FAR 52.212-4 Contract Terms and Conditions—Commercial Items: Alternate I Payments Under Time-and-Materials and Labor-Hour Contracts for Commercial Items

Applicability: FAR 52.212-4 applies to acquisitions for commercial items.  Alternate I of that clause is included when the acquisition of commercial items will be awarded using a time-and-materials (T&M) or labor-hour contract (LH).


Key Requirements:  Alternate I specifies how payments will be made for both the Time and the Materials elements of a T&M contract awarded under FAR Part 12, i.e., the acquisition of commercial items.  Some of these requirements are the same as the requirements in the T&M payments clause for the acquisition of noncommercial items at FAR 52.232-7.  However, there are also some significant differences, particularly in the area of materials.  These key differences are highlighted below.  Alternate I also includes requirements that address Inspection/Acceptance. Ceiling Price, Underpayments/Overpayments, and Terminations.  While these are also important requirements, the summary below focuses on the Time and Material elements, which are generally where most of the issues arise with T&M contracts.


Time: The requirements regarding Time are the same for the acquisition of commercial and noncommercial items.  Alternate I and the noncommercial payments clause both provide for payment at a fixed hourly rate for labor that meets the labor category qualifications of a labor category specified in the contract.  The fixed hourly rate includes wages, indirect costs (fringe benefits, overhead, etc.), general and administrative expense, and profit.  The labor can be performed by the prime contractor (including any divisions, subsidiaries, or affiliates under common control), as well as by any subcontractor.  The Contractor is required to substantiate the hours billed (including any subcontractor hours reimbursed at the hourly rate in the schedule) by evidence of actual payment to employees, maintaining individual daily job timekeeping records, and maintaining records that verify the employees meet the qualifications for the labor categories specified in the contract.  The fixed hourly rates are not varied for overtime work unless there is a specific schedule in the contract for overtime rates.


Materials: The commercial and noncommercial clauses include identical definitions of materials.  Under both clauses, materials include direct materials; subcontracts for supplies and; other direct costs(e.g., travel, computer usage charges, incidental services for which there is not a labor category specified in the contract); and indirect costs.  However, the reimbursement requirements differ, as described below:

–   Under both Alternate I and the noncommercial payments clause, direct materials and subcontracts for supplies are generally billed based on actual cost incurred, provided the payments are made in accordance with the terms and conditions of the agreement or invoice and those payments are ordinarily made within 30 days after the submission of the voucher to the Government.  If the Contractor furnishes its own materials that meet the FAR definition of a commercial item, the contractor can bill at established catalog or market prices, adjusted to reflect the quantities being acquired and any modifications necessary because of contract requirements.  However, there is one important distinction.  The noncommercial payment clause includes a requirement that material costs comply with FAR 52.216-7, Allowable Cost and Payment.  Alternate I does NOT include this requirement.  This is significant, since the Allowable Cost and Payment clause incorporates the numerous provisions of FAR Part 31 governing cost allowability.

–   Under Alternate I, the contractor must obtain materials at the most advantageous prices available with due regard to securing prompt delivery of satisfactory materials.  However, the contractor is NOT required to take all cash and trade discounts, rebates, allowances, credits, salvage, commissions, and other benefits, as is specifically required by the noncommercial clause.

–   Alternate I provides significantly different payment terms for other direct costs than does the noncommercial payments clause.  Alternate I does NOT require that other direct costs be allocated in accordance with the contractors written/established accounting practices.  Instead, under Alternate I, the element(s) of other direct costs to be reimbursed must be specifically listed in the contract, as illustrated by the following excerpt from the clause:


The Government will reimburse the Contractor on the basis of actual cost for the following, provided such costs comply with the requirements in paragraph (i)(1)(ii)(B) of this clause: Insert each element of other direct costs (e.g., travel, computer usage charges, etc. Insert “None” if no reimbursement for other direct costs will be provided.


