule orders: Complete Part 12 D&F: 2;
GSA schedule orders: Partial Part 12 D&F: 0;
GSA schedule orders: Part 16 D&F: 11;
GSA schedule orders: No D&F: 6;
Total: 19.
Source: GAO analysis of data from agency contract files.
Note: FAR Subpart 8.4 does not specifically require a D&F. However, GSA
ordering procedures require the ordering agency to make a determination
that it is not possible at the time of placing the order to estimate
accurately the extent or duration of the work or to anticipate costs
with any reasonable degree of confidence.
[End of table]
Further, the FAR Part 12 requirement to document ceiling price changes
on T&M contracts is not included in FAR Subpart 8.4, which pertains to
schedule purchases. We found a few GSA orders at the VA location we
visited that had ceiling price increases with no documentation on why
the increase was in the best interest of the VA. For example, one order
for information technology support services increased from $3.5 million
to almost $4.8 million with minimal explanation as to why this increase
occurred.
GSA policy officials told us that the statutory authority that created
the schedules program is unique and allows the administrator the
flexibility to decide what procedures to apply to the schedules
program.[Footnote 37] They noted, however, that they were planning to
issue a procurement information notice in the spring of 2009 to put in
place a Part 12 D&F for the entire GSA schedules program. It is not
clear how this D&F will address the specific elements required by Part
12 of the FAR, or how it will act as a safeguard to ensure that each
agency using GSA's schedule contracts has made the necessary
determination that no other contract type is suitable.
On March 6, 2009, we requested a legal opinion from GSA on the
applicability of FASA section 8002(d), as amended by section 1432 of
SARA, and the implementing FAR section 12.207(b) D&F requirement to the
GSA schedules program. In its April, 15, 2009, response, GSA stated
that the statutory language of FASA is not explicit and is unclear
regarding applicability of the FASA provisions to the GSA schedules
program, and therefore concluded that applicability is uncertain with
regard to T&M commercial services contracts and orders under the
program. In this regard, GSA recognized congressional concerns
expressed regarding the use of T&M contracts for commercial services,
which in some cases have led to inefficient and costly procurements.
Specifically, GSA recognized the concern of the Senate Armed Services
Committee that T&M commercial services contracts "are potentially
subject to abuse because...it [is] very difficult to ensure that prices
are fair and reasonable." GSA stated, however, that it "has exercised
the agency's authority over the Schedules program to create safeguards
so as to mitigate the issues presented by T&M commercial services
contracts" and that existing provisions in the GSA Acquisition
Regulation (GSAR) and FAR Subpart 8.4 "satisfy any concerns about the
use of T&M orders in the Schedules program."
It is not apparent to us that the regulations cited by GSA provide the
government with risk mitigation equivalent to that provided by the Part
12 D&F requirement that T&M contracts will only be used when no other
contract type is suitable. For example, GSA points to the FAR Section
8.4 requirement for the ordering activity to document the rationale for
using other than a firm-fixed price order for services.[Footnote 38]
This documentation requirement is minimal, requiring only the
"rationale" for using other than a firm-fixed price order rather than
the more detailed rationale required in FAR Part 12 to demonstrate that
there is no other suitable contract type. GSA also points to two
existing price reasonableness requirements as safeguards: (1) the GSAR
requirement that before a schedule contract is awarded, the GSA
contracting officer must determine that the prices offered are fair and
reasonable[Footnote 39] and (2) the FAR requirement that the ordering
activity contracting officer must consider the level and mix of labor
proposed and determine that the total price of the schedule order is
reasonable.[Footnote 40] Again, these provisions do not address the
more detailed rationale required in FAR Part 12.
We see no reason why the concerns which led Congress to require the
Part 12 safeguards for the use of T&M contracts would be any less
compelling in those instances in which an agency proposes to use a GSA
schedule to obtain commercial services on a T&M basis. GSA did not
provide any rationale why T&M contracts and orders for commercial
services should be treated differently under the GSA schedules program,
or be subject to fewer safeguards than those purchased outside of the
GSA schedules program where the more heightened FAR section 12.207
requirements would be required. Further, we note that in section
8002(d) of FASA, as amended, there is no indication that the D&F
requirement cannot apply to the purchase of any commercial item or
service to include items or services available for purchase under the
GSA schedules program.
