Part 16

[Voxx]

I am trying to get a better understanding of certain aspects of part 16. We do a fair number of contracts that are based upon an hourly rate (fixed) and number of hours to be worked. The only changes are if the contractor does not show up for work (they are sick that day). That hourly rate includes all the costs for the vendor---wages, profit, etc. These services are commercial in nature and have usually been awarded in the past to either 8(a) companies or via competition (either full and open or SB set-aside). However some in my organization say that these contracts/requirements should be T&M or labor hour contracts and not FFP. Looking at labor hour contracts I see:

16.602 Labor-hour contracts.

Description. A labor-hour contract is a variation of the time-and-materials contract, differing only in that materials are not supplied by the contractor. See <a href="https://www.acquisition.gov/far/current/html/Subpart%2012_2.html#wp1087410">12.207(b ), 16.601©, and 16.601(d) for application and limitations, for time-and-materials contracts that also apply to labor-hour contracts. See 12.207(b ) for the use of labor-hour contracts for certain commercial services.

Looking at the sections 12.207(b ), 16.601(c ) and 16.601 (d ) is not clearing it up for me.

I see references that a T&M or labor contract MAY be used for this but nothing that seems to state it must be used. Any advantages or dis-advantages to using T&M/Labor vs a FFP that gets adjusted depending upon the number of hours worked? Any reason why we cannot use a FFP or even an ID/IQ?

[Guest Vern Edwards]

We do a fair number of contracts that are based upon an hourly rate (fixed) and number of hours to be worked. The only changes are if the contractor does not show up for work (they are sick that day).nothing that seems to state it must be used.

Any advantages or dis-advantages to using T&M/Labor vs a FFP that gets adjusted depending upon the number of hours worked? Any reason why we cannot use a FFP or even an ID/IQ?

I don't know what you meant when you said that you have contracts "based on" an hourly rate and a number of hours. That is not enough useful information.

The key difference between FFP and T&M or L-H is not hourly rate pricing. The key difference is that under an FFP contract the contractor is paid only when it delivers the specified supplies or renders the specified service. Payment is further conditioned upon acceptance of the performance by the government.

A T&M or L-H contract does not require the contractor to complete any work or deliver anything as a condition of payment. The contractor is paid for every hour worked, regardless of accomplishment, and has no obligation to continue working once payments have reached a ceiling price unless the government raises the ceiling price.

What do your contracts require the contractor to do? Do they require the contractor to deliver acceptable work as a condition of payment? Why do your colleagues think the contracts should be T&M or L-H?

[Voxx]

For example, a requirement for an admin assistant, which is set up for 1920 hrs for the year at a rate of $30.00/hr for a total of $57,600. Let's keep it simple and say that is the only CLIN. The only possible change with this might be the number of hours such as if the person gets sick for a day. We would not pay that day because they were not there to do any work. But that would change the total number of hours and the total cost of the contract. The work statement would inlcude various tasks such as compiling data, coordinating meetings and such. And a QASP is in the contract to monitor performance.

One group here says that would still be a FFP since the cost per hour is a fixed price. And that this is no different than if we did a FFP for supplies where we did not order all the supplies through the year. At the end we would de-ob the money that was not used.

The others say that this should be a labor contract because it uses an hourly wage to pay the contractor. And really that is the only explaination I have gotten from that group. Simply that if it uses an hourly rate that it should be a labor contract.

I lean towards the FFP.

When you say that a contractor is not required to complete any work in a T&M, in what situation would you use such a contract?

[Guest Vern Edwards]

Your description of the contract is a mixed bag:

For example, a requirement for an admin assistant, which is set up for 1920 hrs for the year at a rate of $30.00/hr for a total of $57,600... The only possible change with this might be the number of hours such as if the person gets sick for a day. We would not pay that day because they were not there to do any work. But that would change the total number of hours and the total cost of the contract.

If the contractor is obligated to deliver the total number of hours, then why are you paying by the hour? Why aren't you paying a lump sum for the total?

