T&M contracts are high risk for a number of reasons. First, it does not incentivize contractors to control costs. In fact, just the opposite. The more labor hours a contractor can throw at a task, the more profit it will make. Secondly, and this happens a lot, contractors sometimes provide a lesser skill than contemplated in the T&M rate. For example, the rate may have been developed for an Electrical Engineer II but the contractor uses an Electrical Engineer I for the task and bills at the Level II rate. From the Government's perspective, it doesn't matter that the work was performed satisfactorily by a lesser qualified individual - the Government paid for a higher skill level than it received. By comparison, under a cost-type contract (also considered a high-risk contracting vehicle), if the contractor utilized a lower skilled worker, the Government would have reimbursed it for the lower skill, not something higher.
T&M contracts can also be high-risk for contractors. T&M rates are fully burdened rates and include fringe, overhead, and G&A allocations. If the contractor (or subcontractor) understates any of these factors, it will be at risk of losing money on the deal (which may be one reason that some contractors are tempted to substitute lower skilled workers for the higher-rate jobs.
When awarding (or contemplating) T&M subcontracts, contractors should insure that their files contain sufficient facts and rationale to justify that no other subcontract type is suitable. Subcontract files should
- Include a description of the market research conducted
- Establish that it is not possible at the time of placing the contract or order to accurate estimate the extent or duration of the work or to anticipate costs with any reasonable degree of certainty
- Address why a cost-plus-fixed-fee or other cost-reimbursement, incentive, or fixed-price contract or order is not appropriate. Generally, a cost-plus-fixed-fee contract is preferred over a time-and-materials (or labor hour) contract type
- Establish that the requirement has been structured to minimize the use of T&M requirements
- Describe the actions planned to minimize the use of T&M (and labor-hour) subcontracts on future acquisitions of the same requirements.
Government reviews of contractor purchasing systems will undoubtedly include reviews of T&M subcontracts. It would be beneficial for contractors to have their files, justification, and support in order.