Conclusion:
The FAR Part 12 D&F requirement for the use of T&M contracts to acquire
commercial services helps to ensure that this contract type is used
only when no other contract type is suitable and to instill discipline
in the determination of contract type with a view toward managing the
risk to the government. The general lack of awareness of this
requirement among contracting officers across all agencies in our
review--more than 2 years after its implementation--coupled with the
failure of management to detect the lack of compliance with this key
safeguard suggests that further actions are necessary. In addition,
miscoding of labor-hour contracts as fixed-price, when based on a
misunderstanding about this contract type, potentially understates the
risk to the government. Further, the fact that the safeguards put in
place by Congress are not applied to GSA schedule contracts or orders
raises concerns that the safeguards are not being used for the vast
majority of T&M contracts for commercial services. When these
safeguards are not used, the government may be assuming more risk than
necessary.
Recommendations for Executive Action:
To help ensure that the risks associated with T&M contracts are
understood and that safeguards are followed and to ensure consistency
in the use of T&M contracts regardless of which part of the FAR
authorizes their use, we recommend that the Administrator of the Office
of Federal Procurement Policy take the following three actions:
* Take steps to:
- amend FAR Subpart 16.6 (T&M, Labor-Hour and Letter Contracts) and FAR
Subpart 16.2 (Fixed-Price Contracts) to make it clear that contracts
with a fixed hourly rate and an estimated ceiling price are T&M or
labor-hour contracts, not fixed-price-type contracts and:
- amend FAR Subpart 8.4 (pertaining to the GSA schedules program) to
explicitly require the same safeguards for commercial T&M services--
i.e., the FAR Part 12 D&F and the justification for changes to the
ceiling price---that are required in FAR section 12.207.
* Provide guidance to contracting officials on the requirements in FAR
section 12.207 for the detailed D&F for T&M or labor-hour contracts for
commercial services and encourage agencies to provide training
regarding the D&F requirement.
Agency Comments and Our Evaluation:
We requested comments on a draft of this report from OFPP, NASA, HHS,
GSA, DOD, VA, and DOJ. In oral comments on a draft of this report,
OFPP's Acting Administrator concurred with our recommendations. In
written comments, included in appendix II, NASA stated that the report
provides a balanced view of the issues. HHS also provided written
comments. Although our recommendations were directed at OFPP, HHS
stated that it agrees with them and outlined several steps it is taking
to reinforce the need for its acquisition community to comply with
requirements for T&M and other contract types. HHS's comments are
included in appendix III. In comments provided via e-mail, DOD's
Director, Defense Procurement and Acquisition Policy, concurred with
our findings related to DOD contracts. The Director stated that DOD
fully supports the objectives of promoting awareness and compliance
with existing requirements related to the safeguards employed to ensure
that T&M contracts are used only when justified.
GSA, DOJ, and VA provided no comments.
We are sending copies of this report to interested congressional
committees; the Secretaries of Defense, Justice, Veterans Affairs, and
Health and Human Services; the Administrators of the General Services
Administration, Office of Federal Procurement Policy, and NASA. In
addition, this report will also be available at no charge on GAO's Web
site at [hyperlink, 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
huttonj@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. Staff acknowledgements are provided in appendix IV.
