Friday, January 13, 2012

Time and Material Contracts - Be Careful How You Bill

Under Time and Material (T&M) contracts, the Government pays contractors based on fixed hourly rates plus the cost of any materials used. The fixed hourly rates are fully loaded rates and include fringe benefits, indirect expense allocations, and profit. The final price of a T&M contract is tied to the actual hours a contractor works. The Government considers the T&M contract to be one of the riskiest contract types because there is really no positive profit incentive for cost control or labor efficiency. Not surprisingly, there are a number of FAR provisions that require to Government to prepare solid justification whenever a T&M contract is contemplated.

T&M contracts typically include hourly rates for various labor classifications. Thus, a senior engineer would  carry a different (and higher) rate than a technician. The rates are based on specific qualifications for the each particular labor category. The qualifications might be educational, certifications, years of experience, or any number of knowledge, skill, and ability criteria. When the Government "buys" labor under a T&M contract, it usually specifies the labor category it wants to "buy" as well as the number of hours needed.

Contractors are expected to assign employees to the contract that meet the requisite qualifications of the contracted position. If, for example, a Sr. Engineer required a Bachelor's degree in electrical engineering plus ten years of experience, the employees assigned to perform the contracted work, must possess those qualifications. It does not matter that an employee not meeting those qualifications can perform as well as or better than one that does meet those qualifications. The Government contracted for a particular qualification and expects that employees assigned to perform the work meet those qualifications.

Because T&M contracts are considered high risk, the Government performs increased oversight on those contracts. After contract award, the contracting officer establishes a surveillance plan that includes floorchecks and other oversight activities. Most likely, the contracting officer will require the contractor to demonstrate that it is performing efficiently and using effective cost control measures. Floorchecks are used to ensure that the employees assigned to specific job categories meet the qualifications of those positions. And, herein lies our advice. Be certain that you are not billing for time when the positions are filled by those who do not possess the requisite qualifications. Many contractors have had to compensate the Government when they were found to billed for work performed by under-qualified individuals. Some have even faced civil and criminal penalties.

A recent settlement announced by the Department of Justice illustrates the importance of this advice. A contractor agreed to pay $700 thousand to settle allegations that it overbilled for labor on a T&M contract. The Government claimed that during the performance of an army contract, the company falsely billed the government for labor performed by employees who lacked the qualifications specified by the contract for the rates billed to the Government.

In this case, however, it wasn't Government oversight that disclosed the fraud. It was an employee of the company that blew the whistle and filed a "qui tam" action under the False Claims Act. The qui tam provision permits private parties to file actions on behalf of the US and receive a portion of the recovery if the Government takes over the case and reaches a monetary settlement with the defendant.

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