The T&M Payment Clause
Every government contract has (or should have) a payment clause. The payment clause tells the contractor the government’s expectations regarding what costs can be billed and how they will be billed. If you have a cost-type contract, you almost certainly have the payment clause 52.216-7 (“Allowable Cost and Payment”) that, among many other things, invokes the cost principles of FAR Part 31 to be used in determining what costs will be reimbursed by the government customer. But that’s not the only payment clause: there are other payment clauses for other contract types.
For example, there are at least ten individual payment clauses with prescriptions found in FAR Part 32, ranging from 52.232-1 (“Payments”) to 52.232-10 (“Payments Under Fixed-Price Architect-Engineer Contracts”). There are other payment clauses to be used when progress payments are authorized, and there is another clause to be used when performance-based payments are authorized. There are a lot of payment clauses and the one you have to comply with is the one that’s in your contract. Indeed, your contract may have more than one clause related to payment and you need to comply with all of them.
Have you read your contract’s payment clause(s)? Are you confident that you are fully complying with the requirements of the payment clause(s)?
If you have a T&M contract the payment clause should be 52.232-7 (“Payments Under Time-and-Materials and Labor-Hour Contracts”). Have you read the clause? Are you confident that you are complying with its requirements?
Go look at the date of the payment clause in your contract. With respect to the 52.232-7 payment clause, the date is extremely important. The current clause (as of today) is dated August, 2012. You need to know whether you are required to comply with the requirements of the current clause or the requirements of the previous clause, because the requirements changed. Granted, that was five years ago, so most contracts will have the current clause—but not all of them will, because sometimes the government is slow to modify its contract-writing software and old clauses stick around for longer than they should. If you have the old clause in your contracts, you are lucky. The old clause is more permissive than the current clause. Compliance is easier and disallowance of payments is harder. Go you!
The current clause is quite prescriptive. We are not going to delve into all the intricacies. From a high level the clause breaks billings down to two elements: (1) hourly rates, and (2) materials. (Duh! It’s a T&M contract. What did you expect?) Hourly rates are used for payment “for labor that meets the labor category qualifications of a labor category specified in the contract” that are (a) performed by the contractor; (b) performed by the subcontractors; or (c) transferred between divisions, subsidiaries, or affiliates of the contractor. The clause requires that the hourly rates “shall include wages, indirect costs, general and administrative expense, and profit.” In other words, the “T” part of the T&M contract is a fully burdened through profit “wrap-rate.”
But wait! How can every entity performing the work have the same wrap-rate? Doesn’t each entity have its own direct labor rates, its own overhead rates, and its own profit rates? Yes! You are correct!
If you want to bill subcontractors or inter-organizational transfers under the “T” hourly rate portion of the contract, you must establish a separate billing schedule for each entity in your prime contract. You must submit the entity’s wrap-rates and negotiate the wrap-rates and get those wrap-rates incorporated into the contract. That’s the only way to do it under the requirements of the August, 2012 clause language. (If you have the old clause you have more options. Go you!)
But what happens if you don’t do all that? What happens if the prime contract just has hourly rates for the prime contractor? In that case, the clause requires that the other entities’ labor be billed under as “materials”—under the “M” side of the T&M contract. The clause defines “materials” as including “subcontracts for supplies and incidental services for which there is not a labor category specified in the contract.” If you didn’t specify then you bill the labor as materials, to which you can apply appropriate indirect costs but to which you cannot bill any fee/profit. Yep, you just lost profit on your subcontractors’ or affiliates’ costs. Not good from a financial perspective.
But what happens if you didn’t negotiate individual hourly rates in your prime contract but you billed subcontractor labor as your own prime contractor labor using the prime contractor’s hourly billing rates? In that case, you end up before the ASBCA, just as Access Personnel Services (APS) did. (Link to case here.)
APS is an 8(a) firm, which means it is small and socioeconomically disadvantaged. Perhaps we should not have expected a firm in that position to understand, and comply with, the terms of its T&M payment clause in its Navy contract. However, when DCAA disallowed subcontractor costs, then APS realized the price it was going to pay—and so it appealed to the ASBCA.
Importantly to us the clause in question was the older version (December, 2002) and not the current version. Judge McNulty didn’t think that difference was as important as we would have thought. The fact that APS was represented by its CEO rather than an attorney versed in government contract law may have contributed to the situation.
