New Regulation Proposed for Payments under Commercial Time-and-Material Contracts

Back in 2006, FAR was revised to expressly authorize the use of time-and-materials (T&M) and labor-hour contracts for commercial services under specified conditions as well as policies regarding payments under those contracts. The proposed change affects payments under T&M contracts that are terminated for cause.

Commercial T&M contracts include a termination for cause clause (FAR 42.212-4) that gives the Government the right to terminate commercial contracts. If the Government terminates the contract for the Government's convenience, the Government pays the contractor for work performed prior to the termination, plus reasonable charges resulting from the termination. If the Government terminates the contract for cause, the Government only pays for supplies and services ``accepted by the Government.''

The proposed change will, for contracts terminated for cause, allow the contractor to be paid for work performed prior to the termination for cause, including work not delivered or accepted by the Government, less applicable profit. 

When supplies or services do not conform to contract requirements, the Government generally rejects the supplies or services. The Government ordinarily provides contractors an opportunity to correct or replace nonconforming supplies or services when correction or replacement can be accomplished within the required delivery schedule. Correction or replacement is generally made without additional cost to the Government. However, certain contract types, including T&M contracts, generally require the Government to pay additional costs for replacement or correction, but no additional fee is paid. Payment for replacement or re-performance is consistent with the ``best efforts'' nature of T&M contracts. The Government generally pays for replacement and re-performance on both commercial and noncommercial T&M contracts.