Signed by:
John Hutton, Director:
Acquisition and Sourcing Management:
List of Committees:
The Honorable Carl Levin:
Chairman:
The Honorable John McCain:
Ranking Member:
Committee on Armed Services:
United States Senate:
The Honorable Joseph I. Lieberman: Chairman:
The Honorable Susan M. Collins:
Ranking Member:
Committee on Homeland Security and Governmental Affairs:
United States
Senate:
The Honorable Ike Skelton:
Chairman:
The Honorable Howard P. McKeon:
Ranking Member:
Committee on Armed Services:
House of Representatives:
The Honorable Edolphus Towns:
Chairman:
The Honorable Darrell Issa:
Ranking Member:
Committee on Oversight and Government Reform:
House of Representatives:
[End of section]
Appendix I: Scope and Methodology:
The objectives of this review were to assess (1) the extent to which
agencies have reported using time-and-materials (T&M) contracts and
General Services Administration (GSA) schedule T&M orders for
commercial services and what they are acquiring using this contract
type, (2) the degree to which agencies complied with the FAR Part 12
safeguards and (3) the applicability of these safeguards to the GSA
schedule program. To address these objectives, we identified through
the Federal Procurement Data System-Next Generation (FPDS-NG) all
reported T&M contracts and orders--including GSA schedule orders--that
were coded as using commercial item acquisition procedures from October
1, 2001, to June 30, 2008. We then selected five federal departments to
review--based primarily on their high-dollar obligations and high
numbers of contract actions--which represent 97 percent of total
obligations coded as T&M contracts awarded using commercial item
procedures for this time period:
* Department of Defense (DOD):
* Department of Health and Human Services (HHS):
* Department of Justice (DOJ):
* National Aeronautics and Space Administration (NASA):
* Department of Veterans Affairs (VA):
While the focus of our engagement was non-GSA contracts awarded after
the February 2007 changes to the FAR, we also reviewed some GSA orders
and contracts awarded by selected defense and civilian agencies prior
to the FAR changes to get a better understanding of the circumstances
of those procurements--such as whether the contracts were miscoded. We
corroborated contract file information by interviewing over 100
contracting and policy officials at all of the selected agencies.
At DOD, we selected Air Force, Army, and Navy locations that had high
reported obligations for commercial services using T&M contracts,
coupled with the geographic location of the contracting activities. At
each DOD location, we conducted a preliminary review of the contracts
through the department's electronic database system to corroborate FPDS-
NG information. We conducted file reviews and interviewed contracting
officials at the following locations:
Army:
* U.S. Army Medical Research Acquisition Activity, Fort Detrick;
Frederick, Maryland:
Air Force:
* Air Force Intelligence, Surveillance, and Reconnaissance Agency,
Lackland Air Force Base; San Antonio, Texas:
* Air Combat Command Acquisition Management and Integration Center,
Langley Air Force Base, Virginia (Contracts at this location were
awarded prior to the FAR change):
Navy:
* Fleet Industrial Supply Center, Norfolk; Norfolk, Virginia;
Philadelphia, Pennsylvania; Portsmouth, New Hampshire; Millington,
Tennessee; and Great Lakes, Illinois.
At the Army's Medical Research Acquisition Activity, we randomly
selected 20 non-GSA schedule contracts awarded after the February 2007
FAR Part 12 change, 5 non-GSA contracts awarded prior to the FAR
change, and 5 GSA schedule orders issued after the FAR change. Ten of
the 20 non-GSA contracts were indefinite-delivery contracts and 2 were
blanket purchase agreements. For these, we reviewed 13 T&M orders under
the indefinite-delivery contracts and 3 orders that had been placed
under 1 of the blanket purchase agreements. At the Navy, we reviewed
all of the non-GSA schedule contracts awarded during our selected time
period of October 1, 2001, to June 30, 2008, which included 20
contracts awarded after the FAR change and 5 awarded prior to the FAR
change.[Footnote 41] We also reviewed 5 randomly selected GSA schedule
orders that were awarded after the FAR change. At Lackland Air Force
Base, we reviewed all non-GSA schedule contracts reported as T&M using
commercial items acquisition procedures, including 1 awarded prior to
the FAR change. We reviewed all 7 GSA schedule orders awarded after the
FAR change that were reported as using T&M contracts for commercial
services. At Langley Air Force Base, which had the largest obligations
reported as T&M contracts for commercial services prior to the
enactment of the Services Acquisition Reform Act in November 2003, we
selected and reviewed 2 non-GSA T&M orders awarded prior to November
2003 that had been recently modified to better understand the
circumstances of these contracts. These 2 orders turned out to have
been miscoded in FPDS-NG as having used commercial items acquisition
procedures.
For the civilian agencies included in our scope, we reviewed all of the
T&M contracts for commercial services reported in FPDS-NG during the
October 2001 to June 2008 time period. We conducted file reviews and
interviewed contracting officials at the following civilian agency
components:
Department of Justice:
* Bureau of Alcohol, Tobacco, Firearms, and Explosives; Washington,
D.C.
