Defense Contracting: Improved Insight and Controls Needed over DOD's Time-and-Materials Contracts

U.S. Government Accountability Office

Defense Contracting:

Improved Insight and Controls Needed over DOD's Time-and-Materials Contracts

GAO-07-273: Published: Jun 29, 2007. Publicly Released: Jun 29, 2007.

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Under time-and-materials contracts, payments to contractors are made based on the number of labor hours billed at hourly rates and, if applicable, other direct costs. Because of the risk they pose to the government, their use is supposed to be limited to cases where no other contract type is suitable. GAO was asked to identify trends in the Department of Defense's (DOD) obligations under time-and-materials contracts; analyze what DOD is buying under these contracts; assess why DOD is using them and whether actions are being taken to ensure that they are used only when no other contract type is suitable; evaluate DOD's monitoring of contractor performance; and determine the differences between the labor rates prime contractors bill DOD and the rates in their subcontracts. GAO reviewed 82 time-and-materials contracts, agreements, and orders and examined prime contract and subcontract labor rates on 12 additional contracts or agreements.

DOD's reported obligations under time-and-materials contracts increased from almost $5 billion in 1996 to about $10 billion in 2005. But this dollar amount is understated because DOD has not been coding contract type for orders placed under federal schedules (e.g., General Services Administration's schedule contracts). The accuracy of reported time-and-materials dollars should improve starting with fiscal year 2007 because DOD transitioned to the federal government's procurement information system, which requires contract type to be coded for every order. Over 75 percent of DOD's reported time-and-materials obligations are concentrated in three service categories: professional, administrative, and management support services; information technology and communications; and equipment maintenance and repair. Over 80 percent of these obligations are against task orders. DOD is also using time-and-materials contracts to acquire contract services to supplement the government workforce. Examples include intelligence support, advisory and assistance services, and systems engineering. DOD is turning to time-and-materials contracts because they can be awarded quickly and labor hours or categories can be adjusted if requirements are unclear or funding uncertain. Contracting officers' written determinations almost never included a rationale as to why a less risky contract type could not be used, and little attempt was made to convert follow-on work to a different contract type. Recent changes to federal acquisition regulations to allow for commercial services to be procured on a time-and-materials basis impose more stringent justification requirements, but most of the revisions do not apply to non-commercial procurements. Even though time-and-materials contracts call for appropriate government monitoring of contractor performance, there were wide discrepancies in the rigor with which monitoring was performed and most of the contracts and orders GAO reviewed did not include documented monitoring plans. In general, monitoring was based on contractor-provided monthly status reports showing the contractor's activities and amount of funds expended. Under some time-and-materials contracts, the prime contractor charged DOD at prime contract hourly rates for subcontracted labor. According to the Defense Contract Audit Agency, this practice can result in the prime contractor earning additional profits. GAO's analysis of billing rates under 13 contracts and agreements showed that when the prime contractor charged prime contract hourly rates for subcontracted labor, the difference between the prime's rates and those in their subcontracts ranged from negative 40 percent to 192 percent, with most in the 6 to 53 percent range. Recent revisions to federal acquisition regulations will mitigate this practice for certain types of acquisitions.

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Recommendations for Executive Action

Status: Closed - Implemented

Comments: DOD concurred with the recommendation and has issued a policy memorandum directing the military departments and defense agencies to establish procedures to analyze whether time-and-materials contracts are being used when other contract types are suitable.

Recommendation: To monitor and minimize DOD's use of time-and-materials contracts, the Secretary of Defense should direct the Director of Defense Procurement and Acquisition Policy to, for indefinite-quantity contracts that permit time-and-materials orders, require heads of contracting activities to analyze on an annual basis whether time-and-materials is being used as a default contract type when other pricing arrangements may be appropriate. The Secretary will need to determine appropriate risk-based criteria to select the contracts for such analysis.

Agency Affected: Department of Defense

Status: Closed - Implemented

Comments: In November 2008, the Defense Department amended the DFARS to require, for non-commercial acquisitions, contracting officers to structure contracts that authorize time-and-materials orders to also authorize orders on a cost-reimbursement, incentive, or fixed-price basis, to the maximum extent practicable.

