RGCI - Labor Qualifications under Time and Material Contracts

All Time and Material (T&M) contracts with the Federal Government, even commercial ones under Federal Acquisition Regulations (FAR) part 12, have one big thing in common. That big thing is that all of the labor hours delivered must be performed by individuals meeting the labor qualifications specified in the contract. The Federal Government uses very strong language in its contract requirement related to this, stating the hours “will not be paid to the extent the work is performed by individuals that do not meet the qualifications.”

FAR 52.232-7 Payments under Time-and-Materials and Labor-Hour Contracts

FAR 32.111(a)(7) requires this clause be incorporated into solicitations and contracts when a time-and-materials or labor-hour contract is contemplated. FAR 52.232-7(a)(3) Payments states:

“The rates shall be paid for all labor performed on the contract that meets the labor qualifications specified in the contract. Labor hours incurred to perform tasks for which labor qualifications were specified in the contract will not be paid to the extent the work is performed by individuals that do not meet the qualifications specified in the contract, unless specifically authorized by the Contracting Officer.” (Emphasis added)

FAR 52.212-4 Contract Terms and Conditions – Commercial Products and Commercial Services

FAR 12.301(b)(3) requires the Alternate I version of this clause be incorporated into commercial solicitations and contracts when a time-and-materials or labor-hour contract will be awarded. FAR 52.212-4 Alternate I (i)(1)(i)(B) Payments states:

“The rates shall be paid for all labor performed on the contract that meets the labor qualifications specified in the contract. Labor hours incurred to perform tasks for which labor qualifications were specified in the contract will not be paid to the extent the work is performed by individuals that do not meet the qualifications specified in the contract, unless specifically authorized by the Contracting Officer.” (Emphasis added)

A Little Ancient History

In the late 1900s and early 2000s, the Defense Contract Audit Agency (DCAA) started making labor qualifications a significant audit issue. DCAA questioned a substantial amount of labor hours on non-commercial T&M contracts where in their opinion the labor qualifications were not met. This made things very difficult for contracting officers (COs) and contracting officer technical representatives (COTRs) that were for the most part happy with the scope of work that had been delivered and the final deliverables under these contracts. The result was many COs issued after the fact documentation to support informal agreement that the work performed was adequate and the individuals performing that work met the CO’s labor expectations – not the ideal situation but in the end, not really a significant impact. That said, DCAA’s “the sky is falling” reporting propensity created a great deal of extra work for COs and contractors – not sure the taxpayer made out on that deal.

We have to say we have not seen a significant number of recent DCAA findings in this area. Unsupported cost (i.e., lack of documentation) is the new song we hear many DCAA auditors singing. It could also be that DCAA only performed 522 incurred cost audits in GFY 2022 compared with 1,117 in GFY 2019. Based on our understanding of the DCAA incurred cost sampling process most of that 522 are audits of very large contractors with robust accounting systems driving the likely documentation DCAA is demanding on these T&M contracts. From what we can see, we believe most smaller contractors are being audited by the Independent Public Accountants (IPAs) that Congress requires DCAA to outsource (117 in GFY 2022). We wonder if these IPAs see the risk in the T&M labor qualification area as low, due to the established controls put in place by the oversight of Government Program Offices and COTRs review of all billings. Regardless, a contractor should not ignore the risk these contractual requirements place on them.

Some Recent Developments

A 6 month CBS News investigation into Department of Defense (DoD) pricing aired on 60 Minutes May 21, 2023 accusing the DoD of over paying for many products. The ex-DoD officials interviewed had some pretty unkind things to say about contractors and Government acquisition professionals. This triggered a May 24, 2023 letter from several Senators to the Secretary of Defense to initiate an investigation. While the finger is being pointed at the very large contractors, we all know that when DoD takes any action the entire industry will be punished.

DoD has issued a recent change to Defense FAR Supplement (DFARS) likely to drive COs to request “data other than certified cost or pricing data.” The final rule in DFARS Case 2020-D008 effective October 28, 2022, modified the language at DFARS 215.403-3 by adding paragraph(a) – “Contracting Officers shall not determine the price of a contract or subcontract to be fair and reasonable based solely on historical prices paid by the Government.” Contractors who fail to comply with a reasonable request to submit data needed to determine price reasonableness may be ineligible for award. This change was required by Section 803 of the 2020 National Defense Authorization Act (NDAA).

Section 803 of the 2023 NDAA – Data Requirements for Commercial Products for Major Weapons Systems we commented on previously, will require contractors of weapons systems and spare parts proposed as commercial, that have not determined to be commercial, to:

  • Identify the comparable commercial product that it sells to the public that serves as the basis for the “of a type” assertion;
  • Submit a comparison of the physical characteristics and functionality to the contracting officer that will serve as the basis for the “of a type” assertion; and
  • Provide the National Stock Number to the contracting officer for both the comparable commercial product and subsystem or spare parts.

Additionally, if the contractor does not sell a comparable commercial product to the general public, the contractor is required to:

  • Notify contracting officer in writing and
  • Provide a comparison to serve as the basis for the “of a type” comparison (physical characteristics and functionality) to the most comparable commercial product in the commercial marketplace.

While these are product focused, we believe these developments will drive greater risk that COs will request supporting cost data for commercial service labor rates and labor qualifications. We are concerned that it is only a matter of time before commercial services becomes a focus area for Inspector Generals (IGs) and General Accountability Office (GAO).

Our Takeaway

A contractor with significant T&M Federal Government contracts, including commercial T&M, needs to have a systemic process to ensure compliance with labor qualification requirements and reduce its risk of not being paid hours it delivered under those T&M contracts.

Redstone GCI assists contractors, everywhere, with understanding the Government’s compliance expectations with the federal regulation, contract terms and help with the implementation of a system to ensure compliance with labor qualification requirements.

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Written by John C. Shire, CPA

John C. Shire, CPA John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama Certified Public Accountant

About Redstone GCI

Redstone GCI is a consulting firm focused on fulfilling the needs of government contractors in all areas of compliance. With a singular mission to help contractors through the multiple layers of “red tape,” we allow contractors to focus on what they do best – support their mission with the U.S. Government. We are home to a group of consultants made up of GovCon industry professionals, CPAs, attorneys, and retired government audit and acquisition professionals.

Our focus and knowledge of audit and compliance functions administered by DCAA and DCMA will always be at the heart of what we do. However, for the past decade, we’ve strategically grown to support other areas of the government contractor back-office with that same level of focus and expertise. We’ve added expertise in contracts management, subcontract administration, proposal pricing, various software systems, HR and employment law, property administration, manufacturing, data analytics/reporting, Grant specialists, M&A, and many other areas. When we see a trend in the needs of contractors, we act to ensure we can provide the best expertise in the market to fulfill those needs.

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Topics: Contracts & Subcontracts Administration, Human Resources, Government Regulations, Federal Acquisition Regulation (FAR)