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How does the ?T&M payment? clause operate with the ?Limitations on Pass-Through Charges? clause - specifically for subcontractor labor under a T&M Contract. Which one takes precedence?

See

52.232-7 -- Payments Under Time-and-Materials and Labor-Hour Contracts.

The Government will pay the Contractor as follows upon the submission of vouchers approved by the Contracting Officer or the authorized representative:

(a) Hourly rate.

(1) Hourly rate means the rate(s) prescribed in the contract for payment for labor that meets the labor category qualifications of a labor category specified in the contract that are?

(i) Performed by the Contractor;

(ii) Performed by the Subcontractors;

vesus

52.215-23 ? Limitations on Pass-Through Charges.

(a) Definitions. As used in this clause--

?Added value? means that the Contractor performs subcontract management functions that the Contracting Officer determines are a benefit to the Government (e.g., processing orders of parts or services, maintaining inventory, reducing delivery lead times, managing multiple sources for contract requirements, coordinating deliveries, performing quality assurance functions).

?Excessive pass-through charge,? with respect to a Contractor or subcontractor that adds no or negligible value to a contract or subcontract, means a charge to the Government by the Contractor or subcontractor that is for indirect costs or profit/fee on work performed by a subcontractor (other than charges for the costs of managing subcontracts and any applicable indirect costs and associated profit/fee based on such costs).

?No or negligible value? means the Contractor or subcontractor cannot demonstrate to the Contracting Officer that its effort added value to the contract or subcontract in accomplishing the work performed under the contract (including task or delivery orders).

?Subcontract? means any contract, as defined in FAR 2.101, entered into by a subcontractor to furnish supplies or services for performance of the contract or a subcontract. It includes but is not limited to purchase orders, and changes and modifications to purchase orders.

?Subcontractor,? as defined in FAR 44.101, means any supplier, distributor, vendor, or firm that furnishes supplies or services to or for a prime Contractor or another subcontractor.

(:huh: General. The Government will not pay excessive pass-through charges. The Contracting Officer shall determine if excessive pass-through charges exist.

© Reporting. Required reporting of performance of work by the Contractor or a subcontractor. The Contractor shall notify the Contracting Officer in writing if?

(1) The Contractor changes the amount of subcontract effort after award such that it exceeds 70 percent of the total cost of work to be performed under the contract, task order, or delivery order. The notification shall identify the revised cost of the subcontract effort and shall include verification that the Contractor will provide added value; or

(2) Any subcontractor changes the amount of lower-tier subcontractor effort after award such that it exceeds 70 percent of the total cost of the work to be performed under its subcontract. The notification shall identify the revised cost of the subcontract effort and shall include verification that the subcontractor will provide added value as related to the work to be performed by the lower-tier subcontractor(s).

(d) Recovery of excessive pass-through charges. If the Contracting Officer determines that excessive pass-through charges exist;

(1) For other than fixed-price contracts, the excessive pass-through charges are unallowable in accordance with the provisions in FAR subpart 31.2

Is the ?T? in a T&M contract considered a fixed-price contract?

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The "T" in T&M is not considered fixed-price.

If the labor rates in a T&M contract are fair and reasonable, it would not seem to matter much whether the labor is self-performed or subcontracted out, but the pass-through limitations cannot be ignored.

One approach would be an Advance Agreement that specifically addresses the value added by the prime's performance of the management functions listed in the clause. If you are the prime, make your case and provide support. If you are the Government, use some healthy skepticism but keep an open mind.

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I don?t understand your answer with regards to the limitation clause can not be ignored. Per 15.408 for civilian agencies this clause can only apply to cost reimbursable type contracts - so we are OK there. But for DoD, subject to a number of exemptions, the clause applies to any contract type that isn?t fixed price.

It seems to me that if the government wanted to impose this clause they should ask for separate contract rates for prime work and subcontractor work.