* Drug Enforcement Agency; Arlington, Virginia:
* Federal Bureau of Investigation; Washington, D.C.
* Justice Management Division; Washington, D.C.
* Office of Justice Programs; Washington D.C.
* U.S. Marshals Service; Washington, D.C. and Oklahoma City, Oklahoma:
Health and Human Services:
* Centers for Disease Control and Prevention; Atlanta, Georgia:
* Food and Drug Administration; Rockville, Maryland:
* Health Resources and Services Administration; Rockville, Maryland:
* Indian Health Service; Oklahoma City, Oklahoma; Phoenix, Arizona, and
Window Rock, Arizona:
* National Institutes of Health; Bethesda, Maryland and Research
Triangle Park, North Carolina:
* Program Support Center; Rockville, Maryland; Kansas City, Missouri;
and Perry Point, Maryland:
* Substance Abuse and Mental Health Services Administration; Rockville,
Maryland:
* Centers for Medicare and Medicaid Services; Baltimore, Maryland:
NASA:
* John H. Glenn Research Center; Cleveland, Ohio:
* Goddard Space Flight Center; Greenbelt, Maryland:
Veterans Affairs:
* Cleveland Business Center; Cleveland, Ohio:
* Acquisition Management Section; Austin, Texas:
Table 7 contains details about the distribution of our contract sample
across the agencies in our review.
Table 7: GAO Sample of T&M Contracts and Orders for Commercial Services
Awarded Prior to and After the February 2007 FAR Change:
Agency: Air Force;
Non-GSA contracts and orders: Pre-FAR change: 3;
Non-GSA contracts and orders: Post-FAR change: 8;
GSA schedule orders: Pre-FAR change: 0;
GSA schedule orders: Post-FAR change: 7;
Total: 18.
Agency: Army;
Non-GSA contracts and orders: Pre-FAR change: 5;
Non-GSA contracts and orders: Post-FAR change: 28;
GSA schedule orders: Pre-FAR change: 0;
GSA schedule orders: Post-FAR change: 5;
Total: 38.
Agency: Navy;
Non-GSA contracts and orders: Pre-FAR change: 4;
Non-GSA contracts and orders: Post-FAR change: 20;
GSA schedule orders: Pre-FAR change: 0;
GSA schedule orders: Post-FAR change: 5;
Total: 29.
Agency: Justice;
Non-GSA contracts and orders: Pre-FAR change: 5;
Non-GSA contracts and orders: Post-FAR change: 7;
GSA schedule orders: Pre-FAR change: 0;
GSA schedule orders: Post-FAR change: 1;
Total: 13.
Agency: Health and Human Services;
Non-GSA contracts and orders: Pre-FAR change: 2;
Non-GSA contracts and orders: Post-FAR change: 20;
GSA schedule orders: Pre-FAR change: 4;
GSA schedule orders: Post-FAR change: 0;
Total: 26.
Agency: NASA;
Non-GSA contracts and orders: Pre-FAR change: 0;
Non-GSA contracts and orders: Post-FAR change: 1;
GSA schedule orders: Pre-FAR change: 1;
GSA schedule orders: Post-FAR change: 0;
Total: 2.
Agency: Veterans Affairs;
Non-GSA contracts and orders: Pre-FAR change: 1;
Non-GSA contracts and orders: Post-FAR change: 5;
GSA schedule orders: Pre-FAR change: 7;
GSA schedule orders: Post-FAR change: 10;
Total: 23.
Total non-GSA contracts and orders: 109;
Total GSA schedule orders: 40;
Total contracts and orders in sample: 149.
Source: GAO file reviews.
Note: Our sample of contracts and orders was selected from FPDS-NG data
from October 1, 2001, to June 30, 2008. "Pre-FAR change" means that the
contract or order was awarded prior to the changes to FAR Part 12
effective on February 12, 2007; "Post-FAR change" means the contract or
order was awarded after the FAR change effective date.