APS told its subcontractor (PSA) to bill it for hourly labor at the prime contract rates; there were no separate rates for any subcontractor. DCAA audited the contract and issued a Form 1, disallowing six elements of cost. APS appealed only one of those cost disallowances—the disallowance that was based on the difference between the PSA’s hourly rates and the hourly rates that APS used to bill them. There were some nuances in the situation that we are not going to write about; we suggest you read the case.
Judge McNulty, writing for the Board, found that APS was entitled to be reimbursed for its subcontractor costs, but only for its subcontractor’s costs. To the extent APS billed the government for amounts in excess of its subcontractor’s costs, it was not entitled to reimbursement.
Now we have to say—as non-attorneys and as not offering any legal advice whatsoever—that we think the outcome may well have been different, had APS engaged a skilled government contracts attorney to represent it before the Board. We believe that the old clause language is more flexible than the current clause language. Regardless of our beliefs, however, the case was decided how the case was decided.
APS is a small business, socioeconomically disadvantaged. Perhaps we should not expect such a firm to understand its contract requirements, to comply with them, or to know how to defend itself when challenged by DCAA or its contracting officer. Perhaps APS lacked the financial resources to hire a contract administrator, or a consultant, or an attorney.
On the other hand, if APS wasn’t fully capable of complying with the requirements of its contract, then perhaps it is not ready to be a government contractor.
Don’t be an APS.
Read your contract—all of it.
Read the payments clause. Understand it. Comply with its requirements.
Otherwise you might find yourself before the ASBCA, arguing contract interpretation with thousands of dollars (or more!) on the line.
Not Much to Say
We’ve been absent from these parts for a while now, and some may be wondering “what’s up with that?”
The title says it all: Things have been quiet lately.
DCAA hasn’t published any MRD’s since May. The FAR Councils, and DAR Council in particular, seem to have paused in the rule-making process—perhaps wrestling with how to implement the “issue one-eliminate two” Trump Executive Order. It’s been several weeks since we found any new legal decisions that piqued our interest. The Section 809 panel has gone silent. We are waiting to see what the final language of the 2018 NDAA will look like. And we are tired of reporting the run-of-the-mill fraud and corruption stories that seem endemic to public procurement.
So: not much to say.
Even though blog posts have ceased, we’ve stayed busy. We’ve been polishing up our new training offering, focused on subcontract cost and pricing issues. We’ll be delivering the first session mid-October. Not to be egregiously self-serving, but if you want your subcontract administrators trained in the FAR requirements—and not just trained in the requirements, but trained in the flexibility found within the requirements—then you could do a lot worse than reach out to us and see if we can come to you and deliver the training. The session is timed at between four and six hours, depending on how many exercises and discussions clients want. In other words, we will tailor the training to emphasize what you want emphasized.
We’ve also got a couple of long-term projects still ongoing. We hope very much to write about one of them in the future, once things resolve and we get permission from the client and counsel. If we get permission, we think it will be a doozy of a story, involving a prime contractor’s management of one of its subcontractors. (We have been supporting the subcontractor.) Until then, however, nothing can be said.
Be patient, readers. We will publish articles again when there is something of value to add to the conversation. In the meantime, if you want to email us with topic suggestions or links to stories that you suspect would make an interesting article, please do so! And if you ever feel the need to submit a “guest blog” entry, we’d be interested in that as well.
Talk to you later.
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Putting the “I” Back in IR&D
Readers may recall our vehement concern with recent decisions made by the Department of Defense that, taken together, seemed to signal an intent to control contractors’ “independent” research and development (“IR&D” or “IRAD”) efforts. We most recently voiced our concerns last January, in this article. We made some fairly strong characterizations of the policies of then-USD (AT&L) Frank Kendall. We stand by those characterizations.
That article, of course, was but one of many in which we pointed out how the DoD was engaging in a “guerilla war” against its contractors. (The words in quotes weren’t originally ours; we swiped ‘em with full attribution.) We posited in early 2016 that the real objective behind the attacks on IR&D was to obtain contractors’ intellectual property rights without paying for the privilege.
