FAR 52.232-7: Payments Under Time-and-Materials and Labor-Hour Contracts

Applicability: This FAR clause specifies the payment terms for Time-and-Materials (T&M) and Labor-Hour (LH) contracts that were not acquired using FAR Part 12 (commercial items).  The clause is included in solicitations and contracts when a time-and-materials or labor-hour contract is contemplated (other than a FAR Part 12 acquisition).

 

Key Requirements:  A T&M contract is comprised of two key elements:  (1) Time, and (2) Materials (note that a labor hour contract is a T&M contract without the materials).  The T&M/LH payments clause specifies how payments will be made for both the Time and the Materials elements of the contract.The clause at FAR 52.215-7 also includes key elements related to other areas, including assignment and release of claims; ceiling price; and the timing of interim payments. While all of these are important requirements, issues most frequently arise related to the Time and/or Materials paragraphs of the clause:

 

Time: The clause provides 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 contracting officer can also request additional documentation as he/she deems appropriate).  The fixed hourly rates are not varied for overtime work unless there is a specific schedule in the contract for overtime rates.

 

Materials: The clause defines materials to 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 applicable indirect costs.  Direct materials, subcontracts for supplies and other direct costs 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.  However, 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.

Other key requirements include the following:

–   Payment for materials is subject to the Allowable Cost and Payment clause at FAR 52.216-7.

–   Other direct costs and indirect costs cannot include any costs that are already part of the fixed hourly rate, and must be allocated in accordance with the contractors written/established accounting practices.

–   Indirect costs are only applied to materials, i.e., they are not applied to the fixed hourly rates (as noted in the Time section of the contract, the fixed hourly rates already include all applicable indirect costs).

–   The contractor must obtain materials at the most advantageous prices available with due regard to securing prompt delivery of satisfactory materials; and take all cash and trade discounts, rebates, allowances, credits, salvage, commissions, and other benefits (when unable to take advantage of the benefits, the Contractor shall promptly notify the Contracting Officer and give the reasons).

–   No profit is allowed on materials, except when the contractor furnishes its own materials that meet the definition of a commercial item.

 

Compliance Verification:  This function is generally shared among the Contracting Officer Technical Representative (COTR) and the cognizant auditor.  The clause contains a specific paragraph (f) entitled “Audit”.  Under this paragraph, at any time before final payment under this contract, the Contracting Officer may request audit of the vouchers and supporting documentation.  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 several specific remedies, including the following:

1. 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.

2. Consent to Subcontract. The time portion of the clause also specifically addresses the issue of Consent to Subcontract.  The clause state that if the Contractor fails to obtain consent for any subcontract that requires consent under the clause at FAR 52.244-2, Subcontracts, the Government is not required to reimburse the Contractor for any costs incurred under the subcontract prior to the date the Contractor obtains the required consent.  Any reimbursement of subcontract costs incurred prior to the date the consent was obtained shall be at the sole discretion of the Government.

3. Contract Closeout. The Contracting Officer may require a withhold of 5 percent of the amounts due but the total amount withheld for the contract shall not exceed $50,000.  The amounts withheld shall be retained until the Contractor executes and delivers the release required by the clause.  The withhold is at the discretion of the contracting officer – if the contractor has a history of executing and delivering the release in accordance with the timing requirements of the clause, it is much more likely that the contracting officer will not require the withhold (or may require an amount less than the maximum provided for in the clause).

4. Materials. For the materials portion of the clause, the only remedy is a cost disallowance/non-reimbursement of the cost claimed if the cost does not meet the requirements of the clause.

 

Background:  This contract clause was substantially revised in February, 2007.  The revised clause provided a clear distinction between the Time (Fixed hourly rates) and Materials (everything that is not part of the fixed hourly rate) elements of the contract.  Prior to these revisions, there were disputes regarding whether work performed by a subcontractor could be billed using the fixed hourly rates or was limited to the actual cost billed by the subcontractor.  Some contracts included addendums that allowed subcontractor work to be billed at fixed hourly rates, while others were silent.  In addition, there was no specific remedy to address instances where a prime contractor billed for subcontract costs but had failed to obtain the required consent to subcontract.  Furthermore, it was also unclear what the remedy was if an employee did not meet the labor qualifications for the category to which he/she was billed.  The revised clause was the result of two proposed rules and two public meetings, which were instrumental in forging the current language.

 

Other Key Information:  The Time portion of the contract clause works in conjunction with the solicitation provisions at FAR 52.216-29 (Time-and-Materials/Labor-Hour Proposal RequirementsNon-Commercial Item Acquisition with Adequate Price Competition) and FAR 52.216-30 (Time-and-Materials/Labor-Hour Proposal RequirementsNon-Commercial Item Acquisition without Adequate Price Competition).  These provisions address whether or not a contractor will be permitted to bill subcontractor costs using a blended fixed hourly rate or if separate rates are required.  Under the blended rate, there is only one rate for each category.  For example, a Senior Engineer is billed 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.).

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