[End of table]
To identify the extent to which agencies have reported using T&M
contracts and GSA schedule orders for commercial services, we used FPDS-
NG data to determine the obligations reported as T&M awarded using FAR
Part 12 commercial items acquisitions procedures between February 12,
2007, when the FAR change authorizing T&M contracts for commercial
services went into effect, and December 31, 2008. We compared this
figure to total reported federal obligations for services, obligations
coded as having acquired commercial services, and obligations coded as
T&M contracts and orders during the same time period in order to
demonstrate the relative magnitude of T&M contracts for commercial
services. We discovered that many GSA schedule orders for T&M services
had been miscoded as having used FAR Part 12 procedures (when they had
actually used procedures under FAR Subpart 8.4) and brought this issue
to the attention of the Office of Federal Procurement Policy officials.
To determine the full picture of T&M obligations for commercial
services, we identified GSA schedule T&M orders that had not been coded
as having used commercial item procedures. We also used FPDS-NG data to
assess what proportion of the total reported T&M contracts for
commercial services was purchased through the GSA schedules program.
To test the reliability of FPDS-NG data, we used information from the
contract file and discussions with contracting officials. We confirmed
that a contract was used to acquire commercial services by reviewing
the contract for relevant commercial clauses (52.212-4--Contract Terms
and Conditions--Commercial Items) and other contract file
documentation--such as the acquisition plan or the standard contract
form for commercial item acquisitions (SF 1449)--that indicated that
commercial services were purchased. In some cases, in which the
evidence in the files was not sufficient to make this determination, we
confirmed that commercial services were acquired by speaking with the
contracting officer. To confirm that a contract was T&M, we reviewed
relevant contract documentation such as contract line item notations
(CLIN) and invoices, spoke with contracting officers, and applied FAR
descriptions of T&M or labor-hour contracts. To identify the types of
services agencies are acquiring using T&M contracts for commercial
services, we used FPDS-NG data to identify the top 10 commercial
services purchased under T&M contracts from February 12, 2007, to
December 31, 2008. We also analyzed the statements of work from
selected contracts in our sample to provide more detailed examples of
the types of services agencies are acquiring using these contracts.
When we discovered that some contracting officers had mistakenly
interpreted the fixed labor rate component of T&M contracts to mean
that these contracts are fixed-price type contracts, we decided to
review a nonrepresentative sample of contracts labeled as fixed-price
in FPDS-NG that were coded for the same types of services as the T&M
contracts for commercial services identified in our sample. Using DOD's
electronic database, we conducted a preliminary review of 60 DOD
contracts that had been coded as fixed-price contracts and selected 16
that possibly could have been T&M, based primarily on our
interpretation of language in the contract that suggested that the
contract was not fixed-price. To confirm whether these contracts were
T&M, we spoke with contracting officials and requested additional
contract documentation for 10 contracts at Lackland Air Force Base and
6 managed by the Fleet and Industrial Supply Center at Norfolk Naval
Base. Of these 16 contracts, 3 were confirmed to be incorrectly coded
as fixed-price in FPDS-NG due to data entry errors, and should have
been coded as T&M contracts.
To determine the degree to which agencies' use of FAR Part 12 to
acquire T&M services complies with the safeguards as incorporated in
the FAR, we reviewed the contract files for our sample contracts.
Specifically, we assessed: 1) whether the files contained a
determination and findings (D&F) stating that no other contract type is
suitable; 2) if applicable, the extent to which the D&F included FAR
Part 12 or Part 16 requirements for T&M contracts; and 3) whether
ceiling price increases included written documentation from the
contracting officer that they were in the best interest of the
procuring agency. We determined that a D&F met all the criteria if it
made reference to FAR Section 12.207 and at least mentioned all of the
required elements. For example, if a D&F stated the outcomes of the
market research conducted but did not describe the research conducted,
we still gave credit for having addressed the requirement in FAR
Section 12.207 to describe the market research conducted. A partial
Part 12 D&F included some but not all of the four required elements. We
also reviewed federal and agency-specific acquisition guidance and
regulations.
To determine the applicability of these safeguards to the GSA schedules
program, we reviewed GSA's ordering guidance to agencies and to its own
contracting officers and interviewed GSA policy and legal officials. We
also sent a letter on March 6, 2009, to GSA's General Counsel seeking
an opinion on the applicability of Section 8002(d) of FASA, as amended,
and FAR Section 12.207 to the GSA schedules contracts. We received a
response on April 15, 2009. Finally, we reviewed relevant past GAO and
Inspectors General reports on T&M contracts and commercial contracts
for context.