The deliverable under a T&M/LH contract type is each hour work that meets the qualifications. One hour worked is one hour worked. For example, a LH task order that has two labor categories, a PM worked by the prime and a Technician worked by a subcontractor, has to look at the individual labor categories and not the total TO. It does not seem that ?pass through? has much meaning in a T&M/LH context.

I am thinking that you should not normally see this clause in T&M/LH DoD contracts.

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I don?t understand your answer with regards to the limitation clause can not be ignored. Per 15.408 for civilian agencies this clause can only apply to cost reimbursable type contracts - so we are OK there. But for DoD, subject to a number of exemptions, the clause applies to any contract type that isn?t fixed price.

It seems to me that if the government wanted to impose this clause they should ask for separate contract rates for prime work and subcontractor work.

The deliverable under a T&M/LH contract type is each hour work that meets the qualifications. One hour worked is one hour worked. For example, a LH task order that has two labor categories, a PM worked by the prime and a Technician worked by a subcontractor, has to look at the individual labor categories and not the total TO. It does not seem that ?pass through? has much meaning in a T&M/LH context.

I am thinking that you should not normally see this clause in T&M/LH DoD contracts.

whynot,

I'm struggling to understand your issue(s).

According to the requirements of 52.215-23, if the value of subcontracted work exceeds 70% of the total contract cost, then the contractor must report that fact and verify that it is adding value, as that term is defined in the contract clause. If the contracting officer determines that the prime is not adding value ("no or negligable value") then any indirect costs and associated profit/fee allocated by the prime contractor to its subcontractors' costs will be unallowable.

Please notice that costs that are billed to a customer pursuant to a contract's payment clause may or may not be the same as costs that are allocated to a contract in a contractor's accounting system.

Hope this helps.

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I don?t think in my example that the PM is adding value, or not, to the Technician. I think in a T&M/LH contract each category and each hour stands alone. Therefore, a subcontractor provided hour of work, always triggers excessive pass through ? which doesn?t make sense. If you look at the Task Order level, then a prime could simply load up the T&M/LH task order with unnecessary prime hours to generate value-add ? which doesn?t make sense either.

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I don?t think in my example that the PM is adding value, or not, to the Technician. I think in a T&M/LH contract each category and each hour stands alone. Therefore, a subcontractor provided hour of work, always triggers excessive pass through ? which doesn?t make sense. If you look at the Task Order level, then a prime could simply load up the T&M/LH task order with unnecessary prime hours to generate value-add ? which doesn?t make sense either.

whynot,

I don't think you are analyzing the situation correctly.

As I interpret clause requirements, a contractor cannot have excess pass-through costs unless it subcontracts at least 70% of the work. If it does, then it needs to demonstrate how it adds value. If the contracting officer determines that no or negligible value is being added, then the contractor is incurring unallowable costs and the clause tells me how to calculate the value of those unallowable costs.

I don't know why you think each category and each hour stands alone when the clause refers to the contract as a whole. The clause makes no sense only if you approach it from your point of view -- i.e., assuming that the 70% threshold applies to each labor hour. I don't believe that it does, so the clause works for me.

H2H

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The 70% is a reporting threshold - the clause allows for no excessive costs at any percentage.

My point is that it appears that the T&M/LH contract type, along with its unique payment clause, is inconsistent with the limitation clause. And it is not readily apparent how the resolution of this inconsistency would be achieved.

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Maybe the best way to look at this is to look at a real example (I don't have one):

Does anyone know of a DoD T&M/LH contract for commercial services awarded under FAR part 12 that also has the 52.215-23 ? Limitations on Pass-Through Charges clause?

If so, how is the 52.215-23 ? Limitations on Pass-Through Charges administered?

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The 70% is a reporting threshold - the clause allows for no excessive costs at any percentage.

My point is that it appears that the T&M/LH contract type, along with its unique payment clause, is inconsistent with the limitation clause. And it is not readily apparent how the resolution of this inconsistency would be achieved.

Yes, I'm starting to believe that is the right interpretation. Though it still baffles me how the disallowance process could work if there is no reporting and no determination of no/negligible value being added.

H2H -- standing corrected

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