Proposed Rule for Payments Under Time-and-Materials and Labor-Hour Contracts

July 27, 2011

DoD, GSA, and NASA are proposing to amend the Federal Acquisition Regulation (FAR) to make necessary revisions to accommodate the authorization to use time-and-materials and labor-hour contract payment requirements. Reference Federal Register Volume 76, Number 144 (Wednesday, July 27, 2011).

On December 12, 2006, DoD, GSA, and NASA published two final FAR rules that made significant changes to the regulations for time-and-materials and labor-hour contracts:
(1) FAR Case 2003-027, Additional Commercial Contract Types, published in the Federal Register at 71 FR 74667, December 12, 2006, implemented section 1432 of the National Defense Authorization Act for Fiscal Year 2004 (Pub. L. 108-136). Title XIV of the Act, referred to as the Services Acquisition Reform Act of 2003, amended section 8002(d) of the Federal Acquisition Streamlining Act of 1994 (Pub. L. 103-355, 41 U.S.C. 3307) to expressly authorize the use of time-and-materials and labor-hour contracts for commercial services under specified conditions.
(2) FAR Case 2004-015, Payments Under Time-and-Materials and Labor-Hour Contracts, published in the Federal Register at 71 FR 74656, December 12, 2006, revised and clarified policies related to the award and administration of noncommercial time-and-materials and labor-hour contracts and the policies regarding payments made under those contracts.

This rule proposes to make additional changes to enable the use of appropriate payment provisions for time-and-materials and labor-hour contracts, addressing potential problems with the new time-and-materials regulations.

Discussion and Analysis
A. Commercial Time-and-Material (T&M) Contracts
Termination for Cause. FAR 52.212-4, Contract Terms and Conditions--Commercial Items, contains the provisions on the Government's right to terminate commercial contracts. If the Government terminates the contract for the Government's convenience, the Government pays the contractor for work performed prior to the termination, plus reasonable charges resulting from the termination. If the Government terminates the contract for cause, the Government only pays for supplies and services ''accepted by the Government.'' Alternate I of the clause establishes the termination-for-convenience provisions for commercial T&M contracts. Consistent with the basic clause, the Government pays contractors for work performed
prior to the termination plus reasonable charges that result from the termination. However, Alternate I does not provide any unique termination-for-cause provisions for commercial T&M contracts. Currently, without substitute/unique provisions, the termination-for-cause provisions of the basic clause apply. Under those provisions, the Government only pays for work ''accepted by the Government.'' However, those provisions are inconsistent with the longstanding noncommercial T&M termination-for-cause provisions. Alternate IV of FAR 52.249-6, Termination (Cost-Reimbursement), provides that the Government pays the contractor for work performed prior to the termination for cause. For labor ''not accepted by the Government,'' the Government pays for work performed, but does not pay any profit on the work. The proposed rule establishes commercial T&M termination-for-cause provisions that are consistent with the longstanding provisions for noncommercial T&M contracts. Under the proposed rule, the contractor will be paid for work performed prior to the termination for cause, including work ''not delivered to or accepted by the Government,'' less applicable profit.

B. Payment for Nonconforming Supplies and Services
When supplies or services do not conform to contract requirements, the Government generally rejects the supplies or services. The Government ordinarily provides contractors an opportunity to correct or replace nonconforming supplies or services when correction or replacement can be accomplished within the required delivery schedule. Correction or replacement is generally made without additional cost to the Government. However, certain contract types, including T&M contracts, generally require the Government to pay additional costs for replacement or correction, but no additional fee is paid. Payment for replacement or re-performance is consistent with the ''best efforts'' nature of T&M contracts. The Government generally pays for replacement and re-performance on both commercial and noncommercial T&M contracts.    However, a subtle difference in the terminology used for payments in the commercial and noncommercial T&M clauses may be causing confusion over whether the treatment for replacement and re-performance is the same on both commercial and noncommercial contracts. For noncommercial T&M contracts, FAR 52.232-7, Payments under Time-and-Materials and Labor-Hour Contracts, states--

''The Government will pay the Contractor as follows upon the submission of vouchers approved by the Contracting Officer or the authorized representative.''

In addition to the above coverage, paragraph (i)(1) of the commercial T&M clause (Alternate I of FAR 52.212-4, Contract Terms and Conditions--Commercial Items) states--

''Services accepted. Payment shall be made for services accepted by the Government that have been delivered to the delivery destinations(s) set forth in this contract.''

Inclusion of the additional text in the commercial T&M clause is unnecessary. Therefore, this rule proposes to delete the inappropriate text in the commercial T&M clause.