We conducted this performance audit from September 2008 to June 2009,
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
[End of section]
Appendix II: Comments from NASA:
National Aeronautics and Space Administration:
Headquarters:
Washington, DC 20546-0001:
Reply to: Contract Management Division:
June 11, 2009:
Mr. John P. Hutton:
Director, Acquisition and Sourcing Management:
United States Government Accountability Office:
Washington, DC 20548:
Dear Mr. Hutton:
Thank you for the opportunity to review draft report, "Contract
Management: Minimal Compliance with New Safeguards for Time-and-
Materials Contracts for Commercial Services and Safeguards Have Not
Been Applied to GSA Schedules Program," (GAO-09-579).
We found the report to be complete, concise, and accurate. In our
opinion, it provides a balanced view of the issues related to the
additional safeguards required to offset the potential risks associated
with using time-and-material contracts to purchase commercial services.
We do not have any technical comments to the draft report.
Again, thank you for the opportunity to provide comments on the draft
report and for your continued interest in improving Government contract
management.
Sincerely,
Signed by:
William P. McNally:
Assistant Administrator for Procurement:
[End of section]
Appendix III: Comments from the Department of Health and Human
Services:
Department Of Health & Human Services:
Office Of The Secretary:
Assistant Secretary for Legislation:
Washington, DC 20201:
June 5, 2009:
John P. Hutton:
Director:
Acquisition and Sourcing Management:
U.S. Government Accountability
Office: 441 G Street NW:
Washington, DC 20548:
Dear Mr. Hutton:
Enclosed are comments on the U.S. Government Accountability Office's
(GAO) report entitled: Contract Management: Minimal Compliance with New
Safeguards for Time-and-Materials Contracts for Commercial Services and
Safeguards Have Not Been Applied to GSA Schedules Program" (GAO-09-
579).
The Department appreciates the opportunity to review this report before
its publication.
Sincerely,
Signed by:
Barbara Pisaro Clark:
Acting Assistant Secretary for Legislation:
Attachment:
[End of letter]
General Comments Of The Department Of U.S. Health And Human Services
(HHS) On The Government Accountability Office's (GAO) Draft Report
Entitled, "Contract Management: Minimal Compliance With New Safeguards
For Time-And-Materials Contracts For Commercial Services And Safeguards
Have Not Been Applied To GSA Schedules Program" (GAO-09-579):
HHS agrees with GAO's recommendations to the Administrator of the
Office of Federal Procurement Policy. We will reinforce the need for
our acquisition community to comply with requirements for T&M and other
contract types. This will be accomplished through: (a) conducting
additional training; (b) discussing GAO's findings and sharing
successful practices at our quarterly Executive Committee for
Acquisition meetings; (c) incorporating Commercial Acquisition and FAR
Part 12 D&F requirements in our Procurement Management Review
protocols; and (d) verifying applicable FPDS coding.
Further, HHS issued mandatory, standardized contract file checklists to
its acquisition community in May 2009. These checklists are intended
to: (a) facilitate the consistent and logical placement of required
supporting documentation in contract files; (b) expedite the review of
acquisition files and the conduct of procurement management reviews;
(c) serve as a learning tool for contracting staff; and (d) foster
consistent implementation of acquisition regulations, policies, and
procedures. The checklists encompass all relevant Federal and HHS
acquisition guidance, including guidance pertaining to the requirements
identified in GAO's draft report (e.g., FAR Part 12 D&F).
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgements:
GAO Contact:
John Hutton, (202) 512-4841 or huttonj@gao.gov:
Acknowledgements:
In addition to the individual named above, Michele Mackin, Assistant
Director; Nicholas Alexander; Keya Chateauneuf; and Tatiana Winger made
key contributions to this report. Marie Ahearn, Arthur James, Jr.,
Julia Kennon, and Kenneth Patton also made contributions.
[End of section]
Footnotes:
[1] See GAO, Defense Contracting: Improved Insight and Controls Needed
over DOD's Time-and-Materials Contracts, [hyperlink,
http://www.gao.gov/products/GAO-07-273] (Washington, D.C.: June 29,
2007).
