Contract Management:

Minimal Compliance with New Safeguards for Time-and-Materials Contracts for Commercial Services and Safeguards Have Not Been Applied to GSA Schedules Program

GAO-09-579: Published: Jun 24, 2009. Publicly Released: Jun 24, 2009.

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Federal agencies have used time-and-materials (T&M) contracts to purchase billions of dollars in services. These contracts are risky because the government bears the risk of cost overruns. Effective February 2007, the Federal Acquisition Regulation (FAR) was revised, pursuant to a statutory change, to allow T&M contracts to be used to acquire commercial services under FAR Part 12, which uses a streamlined procurement process. Certain safeguards were included in FAR Part 12, including a requirement that contracting officers prepare a detailed determination and findings (D&F) that no other contract type is suitable. Based on a mandate to review the use of T&M contracts for commercial services, we assessed (1) agencies' reported use of such contracts and what they acquired, (2) the degree to which agencies complied with the new safeguards, and (3) the applicability of the safeguards to General Services Administration (GSA) schedule contracts. GAO reviewed contracts and orders at DOD and civilian agencies and spoke with contracting officials.

From February 2007 to December 2008, agencies reported using commercial item procedures under FAR Part 12 to buy a variety of services through T&M contracts; examples include emergency nursing services on Indian reservations and gunsmith services for the FBI. The reported value of these contracts was $4.4 billion--or less than 1 percent of the total federal dollars obligated for services during this period. Of the $4.4 billion, $3.1 billion had gone through GSA's schedules program. GAO identified about another $6 billion, in addition to the $3.1 billion, in T&M obligations for commercial services under GSA schedule contracts. The reliability of the data reported as T&M contracts using FAR Part 12 procedures is questionable. Of the 149 contracts GAO reviewed, 28 had been miscoded as acquiring commercial services or as T&M contracts. Another issue that indicates a potential underreporting of T&M contracts for commercial services is that contracting officials across the agencies had the mistaken impression that the fixed labor rate in T&M contracts makes these contracts fixed-price. GAO raised this issue with officials from the Office of Federal Procurement Policy (OFPP)--chair of the federal acquisition regulatory council--who agreed that clarification on what constitutes a fixed-price versus labor hour contract would be beneficial. Further, GAO found that contracting officials had different opinions of what generally constitutes a commercial service. Some viewed services intended to meet a specific government requirement as noncommercial, while others viewed similar services as commercial. The Part 12 D&F was rarely used for the contracts GAO reviewed. The D&F must incorporate four elements, such as a description of the market research conducted. Of 82 contracts reviewed that were explicitly subject to this D&F requirement, only 5 included all the required elements, and 9 partially met the requirement. Of the remaining contracts, 33 had no D&F at all and 35 included the less stringent D&F applicable to noncommercial T&M services. GAO found a general lack of awareness of the Part 12 D&F requirement at the agencies in this review. Agencies' internal management and legal reviews generally did not detect the failure to include the D&F. OFPP officials expressed concern about the lack of compliance with the D&F requirement. The Part 12 D&F requirement has not been applied to the GSA schedules program. GSA officials stated that the GSA Administrator has discretion about what procedures apply to the program. In a legal opinion to GAO on whether the statutory changes regarding T&M contracts for commercial services apply to the schedules program, GSA concluded that the applicability is uncertain but stated that existing regulations satisfy concerns about use of T&M under the schedules program. GAO notes that these regulations do not require the same level of detailed analysis as does the Part 12 D&F. Further, there is no indication that the statutory requirements cannot apply to items or services under the schedules program. GSA officials said they are in the process of developing a Part 12 D&F for the entire schedules program, but it is not clear how this D&F will act as a safeguard when T&M orders are used.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To help ensure that the risks associated with T&M contracts are understood and that safeguards are followed and to ensure consistency in the use of T&M contracts regardless of which part of the FAR authorizes their use, the Administrator of the Office of Federal Procurement Policy should take steps to amend FAR Subpart 16.6 (T&M, Labor-Hour and Letter Contracts) and FAR Subpart 16.2 (Fixed-Price Contracts) to make it clear that contracts with a fixed hourly rate and an estimated ceiling price are T&M or labor-hour contracts, not fixed-price-type contracts.

    Agency Affected: Executive Office of the President: Office of Management and Budget: Office of Federal Procurement Policy

    Status: Closed - Implemented

    Comments: The Office of Federal Procurement Policy agreed with the recommendation. Effective February 2, 2012, the Federal Acquisition Regulation (FAR) was revised at FAR Subpart 16.6 and FAR Subpart 16.2 to clarify that time and material contracts and labor hour contracts are not fixed price contracts. See Federal Register/Vol. 77. No. 1 (Jan 30, 2012). This recommendation is closed as implemented.

    Recommendation: To help ensure that the risks associated with T&M contracts are understood and that safeguards are followed and to ensure consistency in the use of T&M contracts regardless of which part of the FAR authorizes their use, the Administrator of the Office of Federal Procurement Policy should take steps to amend FAR Subpart 8.4 (pertaining to the GSA schedules program) to explicitly require the same safeguards for commercial T&M services--i.e., the FAR Part 12 D&F and the justification for changes to the ceiling price---that are required in FAR section 12.207.

    Agency Affected: Executive Office of the President: Office of Management and Budget: Office of Federal Procurement Policy

    Status: Closed - Implemented

    Comments: The Office of Federal Procurement Policy agreed with the recommendation. Effective February 2, 2012, the Federal Acquisition Regulation (FAR) was revised at FAR Subpart 8.4 to require a determination and findings similar to the one required in FAR Part 12 when placing a time and material or labor hour order under the General Service Administration Schedules program. FAR Subpart 8.4 was also revised to require the contracting officer to document that a change to the ceiling price is in the best interest of the government. See Federal Register/Vol. 77. No. 1 (Jan 30, 2012). This recommendation is closed as implemented.

    Recommendation: To help ensure that the risks associated with T&M contracts are understood and that safeguards are followed and to ensure consistency in the use of T&M contracts regardless of which part of the FAR authorizes their use, the Administrator of the Office of Federal Procurement Policy should provide guidance to contracting officials on the requirements in FAR section 12.207 for the detailed D&F for T&M or labor-hour contracts for commercial services and encourage agencies to provide training regarding the D&F requirement.

    Agency Affected: Executive Office of the President: Office of Management and Budget: Office of Federal Procurement Policy

    Status: Open

    Comments: The Office of Federal Procurement Policy (OFPP) agreed with the recommendation yet has not fully implemented it at this time. In reporting on its progress in implementing the recommendation, OFPP noted that it worked with the Federal Acquisition Regulatory Council to modify the section of the Federal Acquisition Regulation (FAR) pertaining to the use of the Federal Supply Schedules program. The FAR changes clarified that the determination and finding for time and material (T&M) and labor hour (LH) contracts must contain several elements, including a description of the market research performed for the acquisition and a description of the actions planned to maximize the use of fixed-price contracts on future or follow-on acquisitions. It also pointed to other regulatory changes that provided additional guidance to address actions required when raising the ceiling price or otherwise changing the scope of work for a T&M or LH contract. OFPP further noted that the General Service Administration guidance on using the Federal Supply Schedules addresses the requirements for the determination and finding. We will continue to follow up with OFPP to determine if guidance is issued to contracting officers on the determination requirements in the FAR for T&M or LH contracts for commercial services.

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