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BrianR

FAR changes for T&M and L-H contracts--Is there a problem?

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I may be woefully misinformed about contract scope issues, so if that is the case, let me know so this topic can die a peaceful, uneventful death....

I have always been of the opinion that any post award increase in the ceiling amount of a T&M or L-H contract was a de facto change to the scope of the contract. As such, I have advised that a sole source or limited source justification must accompany any such increase. (The requirement for D&F's in order to utilize these two types of contracts did not seem very confusing to me.) But along come the FAR Councils to clear up any ambiguity the FAR may have caused in that regard, basically saying that in addition to the D&F’s an increase to the ceiling amounts may require the issuance of sole source justifications.

The FAR case 2011-025, along with the resulting Fed. Register notice, identify the issue as such:

"SUMMARY: DoD, GSA, and NASA are proposing to amend the Federal Acquisition Regulation (FAR) to provide additional guidance when raising the ceiling price or otherwise changing the scope of work for a time-and-materials (T&M) or labor-hour (LH) contract or order."

"The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (Councils) were concerned that contracting officers may erroneously conclude that a Determination and Findings (D&F) is always sufficient to justify a change in the ceiling price."

I added the italics here because I interpret the first sentence--which includes the word "otherwise"--to mean that raising the ceiling price is but one way to change the scope of a contract, among many other ways. Are you with me here? If raising the ceiling price--by itself--does not change the scope of the contract, shouldn't the language read: "raising the ceiling price or changing the scope of work..." dispensing with the word "otherwise?"

In the second sentence, by indicating that use of a D&F is not always sufficient to justify a change in the ceiling price, the Councils seem to be saying that there are circumstances when the ceiling price of a L-H or T&M contract can be raised that will not change the scope of the contract.

Likewise, the actual FAR language the Councils adopted says:

"16.601 Time-and-materials contracts.

* * * * *

(d) Limitations. A time-and-materials contract or order may be used only if—

* * * * *

(2) The contract or order includes a ceiling price that the contractor exceeds at its own risk. Also see 12.207(B) for further limitations on use of time-and-materials or labor-hour contracts for acquisition of commercial items.

(e) Post award requirements. Prior to an increase in the ceiling price of a time-and-materials or labor-hour contract or order, the contracting officer shall—

(1) Conduct an analysis of pricing and other relevant factors to determine if the action is in the best interest of the Government;

(2) Document the decision in the contract or order file; and

(3) When making a change that modifies the general scope of—

(i) A contract, follow the procedures at 6.303;

(ii) An order issued under the Federal Supply Schedules, follow the procedures at 8.405-6; or

(iii) An order issued under multiple award task and delivery order contracts, follow the procedures at 16.505(B)(2).

* * * * * "

As I read the new FAR language (see italics), increasing the ceiling price of a T&M or L-H contract does not--in and of itself--change the scope of the contract.

So my question: Is this correct? I have always understood that adding quantities (hours) above the contractual maximum was viewed as an out-of-scope change. The FAR Councils seem to think otherwise. Can anyone give me an example of when this may be the case?

Are we headed down the road where we must perform an analysis of whether adding hours above the contract ceiling amount was somehow within the scope of the original competition (does that even make sense in regard to contracts that contain a ceiling price with a warning to contractors that they exceed the ceiling at their own risk)? Should we now be placing a statement in all L-H and T&M contracts that the contractual maximum is “x” unless the Government decides to increase it? How does this square with the “materially different” test? A labor hour is a labor hour, one could argue in all cases. Doesn’t exceeding the contract ceiling mean that the changed contract is materially different from the original, or do we start comparing the value of the change to the original contract amount—is it materially different if the change is small: What if is it only $100 dollars? $1,000? $1,000,000? Or what if the change only represents a 10% increase in the overall value of the contract? What about a 50% increase? 100% increase?

Have I been naïve all these years thinking that—with regard to adding hours to a L-H contract—that the contractual ceiling price was a fairly bright line between what was in-scope and what was outside of the scope of the contract? Or have the FAR Councils created a greater ambiguity than the one they wanted to solve?

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I think you have misunderstood the nature of a T&M/LH contract. Such a contract does not purchase hours. That is what a level of effort contract does. Under a T&M/LH contract, you award a contract to a contractor to perform a job at a not to exceed amount. If the job costs more than anticipated, the ceiling price can be raised to provide more funding. This is akin to raising the estimated cost of a cost reimbursement completion contract under the Limitation of Cost clause. The scope of the contract is not changed in this circumstance, only the cost of performance.

