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Prime Contract Employee is now a consultant to the Prime.


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Ladies and Gents of the Forum,

I have a situation where my organization is the Prime Contractor on a DOD T&M contract and one of my employees has left my company as the result of a move, but I would like to retain her services as a consultant from time to time in support of the same contract.

When she was my employee she was mapped to an IT Specialist Category at $XX/hour. Now that she is a consultant the CO wants us to provide a new rate for her. Can anyone shed any light on this situation? I was always under the assumption that we could map her to the same category at the same rate?

Any thoughts would be appreciated.

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Ladies and Gents of the Forum,

I have a situation where my organization is the Prime Contractor on a DOD T&M contract and one of my employees has left my company as the result of a move, but I would like to retain her services as a consultant from time to time in support of the same contract.

When she was my employee she was mapped to an IT Specialist Category at $XX/hour. Now that she is a consultant the CO wants us to provide a new rate for her. Can anyone shed any light on this situation? I was always under the assumption that we could map her to the same category at the same rate?

Any thoughts would be appreciated.

1. I have seen contract clauses prohibiting use of consultants without C.O. approval. Does your contract contain such a clause?

2. You might expect to use the same labor category at the same rate for the same work -- after all, it's common sense -- but the new DOD T&M payment clause interferes with that common sense approach. The fact is that, as a subcontractor, your new consultant will have a different cost to you than the former employee would have. The Government is concerned that there is a hidden windfall profit to your company if the same rates are used while the costs decreases.

Hope this helps.

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Ladies and Gents of the Forum,

I have a situation where my organization is the Prime Contractor on a DOD T&M contract and one of my employees has left my company as the result of a move, but I would like to retain her services as a consultant from time to time in support of the same contract.

When she was my employee she was mapped to an IT Specialist Category at $XX/hour. Now that she is a consultant the CO wants us to provide a new rate for her. Can anyone shed any light on this situation? I was always under the assumption that we could map her to the same category at the same rate?

Any thoughts would be appreciated.

On the other hand, consultants regularly cost more per hour than full-time employees which would increase the cost to the Government under T&M.

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The KO may be wanting you to justify the rate. Since she is now an independent consultant, I doubt that the indirect costs on her salary will be the same. And I dont agree that "consultants regularly cost more per hour than full-time employees". Independant consultants do not necessarily have high overheads. Here, are you saying that it doesnt matter on your contract whether a direct hire or a contractor performs the work regarding the contract T&M rate? What is the date of the contract?

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Thanks for the responses. In the past I have had contracts that allow you to map subcontractors/consultants to the rates agreed to for the prime. Most of these were GSA though. As this is not GSA and it falls under the DOD I would agree that the KO is wanting us to justify the rate to assure a fair and reasonable profit. I have done some reading since my post and I think it comes down to the requirements in DFAR 252.216-7002 which requires separate rates for each labor category proposed to be performed by the contractor, each subcontractor, and each division, subsidiary, or affiliate of the contractor under common control.

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On the other hand, consultants regularly cost more per hour than full-time employees which would increase the cost to the Government under T&M.

Leo1102,

Joel was diplomatic but I want to be clear to other readers. Your logic is wrong.

A consultant may or may not cost more per hour than a full time employee. We don't know. If I had to guess whether bigred's consultant cost the company more than a full-time employee, I would guess no, because bigred was willing to continue billing the consultant at the same rate the employee was being billed at. That suggests to me that the costs likely were not significantly higher for the consultant vs. the employee scenario. But we don't know for sure.

Why don't we know for sure whether consultants "regularly cost more per hour than full-time employees"?

Consultants usually charge a per hour rate. If charged as a direct cost, that charge is burdened with applicable contractor indirect costs (which will vary by contractor, but will almost certainly NOT include any fringe benefit costs). As a side note, if charged as an indirect cost, it probably receives no burden (or at most a G&A burden), but given the context of the discussion, that's very unlikely to be bigred's situation.

A full-time employee, on the other hand, charges a direct labor dollar amount per hour (based on annual salary or hourly wage rate), which is also burdened with applicable contractor indirect costs (which again will vary by contractor, but will almost certainly INCLUDE fringe benefit costs). It's not unheard of for a contractor total burden factor to exceed 100% or even 200% of direct labor dollars, especially if manufacturing is involved. I have personally seen contractors charge 400% or even 500% manufacturing overhead burdens on direct labor. Fringes run in the 30 - 40% range and aren't going down any time soon (because of soaring medical and pension costs). G&A is G&A, no telling what that rate is. So you can see that it is not at all clear which scenario represents the higher contractor costs (but I'd put my money on the full-time employee).