[2] In this report, we use the term "T&M" to refer to both T&M and
labor-hour contracts, as labor-hour contracts differ from T&M contracts
only in that the contractor does not supply materials.
[3] The FAR definition of commercial item includes commercial services,
which are defined as services of a type offered and sold competitively
in substantial quantities in the commercial marketplace based on
established catalog or market prices. FAR § 2.101. For the purpose of
this report, we are focused on the acquisition of commercial services.
In addition, we use the term fixed-price to refer to both firm-fixed-
price and fixed-price with economic price adjustment.
[4] Pub. L. No. 108-136, § 1436 (2003), which amended section 8002(d)
of the Federal Acquisition Streamlining Act of 1994, Pub. L. No. 103-
355.
[5] Our June 2007 report did not assess compliance with this
requirement, as it was implemented after our review was underway.
[6] On November 24, 2008, DOD revised its acquisition regulation, the
Defense Federal Acquisition Regulation Supplement (DFARS), to establish
D&F requirements for all T&M contracts for noncommercial services
similar to those required by section 12.207 of the FAR for T&M
contracts for commercial services. DFARS § 216.601.
[7] Pub. L. No. 103-355, § 8002(d).
[8] Our review was directed by the conferees in the Conference Report
accompanying the National Defense Authorization Act for Fiscal Year
2004. Although the Conference Report directed us to report on these
issues within 1 year of enactment of the act, we initiated our review
after the February 2007 FAR rule implementing the National Defense
Authorization Act for Fiscal Year 2004 provision went into effect.
[9] These obligations are indicated in data element 10H in FPDS-NG,
"Commercial Item Acquisition Procedures."
[10] FASA § 8002(d) and FAR § 12.207.
[11] The FAR provides that a time-and-materials contract provides no
positive profit incentive to the contractor for cost control or labor
efficiency. T&M contracts exhibit some characteristics of fixed-price
contracts in that T&M contracts contain fixed hourly labor rates and a
ceiling price which the contractor exceeds at its own risk. FAR §
16.601.
[12] FAR § 16.601(c).
[13] FAR § 16.601(d).
[14] Commercial items include items that are of a type customarily used
by the general public or nongovernmental entities for purposes other
than governmental purposes and have been sold, leased, or licensed to
the general public or have been offered for sale, lease or license to
the general public. 41 U.S.C.§ 403(12); FAR § 2.101, definition of
commercial item.
[15] Contracting officers may not request cost or pricing data if they
determine that prices have been subject to adequate price competition,
prices are set by law or regulation, or when a commercial item is
acquired. FAR § 15.403-1(b). The government is permitted to obtain
pricing information from sources other than the offering contractor to
support a determination of price reasonableness. If this information
proves inadequate, the government can require the offering contractor
to provide additional information, known as information other than cost
or pricing data, although the government must, to the maximum extent
practicable, limit the scope of the request to include only information
in a form regularly maintained by the offering contractor. FAR § 15.403-
3.
[16] Pub. L. No. 103-355, § 8002(d).
[17] Section 1432 of SARA, which is Title XIV of the National Defense
Authorization Act for Fiscal Year 2004, Pub. L. No. 108-136, (2003),
amended section 8002(d) of FASA.
[18] FAR § 12.207.
[19] FAR §12.207(c).
[20] FAR §16.601.
[21] [hyperlink, http://www.gao.gov/products/GAO-07-273].
[22] 41 U.S.C. § 403 (12).
[23] See section 805 of Title VIII of the National Defense
Authorization Act for Fiscal Year 2008. Pub. L. No. 110-181. As of May
29, 2009, the DFARS case that will implement this provision had not
been issued. The National Defense Authorization Act for Fiscal Year
2009, enacted October. 14, 2008, directed that the FAR be modified
within 180 days of enactment to include a similar provision, which
would be applied to all government agencies. Pub. L. 110-417 § 868
(2008). As of May 29, 2009, the FAR had not been revised to include the
provisions.
[24] We brought this issue to the attention of officials at the Office
of Federal Procurement Policy and GSA, who said they would look into
the matter.