–  Alternate I also provides significantly different payment terms for indirect costs than does the noncommercial payments clause.  Under Alternate I, indirect costs are reimbursed at a fixed dollar amount (a specific dollar amount for reimbursement of indirect costs is inserted into the contract).  Thus, indirect costs are NOT reimbursed based on the contractor’s actual rate (as is the case with the noncommercial payments clause); nor are they reimbursed at a fixed indirect rate (use of a fixed rate would represent cost plus percentage of cost contracting, which is not permitted by law).  As a result, there is no pre-award or post-award audit of the contractor’s indirect costs/rates for contracts that include the language at Alternate I.

– One final distinction for materials.  The noncommercial clause includes a specific statement that no profit is allowed on materials, except when the contractor furnishes its own materials that meet the definition of a commercial item.  This specific prohibition on profit for materials is not included in the language of Alternate I.


Compliance Verification:  This function is generally shared among the Contracting Officer Technical Representative (COTR) and the cognizant auditor.  Alternate I includes a specific paragraph entitled “Access to Records”.  Under this paragraph, at any time before final payment under the contract, the Contracting Officer (or authorized representative) has access to all required supporting documentation.  In actual practice, the COTR generally reviews supporting documentation for each voucher, while the cognizant auditor will generally perform reviews on a sample basis or when specifically requested by the contracting officer.


Remedies:  This FAR clause includes the following specific remedy:

Labor Category Qualifications.  The Government will not pay for work performed by employees that do not meet the qualifications specified in the contract, unless specifically authorized by the Contracting Officer.  Thus, it is imperative that employees meet the qualifications specified in the contract for the labor category to which they are billed.


Background:  Alternate I was initially implemented in February, 2007, and was the result of legislation permitting the use of T&M contracts awarded on a competitive basis for the acquisition of commercial items,  For consistency purposes, Alternate I contains the same definitions as FAR 52.232-7, which was revised at the same time as Alternate I was initially implemented.  However, the FAR Council also recognized that T&M contracts for commercial items had unique aspects that warranted special consideration.  In particular, a FAR Part 12 contract needed to avoid requirements regarding contractor cost accounting practices.  As a result, under Alternate I, other direct costs are reimbursed based on specific elements listed in the contract.  These elements should be the same as the elements of other direct costs contained in the contractor’s proposal.  This mitigates the potential for contractor’s to omit certain elements of other direct costs from their competitive priced proposals and then attempt to recover the cost of these elements after contract award (e.g., a contractor does not bid travel costs to lower its bid, and then requests reimbursement of travel costs after contract award).  The theory is to level the playing field for all competitors.  The same concept applies to indirect costs – the fixed dollar amount of indirect costs submitted in the contractor’s proposal should be the dollar amount inserted into the contract for reimbursement of such costs.  This is all accomplished without requirements to review contractor cost accounting practices or indirect rate computations.


Other Key Information:  The Time portion of the contract clause works in conjunction with the solicitation provision at FAR 52.216-31 Time-and-Materials/Labor-Hour Proposal RequirementsCommercial Item Acquisition.  This provision provides the contractor the option to propose subcontractor costs using a blended fixed hourly rate or separate rates.  Under the blended rate, there is only one rate for each category.  For example, a Senior Engineer is proposed at the fixed hourly rate of $150 specified in the contract for all work done by a Senior Engineer, regardless of whether that work is performed by the prime contractor or a subcontractor.  Conversely, separate rates would require a prime contractor rate for the Senior Engineer (e.g., $160), and a separate rate for each subcontractor (e.g., $140 for a Senior Engineer at Subcontractor A, $150 for a Senior Engineer at Subcontractor B, etc.).   While the solicitation provisions for noncommercial contracts permit the Government to require separate rates, the provision at FAR 52.216-31 does not, i.e., the option to use a blended or separate fixed hourly rate is proposed by the contractor (the billing is based on what the contractor proposes – the Government cannot require use of separate rates).

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