On the other hand, if the description of the job is changed, i.e., a change order is issued, a determination has to be made as to whether the change is within the general scope of the contract. If it is, and the change causes an increase to the ceiling price, the contract is to be equitably adjusted. See FAR 52.243-3. Under this clause, changes within the general scope of the contract are permitted, but not changes that are outside the general scope of the contract.

Changes outside the general scope of the contract are commonly referred to as cardinal changes. In reality, these changes are new procurements as they are not authorized by the Changes clause. What the FAR is saying in that case is that the procedures for awarding a sole source contract need to be followed.

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BrianR:

I may be woefully misinformed about contract scope issues, so if that is the case, let me know... Have I been naïve all these years thinking that—with regard to adding hours to a L-H contract—that the contractual ceiling price was a fairly bright line between what was in-scope and what was outside of the scope of the contract?

I don't know about naive, but certainly misinformed.

Retread is correct and his explanation is perfect. You are wrong to think that T&M and L-H contracts are level of effort contracts. They are not, and they are not defined as such.

A T&M or L-H contract does not require the contractor to deliver a level of effort, i.e., a specified number of hours or some other unit of labor. It requires a contractor to perform a job. The ceiling price is not a level of effort that the contractor must deliver, but a limit on the government's obligation, which is necessary in order to avoid a violation of the Anti-deficiency Act. An increase in the ceiling price is ordinarily akin to funding an overrun on a cost-reimbursement contract. However, if the parties are increasing the ceiling price to cover the addition of work that is beyond scope, then they must comply with certain requirements, such as a sole-source justification and a D&F. The FAR case requires COs to perform an analysis when they increase the ceiling price in order to determine if the increase is the result of a change in scope. The FAR case makes perfect sense.

However, I do not agree with Retread that level of effort contracts "buy hours." They buy specified work. The number of hours is part of the specification, but only part. A level-of-effort contract requires the contractor to pursue specified work for a specified number of hours in return for a firm-fixed-price or fixed fee. The agency is not just "buying hours," it is buying specific work, and in order to be paid the price or the full fee the contractor must (1) do the specified work, (2) for the specified number of hours, and (3) perform acceptably. Retread is not the only one who uses the phrase "buying hours." I do not like it because it is imprecise and misleading.

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Vern:

Granted I may be misinformed. I was using the following definition of Level-of-effort contract:

A type of contract stating the work in terms of an amount of effort (usually labor hours or labor years) to be performed by specific classes of employees over a given period of time. There are four types of level-of-effort contracts: the FIXED-PRICE LEVEL OF EFFORT CONTRACT, the TIME AND MATERIALS CONTRACT, the LABOR-HOUR CONTRACT, and the TERM CONTRACT. See Cibinic & Nash, Formation of Governemnt Contracts 117-80 (3d ed. 1998)

This definition came from a book called "The Government Contracts Reference Book," with your name on the cover as one of the authors. Am I really misinformed?

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You are misinformed. My name is on the cover, but there are three other authors. I did not write that entry, and I disagree with it. I disagree with several of the entries, which is why I had them take my name off the upcoming 4th edition.

L-H and T&M contracts are not level-of-effort contracts, for the reasons given by Retread and me.

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Vern:

I work in an area that rarely--if ever--uses cost-reimbursement contracts. So I am curious; if we wanted to issue a level of effort contract on a fixed price basis, what form would it take? I know L-H and T&M contract types have been "redescribed" in the FAR as not being firm-fixed priced contracts per se, but they aren't really CPFF contracts either unless we used a "term" contract. Or is it your opinion that these should simply be classified as CPFF-type contracts altogether?

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What do you mean when you ask what form an FP LOE should take? Also, are you asking if T&M contracts should be classified as cost reimbursement contracts?

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[...fast forward to today...new follow-on question]

Re T&M or LH contracts: When, if ever, is it beneficial to explicitly state in the contract the hours per LCAT? Specifically, looking for feedback on possible Pros/Cons of including/not including the breakdown of hours per LCAT in the contract. Also, curious to see what is the common practice among other agencies in how to specify proposed LCATs in the contract

For example:

Option 1:

Task 1 - X,Y,Z:

LCAT SME1 NTE 50hrs at $100hr = $5k

LCAT SME2 NTE 100hrs at $150hr = $15k

Task 2 - X,Y,Z:

LCAT SME3 NTE 50hrs at $200hr = $10k

LCAT SME4 NTE 100hrs at $250hr = $25k

Ceiling Price = $55k

Option 2:

Task 1 - X,Y,Z:

Task 2 - X,Y,Z:

Approved LCATs:

LCAT SME1 at $100hr

LCAT SME2 at $150hr

LCAT SME3 at $200hr

LCAT SME4 at $250hr

Ceiling Price = $55k (calculated based upon Ktr proposing same level of effort and mix of labor as under Option 1; although, Ktr can use any mix found to be appropriate during actual performance; Gov provides appropriate surveillance of Ktr through QCP, etc.)