Recommendation: To help ensure that all time-and-materials acquisitions receive the appropriate level of oversight, the Secretary of Defense should direct the Director of Defense Procurement and Acquisition Policy to amend the DFARS to require a similar level of justification for using time-and-materials for non-commercial services as that in the FAR for commercial services by requiring that contracting officers, to the maximum extent practicable, structure indefinite-quantity contracts to allow issuance of fixed-price or cost-reimbursable orders, so that time-and-materials is not the only option, with regard to non-commercial aquisitions.

Agency Affected: Department of Defense

Status: Closed - Implemented

Comments: In November 2008, the Defense Department amended the DFARS to require that, for non-commercial acquisitions, the determination and findings shall (1) contain sufficient facts and rationale to justify that no other contract type is suitable; (2) establish that it is not possible at the time of placing the contract or order to accurately estimate the extent or duration of the work, or to anticipate costs, thus preventing the use of a fixed-price or cost reimbursable contract; (3) establish that the requirement has been structured to minimize the use of time-and-materials contracts; and (4) describe the actions planned to minimize the use of time-and-materials contract on future acquisitions with the same requirements.

Recommendation: To help ensure that all time-and-materials acquisitions receive the appropriate level of oversight, the Secretary of Defense should direct the Director of Defense Procurement and Acquisition Policy to amend the DFARS to require a similar level of justification for using time-and-materials for non-commercial services as that in the FAR for commercial services by requiring that written justifications for the use of time-and-materials contracts and task orders contain sufficient facts and rationale to justify that no other contract type authorized is suitable; address the specific characteristics of the acquisition that prevent the use of either a cost-reimbursable or fixed-price contract; establish that the requirement has been structured to maximize the use of fixed price contract type on future acquisitions for the same or similar requirements; and describe actions planned to maximize the use of fixed-price contracts on future acquisitions for the same requirements, with regard to non-commercial acquisitions.

Agency Affected: Department of Defense

Status: Closed - Implemented

Comments: In November 2008, the Defense Department amended the Defense Federal Acquisition Regulation Supplement (DFARS) to require, for non-commercial acquisitions, contracting officers to execute a determination and findings (justification) for the basic contract if the indefinite-delivery contract only authorizes time-and-materials orders.

Recommendation: To help ensure that all time-and-materials acquisitions receive the appropriate level of oversight, the Secretary of Defense should direct the Director of Defense Procurement and Acquisition Policy to amend the DFARS to require a similar level of justification for using time-and-materials for non-commercial services as that in the FAR for commercial services by requiring that written justifications be prepared for indefinite-quantity contracts that allow only for time-and-materials orders, with regard to non-commercial acquisitions.

Agency Affected: Department of Defense

Status: Closed - Implemented

Comments: On November 24, 2008, the Defense Department amended the Defense Federal Acquisition Regulation Supplement (DFARS) case to require, for non-commercial acquisitions, contracting officers to execute a determination and findings (justification) for each order placed on a time-and-materials basis under an indefinite-delivery contract if the contract also permits orders on a cost-reimbursable, incentive, or fixed-price basis.

Recommendation: To help ensure that all time-and-materials acquisitions receive the appropriate level of oversight, the Secretary of Defense should direct the Director of Defense Procurement and Acquisition Policy to amend the Defense Federal Acquisition Regulation Supplement (DFARS) to require a similar level of justification for using time-and-materials for non-commercial services as that in the Federal Acquisition Regulation (FAR) for commercial services by requiring the contracting officer to execute written justifications for each time-and-materials task order issued under an indefinite-quantity contract, with regard to non-commercial acquisitions.

Agency Affected: Department of Defense

Status: Closed - Implemented

Comments: On July 14, 2008, the Director of Defense Procurement, Acquisition Policy, and Strategic Sourcing issued a memo stating that contracts for services, including time-and-materials contracts, must include quality assurance surveillance or monitoring plans. The memo instructed that these plans be tailored to address the performance risks inherent in the contract type and work effort. The memo also directed that the surveillance activities performed by contracting officer's representatives should be tailored to the dollar value/complexity of the specific contract for which they are designated.

Recommendation: To monitor and minimize DOD's use of time-and-materials contracts, the Secretary of Defense should direct the Director of Defense Procurement and Acquisition Policy to direct that monitoring plans for time-and-materials contracts recognize the risks inherent in this contract type and set forth specific activities to address these risks to the extent feasible.

Agency Affected: Department of Defense