C. Commercial Item Materials
The payment provisions for commercial item materials are inconsistent in the commercial T&M clause and the noncommercial T&M clause. The noncommercial T&M clause provides that the price to be paid for commercial-item materials ''shall not exceed'' the contractor's established catalog or market price. The commercial T&M clause provides that the price to be paid for commercial-item materials ''shall be'' the contractor's established catalog or market price. Since commercial item pricing is subject to negotiation, the rule revises the commercial T&M clause to be consistent with the noncommercial clause.

D. Noncommercial Time-and-Materials
The Allowable Cost and Payment Clause, FAR 52.216-7, is a required contract clause for noncommercial time-and-materials contracts. However, a couple of the provisions of FAR 52.232-7, Payments Under Time-and-Materials and Labor-Hour Contracts, are inconsistent with provisions of the Allowable Cost and Payment FAR clause 52.216-7.
(a) Payment. The Allowable Cost and Payment FAR clause 52.216-7 authorizes bi-weekly invoicing for large businesses and more frequent invoicing for small businesses. However, FAR 52.232-7, Payments under Time-and-Materials Contracts and Labor-Hour Contracts, only authorizes monthly invoicing. By authorizing bi-weekly invoicing for time-and-materials contracts under FAR clause 52.232-7, the proposed rule aligns invoicing under time-and-materials contracts with invoicing under FAR 52.216-7. However, the rule does not change the frequency of invoicing under labor-hour contracts which remains at no more than once each month under revised Alternate I.
(b) Completion Voucher. The Allowable Cost and Payment, FAR clause 52.216-7 requires the contractor to submit a completion voucher within 120 days after settlement of final indirect cost rates. However, Time-and-Materials and Labor-Hour Contracts, FAR clause 52.232-7, requires submission of a completion voucher within one year after the contract is completed. By requiring the submission of the completion voucher within 120 days after contract completion for time-and-materials contracts under FAR clause 52.232-7, the proposed rule aligns the submission of the completion voucher under time-and-materials contracts with that prescribed under FAR clause 52.216-7. However, the rule does not change the requirement for the submission of the completion voucher under labor-hour contracts which remains at one year.

E. Application of FAR 52.216-7 to Time-and-Materials and Labor-Hour Contracts
This rule proposes to amend FAR 16.307(a)(1) to clarify that for time-and-materials contracts FAR clause 52.216-7 is used in conjunction with FAR clause 52.232-7, and that FAR clause 52.216-7 does not apply to labor-hour contracts. Revision of FAR 16.307(a)(1) and creation of new subparagraphs FAR 16.307(a)(3), (a)(4), and (a)(5). Creation of new Alternate clauses II, III, and IV at FAR 52.216-7. Currently, FAR 16.307(a)(1) contains a series of prescriptions to modify FAR clause 52.216-7, Allowable Cost and Payment, by changing the
particular subpart reference under part 31, Contract Cost Principles and Procedures, depending on the characterization of the business entity: educational institutions, State or local governments, or non-profit organizations. Consequently, this subparagraph is extremely busy and not reader friendly. For ease of reading and general clarity, FAR 16.307(a)(1) has been reduced significantly, and FAR subparagraphs 16.307(a)(3), (a)(4), and (a)(5) have been created. These new subparagraphs, respectively, prescribe the use of new Alternate clauses; II (educational institutions), III (state or local governments), and IV (non-profit organizations) at FAR 52.216-7. Each new alternate clause reflects the controlling subpart under part 31, e.g., subpart 31.3 for Alternate II (educational institutions).

Interested parties should submit written comments to the Regulatory Secretariat at one of the addressees shown below on or before September 26, 2011 to be considered in the formation of the final rule. Submit comments in response to FAR case 2011-003 by any of the following methods:
Regulations.gov: http://www.regulations.gov. Submit comments via the Federal eRulemaking portal by inputting ''FAR Case 2011-003'' under the heading ''Enter Keyword or ID'' and selecting ''Search.'' Select the link ''Submit a Comment'' that corresponds with ''FAR Case 2011-003.'' Follow the instructions provided at the ''Submit a Comment'' screen. Please include your name, company name (if any), and ''FAR Case 2011-003'' on your attached document.

Fax: (202) 501-4067.
Mail: General Services Administration, Regulatory Secretariat (MVCB), ATTN: Hada Flowers, 1275 First Street, NE., 7th Floor, Washington, DC 20417.
Instructions: Please submit comments only and cite FAR Case 2011-003, in all correspondence related to this case. All comments received will be posted without change to http://www.regulations.gov, including any personal and/or business confidential information provided.

FOR FURTHER INFORMATION CONTACT: Mr. Edward N. Chambers, Procurement Analyst, at (202) 501-3221 for clarification of content. For information pertaining to status or publication schedules, contact the Regulatory Secretariat at (202) 501-4755. Please cite FAR Case 2011-003. 






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