[25] To confirm that the contracts in our sample were correctly coded
as having acquired commercial services or as T&M, we reviewed the
contracts and documentation in the contract files. For example, we
looked for relevant FAR clauses (FAR 52.212-4---Contract Terms and
Conditions-Commercial Items) in the contract to confirm that commercial
services were acquired. Where the documentation was not clear, we spoke
with contracting officers.
[26] A fixed-price contract provides for a firm price or, in
appropriate cases, an adjustable price. FAR § 16.201.
[27] The OFPP Administrator serves as chair of the Federal Acquisition
Regulatory Council (FAR Council). The FAR Council--whose members
include the DOD Director of Defense Procurement and Acquisition Policy,
NASA's Associate Administrator for Procurement, and the GSA Chief
Acquisition Officer--oversees development and maintenance of the FAR.
[28] Our discussions with contracting officers on this matter were of a
general nature. For specific procurements, market research is an
essential element for the acquisition of commercial items and is used
to establish the foundation for the agency description of need, the
solicitation, and resulting contract. FAR § 12.202.
[29] FAR Section 8.402(a).
[30] These 82 contracts and orders were confirmed as (1) T&M contracts
or orders for commercial services (2) having been awarded after the FAR
revisions to Part 12 took effect on February 12, 2007, and (3) not
having been awarded through GSA schedule contracts.
[31] There is no indication in the FAR that FAR Section 12.207 does not
apply to contracts below the simplified acquisition threshold, which is
generally $100,000. FAR Section 12.207 does not, however, apply to
purchases below the micropurchase threshold, which is generally $3,000.
See FAR Section 2.101 definition of the simplified acquisition and
micropurchase threshold.
[32] The 8(a) program is one of the federal government's primary means
for developing small businesses owned by socially and economically
disadvantaged individuals. Firms approved as 8(a) participants can
receive business development assistance from the Small Business
Administration.
[33] FAR Section 12.207 (b)(ii) provides that the contracting officer
authorize any subsequent change in the ceiling price only upon a
determination, documented in the contract file, that it is in the best
interest of the procuring agency to change the ceiling price. In the
examples presented here, the contracting officer did not always include
the statement that this change was in the best interest of the
procuring agency in the documentation, but nevertheless did include
information on the rationale for the ceiling price change.
[34] In addition, Navy headquarters issued a memo on March 31, 2009,
reminding contracting officials that the D&F is required for T&M
contracts for commercial services.
[35] 71 Fed. Reg. 74,667 (Dec. 12, 2006). We note that the September
20, 2004, advance notice of proposed rulemaking (ANPR), which solicited
comments that could be used to assist in implementing section 1432 of
the National Defense Authorization Act for Fiscal Year 2004 stated that
"This ANPR is not intended to affect the special ordering procedures
issued by the GSA pursuant to FAR 8.402.... [Schedules program]
policies regarding the placement of orders on a T&M and [labor hour]
basis will be conformed to the FAR when FAR coverage is finalized." 69
Fed. Reg. 56,316 (Sept. 20, 2004).
[36] See Subpart 8.4.
[37] 40 U.S.C § 501.
[38] FAR § 8.405-2.
[39] GSAR § 538.270.
[40] FAR § 8.405-2(d).
[41] We eliminated three Navy contracts that had been coded as non-GSA
schedule contracts awarded by the Norfolk location from our review for
different reasons: one turned out to be a blanket purchase agreement
under a GSA schedule contract; one had been awarded by a different Navy
location according to DOD's electronic contract database system; and
finally, contracting officers at the Norfolk Navy Shipyard could not
locate the third contract file.
[End of section]
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each
weekday, GAO posts newly released reports, testimony, and
correspondence on its Web site. To have GAO e-mail you a list of newly
posted products every afternoon, go to [hyperlink, http://www.gao.gov]
and select "E-mail Updates."
Order by Phone:
The price of each GAO publication reflects GAO‘s actual cost of
production and distribution and depends on the number of pages in the
publication and whether the publication is printed in color or black
and white. Pricing and ordering information is posted on GAO‘s Web
site, [hyperlink, http://www.gao.gov/ordering.htm].
Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537.
Orders may be paid for using American Express, Discover Card,
MasterCard, Visa, check, or money order. Call for additional
information.
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Ralph Dawn, Managing Director, dawnr@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
