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I recently received feedback on a T&M proposal that is prompting my question about fee maximums on time and material contracts. We had to submit a breakdown of the proposed labor categories which included the rate buildup and proposed fee. The proposal was made up of prime and subcontract labor and each category was clearly identified in the file. A fee percentage (greater than 10%) was put on prime labor while a lesser percentage was added to subcontractor labor. The contracting officer has referenced FAR 15.404-4(d)(1)(ii)(C) and advised that fee shouldn't exceed 10%. My understanding is that the maximum referenced in that clause is a contract maximum, not a limitation on each element of cost. Do you agree?

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FAR 15.404-4(d)(1)(ii)(C) does not in any way limit the profit that may be included in proposed T&M labor rates to 10 percent. Either the CO is confused, you are confused, or both of you are confused.

The subparagraph to which you referred deals only with a CO's analysis of cost risk to be factored into the development of the Government's negotiation objective. The CO might conclude on the basis of that analysis that the profit in a T&M rate should not exceed 10 percent, and might argue that with you, but the CO's conclusion does not constrain you from seeking or demanding a higher amount.

BTW, when talking about T&M labor rates, the correct term is profit, not "fee."

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It sounds to me like perhaps someone may be mistakenly interpreting the FAR 15.404-4(d)(1)(ii)(C) guidance to "treat time-and-materials . . . contracts as cost-plus-fixed-fee contracts" to call into effect the statutory limitation on fees for cost-plus-fixed-fee contracts of FAR 15.404-4(c)(4)(i)(C).  Such an interpretation is absolutely incorrect.  The guidance of FAR 15.404-4(d)(1)(ii)(C) applies only "in evaluating assumption of cost risk" in the overall scheme of profit analysis, in which contract cost risk is just one of seven factors to be considered.

 

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But remember, as Vern pointed out above, the contracting officer can still insist on a profit not exceeding 10% as part of the negotiating/bargaining process -- since a contractor in a T&M environment assumes very little cost risk, it seems fair for a contracting officer to try to negotiate a lower profit.  And you can insist on a profit exceeding 10% -- maybe some of the other factors (besides cost risk) would support a higher profit.  Somewhere down the road, hopefully the two of you will come to terms.

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ji20874,

I disagree with your assertion that, in a T&M contract, the contractor "assumes very little cost risk." If we just look at the "T" part of the contract, that is a firm, fixed-price per labor hour, with all the same cost risks of any FFP contract type. In addition, each T&M contract has a ceiling price "that the contractor exceeds at its own risk." (FAR 16.601(d)(2).)

Indeed, I would assert just the opposite -- that a T&M contract is just about the contract type with the highest cost risk for a contractor. Each hourly billing rate must be estimated, often months before performance starts, based on a personnel roster that will almost certainly change between the time of proposal submittal and commencement of performance. Each employee may receive salary increases between the time of proposal submittal and commencement of performance, and/or during contract performance. Indirect rates may change at any time. Performance may require use of overtime, which does not vary the negotiated rates. The contractor assumes all that risk and, in return, is offered a fee that excludes the cost of materials (FAR 52.232-7(b)(7).)

H2H

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We will have to disagree.  As a general proposition, a T&M contractor might have some risks, but cost risks are low.  The FAR drafters think so, too -- FAR 15.404-4( d )( 1 )( ii )( C ) says "In evaluating assumption of cost risk, contracting officers shall, except in unusual circumstances, treat time-and-materials . . . contracts as cost-plus-fixed-fee contracts," and the preceding paragraph rightly declares that "[t]he contractor assumes the least cost rist in a cost-plus-fixed-fee contract."

It is hard for me to imagine real cost risk in a billable hours situation -- that's the best possible situation for a contractor.  A smart contractor, in a sole-source T&M acquisition (such as the original poster's situation probably is) can take the Government to the cleaners.

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Well that's not right because FAR 30.604 states--

“Fixed-price contracts and subcontracts” means--

(1) Fixed-price contracts and subcontracts described at 16.202, 16.203 (except when price adjustments are based on actual costs of labor or material, described at 16.203-1(a)(2)), and 16.207;

(2) Fixed-price incentive contracts and subcontracts where the price is not adjusted based on actual costs incurred (Subpart 16.4);

(3) Orders issued under indefinite-delivery contracts and subcontracts where final payment is not based on actual costs incurred (Subpart 16.5); and

(4) The fixed-hourly rate portion of time-and-materials and labor- hours contracts and subcontracts (Subpart 16.6).

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Which two sentences in a T&M contract make it similar to a cost-reimbursement contract with respect to allocation of cost risk? The sentences appear in both commercial and noncommercial T&M contracts, with only minor word differences.

If you can't answer that question, then you don't understand the difference between T&M and fixed-price contracts.

Two sentences only, please.

H2H: The passage that you quoted does not appear in FAR 30.604. It appears in FAR 30.001 and 50.230-6. Also, it seems to me that your argument about the risk of a T&M contract is not sound with reference to T&M as a type, but might be sound for a particular T&M contract, depending on the number of labor rates, the length of its period of performance, and the organizational characteristics of the contractor.

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Vern,  

I suggest that the first sentence of paragraph (d) and the first sentence of paragraph (e) of FAR 52.232-7 [along with the first sentences of paragraphs (i)(2) and (i)(3) of FAR 52.212-4, Alternate I] make a T&M contract similar to a cost-reimbursement contract, because the former addresses the contractor's obligation to "use its best efforts to perform" within the ceiling price, and the latter addresses the fact that the contractor "shall not be obligated to continue performance if to do so would exceed the ceiling price . . . unless and until the Contracting Officer" increases the ceiling price.

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Vern,

Yes, I mis-cited. And I'll accept Navy's research findings because I didn't have time (yet) to do my own research.

And finally my experience with T&M contracts was drawn from mid-size and larger contractors, with large rosters and multiple salary bands--and multiple indirect rate pools. I accept that smaller companies, with only one or two people in each hourly labor rate category, and only one overhead pool, might be able to have an easier time managing their contracts.

H2H

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I agree with ji20874 in general with regard to cost risk, but can see instances where H2H's comments would be valid. Admittedly, I have a nominal amount of working experience with T&M and cost reimbursement type contracts.

As I see it, both T&M and cost reimbursement contract types are only used when uncertainties in contract performance don't permit costs to be estimated with sufficient accuracy to use a fixed-price contract.

Both have a cost ceiling that the contractor may not exceed (except at its own risk).

Both require government surveillance because neither provides positive profit incentive to the contractor for cost control or labor efficiency.

The huge difference I see between the two is a T&M contract has profit baked into every labor hour, which could put an enormous cost risk on the Government (or contractor if they don't price well)...

The contractor gets paid for effort not outcome - the longer performance continues the more risk the Government or contractor assumes, depending on pricing.

A contractor with a T&M contract would be rewarded with additional profit or losses if it is inefficient. Cost reimbursement contracts don't offer such a, positive or negative, profit incentive.

 

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Navy: Bingo!

Jamaal: The keys to T&M are that (1) the contract requires only a best effort, (2) payment is not linked to achievement, but to labor consumed, and (3) the contractor has a positive incentive to be labor-inefficient. The more labor used, the more profit earned, assuming that the labor costs per hour don't end up being higher than expected, as H2H has warned.

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