Federal Audit Blasts Use of Time-and-Materials Contracts

The federal Government Accountability Office (GAO) recently published a critical audit of the widespread use by federal agencies of time-and-material contracts in procuring a variety of commercial services. "These contracts are risky because the government bears the risk of cost overruns," the audit noted.

Here are a couple of resources related to this audit by GAO:

• GAO Audit Report to Congress (47 pages)
• Summary article on the Audit in FederalTimes.com
  

There are a couple of different models for negotiation and payment of services provided in a contract:

• Time-and-Materials: The public agency pays the provider for the actual cost of materials used and agrees to a negotiated hourly rate for labor. Under this model, there is no incentive for contractors to control costs. The more hours they spend on a project, the more they get paid. It is almost a guaranteed employment program for the contractor. Time-and-Materials are often used on public works construction project change orders where such work is often referred to as "force account" work. What makes this a more controlled process for the public agency is that the agency will have their own inspectors present monitoring the work of the contractor. Even with such monitoring, however, productivity is not defined and a slower, less efficient contractor may end up spending more hours than another contractor would.
  
  
• Time-and-Materials, Not-to-Exceed: This is similar to the pure Time-and-Materials contract, but with one critical distinction: the dollar amount of the work is capped at a maximum. In other words, both parties agree that the scope of work is valued at a certain maximum. The public agency agrees to pay the contractor up to the maximum, based on documented time spent and materials actually purchased for the project. If the project takes fewer hours and materials cost less than estimated, the public agency pays less than the Not-to-Exceed amount.
  
  
• Lump Sum: Lump Sum contracts are generally used on public works construction projects where the contractor bids a lump sum (sometimes based on specific unit prices) to perform the work. They are also used in negotiating other types of contracts. Regardless of how much time or money it takes to perform the scope of work, the public agency agrees to pay the Lump Sum amount. This works well in a competitive bidding situation. In a negotiated bid, the public agency must be savvy on how to negotiate, must have a very clearly defined scope of work, and have the ability to estimate the actual value of the services. On a project that does not have a well defined scope of work, contractors may be reluctant to agree to a Lump Sum price. If a contractor does agree to a Lump Sum amount for a less than clear scope of work, the price may be significantly higher than what the public agency might expect in order for the contractor to cover their risk for the unknown conditions of the project.
  

The different pricing models are really all about which party bears the risk in contracting. Other than in competitive bid situations, it is critical for the public agency to have appropriate skills in negotiating contracts.