Under a true fixed-price contract, failure of the admin. asst. to show up for work would be a breach of contract (although perhaps a minor one), not a "sick day" and not a "change." If the assigned assistant became ill the contractor would be required to fill the slot with someone else or face an unsatisfactory performance rating.

If you required a contractor to provide admin. asst. services for X number of months at a rate of $Y per month, and if the statement of work specified the working hours and duties of a secretary, and if monthly payment was conditioned upon delivery of the full month's worth of services performed satisfactorily, then it would be indisputable that you have a firm-fixed-price contract. If an admin. asst. ever fails to show, or fails to do what is required, the contractor might have defaulted and might not be entitled to the month's payment, depending on how long the absence continued or how serious the dereliction. (However, a brief absence or minor dereliction would probably not be a material failure to perform, and the government could not terminate for default or refuse to pay for an entire month. It could only take action under the Inspection and Payment clauses.)

The difference may seem subtle to you, and in some ways it is. But keep in mind that the reason we have to think about this is that the FAR describes various pricing arrangements, sets conditions for their use, and prescribes standard terms and conditions for each type. So we must differentiate. Again, the key is: Is full performance a condition precedent to payment of a firmly stipulated amount. If not, then you don't have an FFP contract. My response is based on the way you described the contract.

When do you use a T&M or L-H contract? In theory, you use one when you want a job done, but are not sure that it can be done or how long it will take to do it. The classic example is the repair of an item of equipment or an automobile when you are not sure what is wrong with it and what it will take to fix it. You pay the contractor to proceed and agree to pay at so much per hour but not more than a ceiling price. If the contractor reaches the ceiling and still has not completed the work, you assess the situation and either raise the ceiling and require the contractor to keep going or you call off the job.

What has happened is that the use of hourly rate payment for various kinds of services has blurred the distinctions between FFP and T&M or L-H. It is not the use of an hourly rate, per se, that determines the type of contract, but the nature of the contractor's obligation. Nevertheless, you could avoid the argument in your office by pricing the service by the month instead of by the hour and including a clause that stipulates a deduction rate when the service is not received. The deduction rate should not necessarily be based on the cost of an hour plus profit, but on an agreed upon stipulation of the damages suffered by the government when the work is not accomplished for some period of time. That amount might exceed the cost and profit of an hour of labor. Such a deduction scheme would apply not only in the event of an absence, but also if the employee, although present, was derelict in the performance of the specified work. The deduction would not be a payment withholding, but a payment denial based on the contractor's failure to perform in accordance with the terms of the contract. The clause should say that deduction does not constitute a waiver of the government's right to terminate the contract for default for failure to perform and that the government is still entitled to pursue all remedies available to it under the default clause.

[Voxx]

Thanks for the example of a T&M/labor contract. We don't typically see those kinds of contracts here.

When you mention inserting a clause that stipluates a deduction rate, are you talking about inserting written text or an actual clause? The only clause I can seem to find relating to this would be 52.323-1.

Though I do not understand what difference it makes in changing the unit from a per hour to a per month. Are not both just units of time? If you are paying for 8 hours of work a day, and the contractor is not there that day due to illness, can we not just say in the contract that we will not pay for hours that are not worked? Sure the contractor may receive negative ratings, especially if it happens often, and depending upon factors, the vendor could be found in default. Bear in mind that often these positions are not easily fillable by the vendor sending a replacement for one day as these positions would require a CAC, access to the computer systems, background checks and such. But I don't understand the difference between saying x amount per hour vs x amount per month. If you have in the contract that the Govt will not pay for hours not worked, what is the difference? Or are you saying that either would work but to avoid the argument, you would switch it to monthly but that either would work?

[Guest Vern Edwards]

You would have to write a clause. There is no standard clause.

Changing from hours to months merely avoids the controversy. Some people see hourly rates as per se indicative of T&M or L-H. That is not the case, as I have tried to point out. The key distinction is not the unit/rate of payment, but the nature of the contractor's obligation.

[Voxx]

Ok that was what I thought you were implying. Appreciate the the help.