No. 142
Tuesday July 26, 2005
Page A-27
ISSN 1523-567X
Regulation & Law
Defense
Contractor Groups Seek to Block Planned Levin Amendment on T&M Subcontracts
As the Senate continued floor debate on the fiscal 2006 defense authorization bill (S. 1042), contractor groups July 25 worked to stymie an amendment expected to be offered by Sen. Carl Levin (D-Mich.) to limit "excess charges" under Defense Department time-and-materials (T&M) and labor-hour (LH) contracts.
Under a draft of the amendment circulating among federal contractor organizations, subcontractors could be reimbursed for direct labor hours on the basis of fixed hourly rates "only if such hourly rates are set forth in the contract for that specific subcontractor." Further, DOD would be required to issue regulations requiring that "appropriate measures" be taken to ensure compliance with this limitation in all DOD purchases through non-DOD agencies.
As of late July 25, Levin had not yet offered the amendment, but his office confirmed that he expected to do so.
The Levin amendment would provide a legislative resolution of what the Defense Contract Audit Agency has termed "uncertainty among auditors and contractors as to what rates should be used to reimburse the prime contractor for the efforts of the subcontractor" under General Services Administration schedule contracts.
However, contractor groups contend that legislation on the issue is premature, and warn that it would both limit DOD flexibility and have a negative impact on small businesses.
In a July 25 letter to Senate Armed Services Committee Chairman John Warner (R-Va.), Professional Services Council President Stan Soloway urged Warner to oppose the amendment, calling it "a step in the wrong direction."
On the same date, the Information Technology Association of America (ITAA) issued a statement warning that the measure "would, in effect, severely limit the use of subcontractors on federal contracts."
Current Policies Inconsistent
In April 2004, DCAA issued audit guidance addressing subcontract pricing under GSA schedule contracts, pointing out that GSA's Web site says that only if there is a contractor teaming agreement does each member bill the government based on its own GSA schedule rates. If a prime contractor/subcontractor relationship exists under a GSA schedule contract, the prime should bill for services/labor hours performed by the sub at the prime contractor's GSA schedule rates, rather than at the subcontractor's rates, according to GSA.
However, DCAA observed, the Federal Acquisition Regulation (FAR 42.232-7(b)(4)(ii)) specifically limits the reimbursement of costs in connection with subcontracts to the amounts paid by the prime contractor.
In its guidance, DCAA advised auditors providing services related to orders placed under GSA schedule contracts to ensure that prime/sub relationships versus contractor teaming arrangements are clearly established.
'Broad Industry Opposition.'
Contractor representatives are working to defeat the Levin amendment on the floor or, if necessary, during House-Senate conference on the authorization bill.
"There is broad industry opposition to this amendment," the Contract Services Association's Cathy Garman told BNA. "CSA believes that it will particularly hurt our small and medium-sized businesses."
Noting that DCAA and GSA have been meeting to resolve any audit issues related to T&M contracting, Garman said, "There doesn't seem to be a need to rush to judgment and pass legislation when the agencies are working diligently to take care of it. Why hurry to enact bad policy?"
According to ITAA, the draft language would require prime contractors engaged in T&M contracts with the federal government to pass through subcontractor rates for firms added to a program after contract award rather than "blend" such rates so as to reflect prime contractor risk and overhead.
"If this amendment goes forward, we're looking at a potential disaster for small and mid-size businesses in the federal marketplace," according to ITAA President Harris Miller. Stressing that T&M contracts are used when the nature of the work makes it difficult to assign a fixed price, Miller said, "No prime will accept the work of subcontractors if they cannot properly price risk and yet still be held accountable for total performance."
The effect will be to force the federal government to act as systems integrator if small businesses are to be included in federal contract programs consistent with administration small business goals, ITAA said.
Flexibility, Transparency Are Concerns
PSC's Soloway disagreed with the amendment's reference to limiting "excess charges," asserting that nothing in DCAA's work supports the allegation of excess charges under T&M contracts. Further, adoption of the amendment would significantly restrict DOD flexibility to select the best contract type to meet mission needs, and would directly affect prime contractor-subcontractor relationships, he said.
Also, because the amendment would apply to new task orders under already awarded contracts, all approved pricing agreements would have to be renegotiated, which would significantly slow new work under these task orders, PSC pointed out.
Like Garman, Soloway pointed to the ongoing meetings between DCAA and GSA on the matter, and urged that "[t]his discussion should be allowed to continue to timely resolution."
In addition, he said, the Federal Acquisition Regulatory Council is reviewing possible FAR clarifications in the area, and the FAR process would provide an opportunity for public comment and important transparency.
By Geoffrey Emeigh
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