Regardless of the foregoing, the Government will NOT experience increased costs under a T&M contract type (all things being equal) because the contractual labor billing rates are fixed, and thus don't change simply because the contractor's costs vary. The only way that the Government would pay more would be to establish a higher labor billing rate for the consultant versus the labor rate that the consultant was billing at when he/she was a full-time contractor employee. And as I noted above, I don't think bigred would expect a significantly higher billing rate for the consultant.

Hope this helps.

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Leo1102,

Joel was diplomatic but I want to be clear to other readers. Your logic is wrong.

A consultant may or may not cost more per hour than a full time employee. We don't know. If I had to guess whether bigred's consultant cost the company more than a full-time employee, I would guess no, because bigred was willing to continue billing the consultant at the same rate the employee was being billed at. That suggests to me that the costs likely were not significantly higher for the consultant vs. the employee scenario. But we don't know for sure.

Why don't we know for sure whether consultants "regularly cost more per hour than full-time employees"?

Consultants usually charge a per hour rate. If charged as a direct cost, that charge is burdened with applicable contractor indirect costs (which will vary by contractor, but will almost certainly NOT include any fringe benefit costs). As a side note, if charged as an indirect cost, it probably receives no burden (or at most a G&A burden), but given the context of the discussion, that's very unlikely to be bigred's situation.

A full-time employee, on the other hand, charges a direct labor dollar amount per hour (based on annual salary or hourly wage rate), which is also burdened with applicable contractor indirect costs (which again will vary by contractor, but will almost certainly INCLUDE fringe benefit costs). It's not unheard of for a contractor total burden factor to exceed 100% or even 200% of direct labor dollars, especially if manufacturing is involved. I have personally seen contractors charge 400% or even 500% manufacturing overhead burdens on direct labor. Fringes run in the 30 - 40% range and aren't going down any time soon (because of soaring medical and pension costs). G&A is G&A, no telling what that rate is. So you can see that it is not at all clear which scenario represents the higher contractor costs (but I'd put my money on the full-time employee).

Regardless of the foregoing, the Government will NOT experience increased costs under a T&M contract type (all things being equal) because the contractual labor billing rates are fixed, and thus don't change simply because the contractor's costs vary. The only way that the Government would pay more would be to establish a higher labor billing rate for the consultant versus the labor rate that the consultant was billing at when he/she was a full-time contractor employee. And as I noted above, I don't think bigred would expect a significantly higher billing rate for the consultant.

Hope this helps.

here 2 help: Thanks for the detailed rebuttal to my e-mail. I learned a lot reading your response, the least of which is that I should not have responded to bigred's initial inquiry without having the knowledge required to do so.

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Don't beat yourself up too much Leo, as most people are unaware of the costs associated with full time regular employees.

I went through that at my former employer (defense contractor) who hired many consultants at $100 or more per hour. Some of the regular employees were being disrespectful to one of those consultants, so I showed them how much they cost the employer, including all the benefits, burdens and other costs such as SS, Workers Comp and employer matching taxes.

Then I showed them what the contractor had to cover with his pay that they themselves did not have to worry about, and they pretty much stopped beating his chops. Some of those people were in finance too, which shows that even people working in that arena do not fully understand compensation.

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Big red's employee has quit the company due to relocation, but will still perform the work that big red agreed to provide at a certain unit price hourly labor rate.

The contract contains the pre-2007 payment for time and materials contract clause.

If I were the KO, I certainly woudnt pay more than the unit price hourly rate we agreed to in the contract. But, as long as the service level doesn't change, I'd also think twice before demanding to renegotiate the labor rate.

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here 2 help: Thanks for the detailed rebuttal to my e-mail. I learned a lot reading your response, the least of which is that I should not have responded to bigred's initial inquiry without having the knowledge required to do so.

Leo1102,

What dwgerard said. No worries; I've made (more than) my share of missteps. This is a place for sharing and learning.

I just wanted to clarify for the other readers, so that they would better understand the position that the C.O. and bigred's company is in. I think Joel's response is reasonable and fair. I hope bigred posts a follow-up message to tell us how the issue was handled.

I just wanted to help.

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Guest Vern Edwards

here_2_help:

On Feb 24 you wrote:

You might expect to use the same labor category at the same rate for the same work -- after all, it's common sense -- but the new DOD T&M payment clause interferes with that common sense approach.

What new DOD T&M payment "clause" did you refer to? I have checked the DFARS and did not find any clause under 252.232 that addresses T&M contracts. Were you referring to the alternate solicitation provision at 252.216-7002? Were you referring to the FAR clause at 52.232-7, or to the commercial items version at 52.212-4, Alt. 1? If so, what part(s) of the provision or clause(s) interfere(s) with common sense regarding subcontractors, and how?

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