Appreciate some feedback.

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How about something like this--

------------------------------------------------------------

Item Description Qty Unit Unit Price Amount

------------------------------------------------------------

001 Task X 1 JB $50,000 $50,000

Contract Type:

Labor-Hour (LH)

The price shown is the

ceiling price.

Understanding of the parties:

Labor Hourly Est Est

Category Rate Hours Amount

-------- ------- ----- ----------

SME 1 $125.00 100 $12,500.00

SME 2 $ 95.00 250 $23,750.00

SME 3 $ 50.00 275 $13,750.00

Total $50,000.00

The contractor shall not incur actual hours for

any labor category beyond 110% of the number shown

above without the concurrence of the contracting

officer; even so, the ceiling price will remain

unchanged.

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The T&M standard payment clause – 52.232-7, Payments Under Time-and-Materials and Labor-Hour Contracts – does not preclude the use of either option one or option two.

In my experience, the labor category hours are frequently stated in the solicitation and contract. In many cases, the sum of the extensions of the hourly rates times the labor category hours is integral to establishing the evaluated price for purposes of source selection and the contract ceiling price. However, you can use other methods to develop the evaluated price for purposes of source selection. See B-299873, General Dynamics Information Technology, September 19, 2007.

With regard to the two options you identify, use the first option if you desire more control of the labor categories the contractor will use. Use the second if you are less concerned about which categories the contractor will use.

Your contract ceiling may help you decide which option to select. If you established a generous ceiling, you may not need to control labor category use as rigidly as you would with a low ceiling. (Note: be careful to give yourself a generous ceiling or you may face a CICA issue if you seek to raise the ceiling. See Liebert Corporation, B-232234.5, Apr 29, 1991)

I would advise against the approach suggested by ji20874 as I believe it represents a misguided amalgam of a fixed price and T&M contract. If you are paying the contractor a fixed price to complete the task, you have no right to control the expenditure of labor hours or the use of labor categories?

In this regard, don’t overlook FAR 16.600 – Scope: “Time-and-materials contracts and labor-hour contracts are not fixed-price contracts.”

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...With regard to the two options you identify, use the first option if you desire more control of the labor categories the contractor will use. Use the second if you are less concerned about which categories the contractor will use....

So, if a LH or T&M contract is not a "level-of-effort" contract, and thus, doesn't 'buy hours,' it seems to be counterintuitive to specify the estimated hours under a LH or T&M contract. LCATs and fixed hourly rates yes. Does this really boil down to how much 'control' [or Government surveillance] is required "to give reasonable assurance that efficient methods and effective cost controls are being used."?

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So, if a LH or T&M contract is not a "level-of-effort" contract, and thus, doesn't 'buy hours,' it seems to be counterintuitive to specify the estimated hours under a LH or T&M contract. LCATs and fixed hourly rates yes. Does this really boil down to how much 'control' [or Government surveillance] is required "to give reasonable assurance that efficient methods and effective cost controls are being used."?

Who said that a T&M or LH contract does not involve levels of effort? The T&M or LH is not a fixed price contract.

Both contract types provide for acquiring supplies or services on the basis of direct labor hours at specified fixed hourly rates that include wages, overhead, general and administrative expenses, and profit.

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Who said that a T&M or LH contract does not involve levels of effort? The T&M or LH is not a fixed price contract.

Both contract types provide for acquiring supplies or services on the basis of direct labor hours at specified fixed hourly rates that include wages, overhead, general and administrative expenses, and profit.

Well, I don't think anyone is saying T&M or LH contracts don't involve "levels of effort." They involve this information, as you state, to assist with establishing the ceiling price.

However, what I am saying is, based on the discussions under posts 4-6 above, is that, if a T&M or LH contract is not a true "level of effort" contract, whereby Gov is not requiring the Ktr to provide a specified level of effort, over a stated period of time, on work that can be stated only in general terms; and, is does not agree to pay Ktr a fixed dollar amt. (e.g. as is FAR 16.207 [FFP-LOE]), why would we state the "levels of effort" in the contract. I might not be able to "estimate accurately the extent or duration of the work, or to anticiapte costs with any reasonable degree of confidence," which is why I'm establishing a ceiling price, which sure, is based in part (or whole) on what we [Gov/Ktr] believe the "levels of effort" might be, but not too sure. I guess I'm looking for, yes, it makes sense to state the "levels of effort" in the contract if you require more control, or no, do not state the "levels of effort" because you're not "buying hours."

I agree "the T&M or LH is not a fixed price contract." I also agree with your last statement.

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