In any case, the most recent article pointed out that Mr. Kendall’s policy was failing, as evidenced by a DFARS Class Deviation that delayed its implementation. And now here we are, nine months later, to tell you that DoD just issued another DFARS Class Deviation that has effectively killed one of Mr. Kendall’s pet initiatives—the requirement that contractors must enter into “technical interchanges” with a DoD official in order to have their IRAD costs reimbursed by the Defense Department.
Yep. It’s dead. And good riddance, too.
The Class Deviation states:
Effective immediately, contracting officers shall not require a major contractor … to engage in or document a technical interchange … as part of the criteria for determining a contractor’s annual IR&D costs to be allowable. … As the result of this deviation, the [DFARS allowability requirements pertaining to such technical interchanges] are no longer a part of the criteria a contracting officer must consider in determining a major contractor’s annual IR&D costs to be allowable.
Well, there you go.
Q Integrated
Normally we don’t focus on bid protests. They are not all that relevant to government contract cost accounting and related matters; they are more relevant to government contracting officers who need to understand what bid protests have been upheld (and why) so that they can avoid similar mistakes. To that end, Bob Antonio’s WIFCON offers an excellent repository of bid protest decisions, updated frequently—so we don’t need to do so.
(However, when we do see a bid protest decision worth thinking about, that decision tends to become of the focus of a long article rather than a blog post. See, for example, this one.)
But a recent bid protest decision over at the U.S. Court of Federal Claims caught our eye. Actually, it wasn’t a bid protest decision: it was a decision regarding a successful protester’s request to have its proposal preparation costs and attorney fees reimbursed by the Federal government.
Q Integrated Companies LLC (“Q Integrated”) asked the Court to approve reimbursement of $63.4K in proposal preparation costs and $82.6K in attorney fees. The government was willing to pay Q Integrated $9.05K in proposal prep costs and objected to paying anything for attorney fees or, in the alternate, argued that the company would be entitled to no more than $24.7K in attorney fees.
Remember that, although the proposal prep costs would be reimbursed via Q Integrated’s G&A expense rate, its attorney fees would be unallowable under the cost principle at 31.205-47(f)—thus any dollar not reimbursed would reduce the company’s profit. So perhaps the stakes were higher than the numbers might otherwise indicate.
The government’s primary objection to Q Integrated’s proposal costs was that the company submitted ten “nearly identical” proposals to the U.S. Department for Housing and Urban Development (HUD) and the successful bid protest only concerned three of the ten proposals. Further, the government noted that Q Integrated actually won one of the ten proposals it submitted, so Q Integrated actually benefited from its proposal preparation costs.
Judge Lettow was not persuaded by the government’s arguments, writing “Q Integrated … unnecessarily incurred bid costs with respect to the three contract areas at issue in this case. The fact that a similar proposal was used in a winning bid for one area is of no relevance to this protest; Q Integrated devoted at least some of the bid costs it incurred to proposals rendered futile by HUD’s errors in the procurement process.”
However, the court accepted the argument that not all proposal prep costs should be reimbursed. Consequently, Judge Lettow then “allocated” the B&P costs between the ten submitted proposals to calculate the amount associated with the three proposals at issue in the bid protest. He used the FAR Part 31 definition of “allocable” to support his position, writing –
A claimed cost is allocable if it ‘[i]s incurred specifically for the contract,’ or if it ‘[b]enefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefits received.’ FAR § 31.201-4(a), (b). More specifically, a cost is allocable if ‘a sufficient ‘nexus’ exists between the cost and a government contract.’ Boeing N. Am., Inc. v. Roche, 298 F.3d 1274, 1281 (Fed. Cir. 2002) (quoting Lockheed Aircraft Corp. v. United States, 375 F.2d 786, 794 (Ct. Cl. 1967)). In its original application for bid costs, Q Integrated sought to recover all of the costs it incurred in connection with the HUD procurement. … The government has argued, however, that Q Integrated is only entitled to bid costs for the three contract areas at issue in this case, not for all ten areas for which Q Integrated submitted bids, which would result in an award of 30% of Q Integrated’s total bid costs incurred. … Q Integrated countered in its reply that it is entitled to bid costs for all of the areas for which it did not receive an award, i.e., nine out of the ten submitted proposals, which would result in an award of 90% of total bid costs.
