T&M Contracts to Include Separate Rates for Primes and Subs

The Department of Homeland Security (DHS) is proposing to limit the options available for pricing T&M and labor hour contracts. Look for other Agencies to follow their lead as the concern that contractors are earning windfall profits on T&M contracts continues to proliferate.

FAR policy currently provides that T&M (and labor hour) contracts can be priced using a single set of rates (composite rates) for a prime contractor and all of its subcontractors and affiliates, or to require separate rates for the prime contractor and each of its subcontractors and affiliates. FAR also states that individual agencies can make the use of separate rates mandatory (see FAR 16.601(e)).

DHS wants to make the use of separate rates mandatory. Under its proposed regulation, offers will be required to submit offers that include separate labor hour rates for subcontractors and affiliates. The purpose of this proposed procedure is to ensure appropriate labor hour rates are paid under T&M/labor hour contracts and orders. "The procedures are intended to eliminate unintentional windfall payments to the prime contractor that might otherwise result from work performed by lower labor rate subcontractors or affiliates that is billed at a higher prime contractor labor hour rate.