Time and Materials Contracts – Does Anybody Really Understand Them?

January 21, 2009 on 3:52 pm | In Contract Types | Comments Off

Under a time and materials contract a supplier is paid simply for delivering hours. Whether anything productive gets done, or a project is completed, or even if it is done correctly are risks that fall totally on the buyer. So long as the vendor shows up and puts in time, they get paid. The “materials” portion is for what is commonly known as “Other Direct Costs” or ODCs. This might include the cost of travel, costs for duplicating something, or most any other cost incurred on behalf of the buyer, by the seller, for which the seller expects to be paid. If there are no materials, and the contract is purely for hours, then the more common term applied to it is Labor Hour Contract.

According to the Federal Acquisition Regulation (FAR), these are highly undesirable contracts for the government. Yet from 1996 to 2005 their use by DOD alone grew from just under $5 billion to about $10 billion. In one study by GAO they reported that the numbers were grossly understated due to coding errors on the reports. The use of such contracts flies in the face of direction from Congress that contractors are to be held more accountable for results, not just putting in time. Thus there are strong mandates from Congress, the Office of Federal Procurement Policy, and many executive branch agencies (including DOD), that contracts for services should be under a performance work statement where the contractor gets paid only for results, not just time.

So why are they so widely used? From the seller’s perspective, they are great contracts. You get paid for showing up. If you actually accomplish something, well that’s just a bonus! They have no responsibility for the results and can’t be blamed if things go badly. They offer no warranty, and have no residual obligation. Unlike a fixed price contract that usually requires that the work be completed and delivered before any payment is made, under a T&M contract they can typically bill weekly or every other week. As we’ve noted in these pages before, cash is king to any business, and especially so for a small business.

From the buyer’s perspective, they are easy to place, require very little pre-planning, can be adjusted quickly if needs change, and gives the manager a body (or two or three or ten or one hundred) that they can use to accomplish their mission without the time and trouble of a detailed work statement and performance plan. So long as they have the budget, they can augment their workforce as much as they please. And it is for these same reasons that FAR suggests that this is one of the least preferred types of contracts. Additionally, as GAO pointed out, there is no monitoring of the monitors on T&M contracts to ensure that they are being administered correctly, with proper discipline, and with an eye toward achieving actual, measurable results. Even after a T&M has been used, perhaps properly, no one ever seems to go back and look for a less risky contract vehicle that will hold the contractor more responsible for results.

Even lawyers, who have traditionally been T&M providers of services, are beginning to do more fixed price work, or setting performance standards for their results. While that may not be appropriate for some types of litigation, most buyers would prefer to have the seller sharing in the risk for results, even where professional services are involved.

T&M contracts are a legitimate way to purchase hours of effort. While it may be the best process in some circumstances, long term efforts, or those that actually contribute to a measurable result probably have a better vehicle to use. Of course this will require more planning and effort on the buyers part, such as in the drafting of a performance work statement or statement of objectives, and more work on the part of the seller to put quality bodies on the project, assume some of the risk, and pay more attention to administering the contract. Contract professionals know this and know as well that it is the right way to contract for services in most cases. Less experienced, less knowledgeable, and just plain lazy ones live their whole lives off of T&M. The choice is yours.

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