In this instance, a 30% allocation of bid costs is appropriate. Even though all of the bid costs incurred by Q Integrated are attributable to each area for which Q Integrated submitted a proposal (i.e., all of the costs were necessarily incurred for each proposal, regardless of how many proposals were submitted), such costs must be allocated among the proposals ‘in reasonable proportion to the benefits received.’ FAR § 31.201-4(b).
The quote above is interesting in the sense that it applies allocation rules to costs incurred for one or more B&P “projects”. When a B&P project is established in a contractor’s accounting system, it must be treated like a final cost objective in many respects. For example, it must receive the same direct labor charges that would have been received by a revenue-generating contract. Those labor charges must be burdened the same way that they would have been burdened if charged to a revenue-generating contract. (See 31.2015-18 and CAS 420.) However, it seems fairly clear that such B&P projects are not revenue-generating projects. Importantly, they do not receive an allocation of G&A expense. Accordingly, we would argue that such B&P projects are not final cost objectives in the contractor’s cost accounting system. They are not one of the “final accumulation points” because their costs are allocated to final cost objectives via use of the same base as is used for allocation of G&A expenses. (See CAS 410.)
Thus, we would assert that Judge Lettow’s rationale for cost allocation is inapposite. He applied rules designed to govern final cost objectives to cost objectives that were not final. Note: We are not saying that he didn’t reach a fair answer; we are saying that his rationale in support of his calculation was wrong.
Judge Lettow then turned to the question as to whether Q Integrated proposal prep costs were reasonable in amount. Here the Judge was on more solid ground (in our view), citing to the cost principle at 31.201-3(a)—which applies to all contractor costs, both direct and indirect. Unfortunately for Q Integrated, its two principals who generated the majority (if not all) of the labor costs associated with the proposal preparation did not maintain “contemporaneous time records” to support their labor hours and associated labor costs. Although the government wanted to make a big deal out of this issue, Judge Lettow found that the labor estimates and rationale provided by Q Integrated were sufficient for these purposes, noting “Such summaries that are based on records maintained by the business are sufficient to support a claim for reasonable bid costs, particularly with regard to small businesses that do not regularly maintain contemporaneous time records. See Geo-Seis, 79 Fed. Cl. at 80; Beta Analytics Int’l, Inc. v. United States, 75 Fed. Cl. 155, 163 (2007).”
The next challenge was to analyze the hourly labor rates associated with the two principles. As Judge Lettow wrote—
Following the government’s objections to Q Integrated’s use of market rates to calculate direct labor cost, Q Integrated revised its application to apply an hourly rate based on Michael Ognek’s and Christopher Ognek’s annual compensation for the years they worked on the HUD proposal, as reflected in the company’s tax filings for each year, and ‘calculated by dividing [each] employee’s total compensation by 2,080 (52 weeks at 40 hours).’ … This approach is reasonable, see Gentex Corp. v. United States, 61 Fed. Cl. 49, 54 (2004) (‘[B]id proposal costs ‘must be based upon actual rates of compensation . . . and not market rates.’’) (citations omitted), and the court accepts that Q Integrated incurred $43,702.75 in direct labor costs in preparing its proposal.
Judge Lettow also evaluated Q Integrated’s request for reimbursement of consultant expenses and other direct costs purported incurred in support of the HUD proposals. Certain expenses were withdrawn by Q Integrated, based on the timing of incurrence or because the claimed expenses “were not supported by credit card statements.” In sum, the Court found that Q Integrated had incurred $70.4K in reasonable and allowable proposal prep costs, of which 30% or $21.1K would be reimbursed by HUD.
With respect to the attorney fees, the Court awarded Q Integrated “338.35 hours of attorney time at a rate of $192.08 per hour,” for a total of $65.0K.
Thus, while Q Integrated sought $63.4K in proposal preparation costs and $82.6K in attorney fees, it was awarded $21.1K in proposal prep costs and $65.0K in attorney fees. The remainder of the unreimbursed proposal prep costs will presumably be recovered in Q Integrated’s G&A expense rate, while the remainder of the unreimbursed attorney fees will come out of Q Integrated’s bottom-line profit.
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Joe’s goodbye lunch was held on Monday. He’s leaving the company after four years, moving on to a much smaller contractor just down the street. He said he wasn’t looking to leave; but when he heard about the position and the compensation, it was too good to refuse. He’s leaving a DCAA support/compliance position and will become a Manager of (General) Accounting, with oversight of Accounts Payable and Payroll.
