Caution Regarding Substitutions for Contracted Skill Levels

T&M (Time and Material) contracts are common Government contract types. These contracts are usually issued when the Government cannot realistically estimate the requirements or the requirements cannot be known at the time of award. Firefighting is a good example. The Government wants to have forest/brush fire fighting capability under contract but the requirements depend on the number of forest fires which cannot be reasonably or accurately forecast.

There are special schedules in annual incurred cost submissions that require contractors to list their T&M contracts and then to detail the billings submitted to the Government for the work performed. Auditors generally focus on two areas related to T&M contracts; (i) are the hours charged to the Government supported by the contractors books and records and (ii) do the employees charging those hours meet the labor qualification set forth in the contract. Auditors might also compare the billing rates to the contract rates but this usually is not a high-risk are that auditors desire to pursue.

At one time, contract auditors were instructed to question any costs for work performed by employees who did not meet the qualifications for the position. So, for example, if the position called for an engineer with a graduate degree and the auditor found the engineer had only a bachelor degree, the auditor would question the entire charges.

The problem with this practice is that in many cases, contracting officers had approved the lesser qualifications or were satisfied with the services rendered by lesser qualified persons and approved it after the fact. This resulted in a significant waste of time by auditors, contractor personnel and contracting officers in developing findings, responding to findings and resolving findings.

In 2014, things came to a head and DoD insisted that before the contract auditors question any costs for work performed by under-qualified individuals, they first contract the contracting officer to determine whether approval was granted to the contractor to utilize those employees for the required tasks. But that's not all. If the contracting officer did not approve substitutions, the contract auditor must ask whether, under the circumstances, if retro-active approval will be given. If so, auditors should not question any costs.

If you're a T&M contractor and find yourself in similar situations, be sure to obtain contracting officer approval before substituting skill levels for contract minimums. Even if you need to adjust the contract price as a result, you should still be profitable.