On December 12, 2006, the Federal Acquisition Regulation (FAR) Councils published a final rule amending FAR 12.207 to implement the Services Acquisition Reform Act of 2003 (SARA) and authorize expressly the use of time-and-materials (T&M) and labor-hour (LH) contracts for commercial services under certain conditions.

Consistent with SARA, the new rule authorizes T&M and LH contracts for commercial services only upon execution by the Contracting Officer (CO) of a determination and finding (D&F) that no other contract type is suitable and establishment of a ceiling price that the contractor exceeds at its own risk, and which may only be increased upon a written D&F that it is in the best interest of the Government.

D&F Requirements

Under the new rule, in order to use a T&M or LH contract for the acquisition of commercial services, the CO must execute a D&F that describes the market research conducted; justifies why the agency cannot "accurately estimate the duration of the work" or "anticipate costs with any reasonable degree of certainty;" establishes that the contract is structured to "maximize" fixed-price orders; and describes actions planned to maximize use of fixed-price contracts on future acquisitions for the same requirements.

For indefinite-delivery, indefinite-quantity (IDIQ) contracts, however, there is a separate D&F requirement. In order to use an IDIQ contract for the acquisition of commercial services on a T&M or LH basis, the CO must execute a D&F for the initial contract and for every T&M or LH order placed under the contract; the contract must allow the issuance of fixed price orders; and if fixed-price orders are not permitted, the D&F must explain why it is not practicable to provide for such orders.

Profit on Subcontractors Permissible

The rule as initially proposed would have limited reimbursement for qualifying commercial item subcontracts to actual costs unless reimbursement at the specified hourly rates was expressly authorized in the prime contract. This proposed methodology drew significant criticism because it was inconsistent with commercial practices and with other contract types that permit profit on subcontract costs. In addition, limiting reimbursement to actual costs had the potential to discourage subcontracts with small businesses. As a result, the final rule allows subcontractors to be billed at prime contract rates so long as the subcontractors' personnel "meet the labor qualifications specified in the contract."

Re-performance Required at Cost

The new rule also includes the Inspection/Acceptance terms and conditions used in non-commercial T&M and LH contracts. Under the new rule, at any time up to six months after acceptance, the Government may require a contractor to replace or correct services or materials that failed to meet contract requirements. The re-performing contractor can receive only its agreed-upon hourly rate, less the portion attributable to profit. The default profit rate is 10 percent. In addition, if a re-performing contractor fails to proceed with "reasonable promptness," the contractor may be required to pay excess re-procurement costs or the contract may be terminated. Finally, under the new rule, the Government may at any time require correction at no additional cost in the case of fraud, lack of good faith, or willful misconduct on the part of the contractor, or if contractor personnel are "habitually careless or unqualified."

Contracting Officers' Right to Conduct Employee Interviews

One of the more controversial aspects of the new rule gives COs access to "[e]mployees whose time has been included in any invoice for the purpose of verifying that these employees have worked the hours shown on the invoice." This provision was included in the new rule despite significant industry criticism that this audit right is not required by SARA or any other law and is inconsistent with commercial practices.

Unidentifiable Rebates, Refunds or Discounts Not Required to Be Credited to the Contract

Under the proposed rule, contractors would have been required to credit the Government for any rebates, refunds, or discounts received by or accrued to the contractor from purchases of materials under a commercial T&M or LH contract. In response to criticism that this provision was contrary to commercial practice, which does not rely on cost accounting information, the final rule requires contractors to reduce the costs of material only for any rebates, refunds, or discounts "that are identifiable to the contract."