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Questions Concerning Time and Materials Contracts
By Anonymous on Tuesday, September 26, 2000 - 05:50 pm:


Issue A:

FAR 52.232-7 Payments Under Time and Materials and Labor-Hour Contracts (MAR 2000) specifies paragraph (a)(2) "Unless otherwise prescribed in the Schedule, the Contracting Officer shall withhold 5 percent of the amounts due under this paragraph (a), but the total amount withheld shall not exceed $50,000. The amounts withheld shall be retained until the execution and delivery of a release by the Contractor as provided in paragraph (f) of this section".

3 Questions:

1. What is the purpose of this withholding?

2. Under what circumstances may the contract schedule specify that the money will not be withheld, or will be withheld in a lesser percentage/amount? In what part of the schedule (seeing how the schedule is Sections B-H) should I specify this and what documentation of my decision to waive/reduce this requirement should I provide?

3. Who does the withholding? Does the contractor take the amount out of his invoices, or does the payment office, and how do I, as a PCO/ACO, make sure that everyone is aware of the requirement for the withholding and eventual release?

ISSUE B: The principle concerns of a T&M/L-H contract appear to be the ceiling price of the contract, the fixed price of the labor hours (and NOT the amount of time associated with those hours - they're just estimates used to develop the ceiling, but after award, its only the ceiling that matters) and the contractor's requirement to notify the Government appropriately when we're either approaching the ceiling or in danger of going beyond it. (Sorry for any oversimplification. Please indulge me for brevity's sake).

Any way, now to my question. I find that I specify a period of performance to go along with my T&M contracts and I'm suddenly asking myself "Why?" (that and I've got contracts with room left below the ceiling that specify the performance period as the end of the fiscal year).

Is the performance period an enforceable term of the contract?

Have I contracted for a contractor's best efforts up to a ceiling using fixed labor rates for a fixed period of time, or have I just contracted to a ceiling using a fixed labor rate (but not time) and he and/or I can take as long as he/I want as long as the other terms of the contract related to T&M/labor hours are obeyed?

Specifically, if I still have room up to the ceiling, but specified a 30 September end of performance, can I unilaterally require the contractor to continue working (even though his labor rates may otherwise be changing at that point and he'd understandably like them to be adjusted accordingly) and, if I can do it unilaterally, do I have to modify the contract to reflect a new performance period? If I can't do it unilaterally and the contractor isn't interested in working with me (let's say things haven't worked out as he/I planned), can I reduce my ceiling to its actual amount and deobligate dollars to use somewhere else (don't think my money people are gonna want to hear that)?

None of the T&M clauses (52.232-7, 52.243-3, 52.246-6) discuss period of performance, although 52.243-3 Changes (T&M/L-H) does mention "delivery schedule". Is that "delivery schedule" my period of performance and is he entitled to consideration for any changes in that period in accordance with the "CHANGES" clause?

Sorry for any run-on sentences or confusing/convoluted logic.

Please help me understand T&M/Labor Hour a little better.

By Vern Edwards on Wednesday, September 27, 2000 - 12:55 am:


Issue A.

Question 1. The purpose of withholding is to protect the interests of the government. Under a T&M contract, the contractor's payment is based upon incurred hours. The government has the right to audit the contractor to verify the contractor's invoices, but the government usually pays the contractor before it conducts an audit. The 5 percent withholding is designed to protect the government in the event that the contractor has billed the government for more hours than it actually incurred.

Question 2. The Schedule includes Sections A through H of the Uniform Contract Format. The most appropriate place to state that you do not intend to withhold would probably be in Section B, G, or H. It probably doesn't matter which of those sections you choose.

As to documentation of your decision not to withhold, do it in accordance with agency policy. If there is no agency policy, but you still want to document your decision, then prepare a memorandum to file and place it under the most appropriate file tab.

Question 3. It depends on your agency payment procedure. Presumably, someone must review and approve each invoice for payment before the paying office cuts a check. Whoever that is should mark the invoice as approved for the amount requested less 5 percent until you reach the $50,000 withholding limit. The paying office should then cut the check in accordance with the approval. This procedure should be coordinated with the paying office in advance.

Issue B.

Yes, the period of performance of a T&M contract is enforceable. Under a T&M contract the contractor promises to make its best effort to complete the work within the ceiling price and the period of performance. If it fails to make its best effort to do that it will have breached the contract. The contractor cannot take as long as it wants to do the job.

You can require the contractor to continue to make its best effort until it reaches the ceiling price or the end of the period of performance, whichever comes first. You cannot require the contractor to continue to perform after the expiration of the period of performance. The fact that the T&M clause does not mention the period of performance doesn't mean anything, since I assume that the parties agreed to a period of performance stipulated in Section F of the contract. You must read the contract as a whole, the clause and the other parts.

In order to change the period of performance, you must negotiate a supplemental (bilateral) agreement with the contractor.

If at the expiration of the period of performance the contractor has not finished the work despite making its best effort to do so, and has not reached the ceiling price, but does not want to continue to work with you, then the contract is over. You should deobligate any funds remaining on the contract, but I don't see any need to modify the ceiling amount.

If you changed the contract in ways that affected the time required to perform, then the contractor may be entitled to an equitable adjustment to the period of performance (delivery schedule) in accordance with the terms of the changes clause.