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A current solicitation describes the following:

B.2 PAYMENT, CEILING, AND WITHHOLDING

The Government will pay the Contractor for the number of hours worked, following the procedures in FAR 52.232-7, Section I, of this contract. Estimated Other Direct Costs (ODC) included in the contract are for the purchase of necessary quality assurance related items.

The Contractor shall not exceed the ceiling prices, shown in pricing tables in Section B, either in total or for any category. The ceiling prices contained herein can only be changed by a contract modification signed by the Contracting Officer (CO).

The Government may impose a deduction from the amount of payment for each instance of unacceptable performance or non-performance in accordance with Exhibit B

Vern noted that some agencies were doing this in a publication on Time-and-Materials Contracts.

I understand the intention on the part of the Government, but has anyone seen this backfire or on the Government or Contractor? Things to note prior to bidding on this type of contract?

FAR 16.601(a) A time-and-materials contract provides no positive profit incentive to the contractor for cost control or labor efficiency. Therefore, appropriate Government surveillance of contractor performance is required to give reasonable assurance that efficient methods and effective cost controls are being used.

In this case, the Government has managed to come up with a penalty or negative incentive. Is it possible to add a positive incentive under at Time and Material contract?

In the solicitation above, there's an incentive to do the job to expectations, but no profit incentive to exceed expectations.

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Interesting that each category in the pricing tables has a ceiling price. In the past I have always made each item an "estimated" quantity and amount, and waited until the end of the pricing schedule for "estimated total not to exceed." This has saved a lot of administrative effort, but it does require close monitoring of line item quantities and amounts during performance. (Watch your "burn rate.")

See 52.246-6, Inspection -- Time-and-Material and Labor-Hour, for handling unacceptable performance or non-performance. This is not new. As with cost type contracts, under T&M if a contractor messes up, they get paid to fix it, less profit (excepting fraud, lack of faith, willful misconduct, etc.).

What might be new is if Exhibit B provides for deduction greater than "...that portion of the rate attributable to profit." Let us hope not.

If B.2 provides for deduction greater than that contemplated in a mandatory FAR clause, which governs? This would be material for a bidder question during the solicitation stage.

In these tough economic times, the incentive to exceed expectations is the opportunity to earn the best possible performance evaluation to help keep T&M contracts either through option or re-competition (since much T&M work is continuing service type work), and to help win new work.

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