Non-Commercial Item Acquisition with Adequate Price Competition
NOTE: This is the first in a three-part series on Time-and-Materials/Labor-Hour Proposal Requirements. This Part 1 addresses non-commercial item acquisition with adequate price competition. Part 2 will address non-commercial item acquisitions where there is not adequate price competition (FAR 52.216-30). Part 3 will address commercial item acquisitions at FAR 52.216-31 (which must, by law, be awarded based on adequate price competition).
Applicability: As stated at FAR 16.601(f)(1), the solicitation provision at FAR 52.216 29 applies to Time-and-Materials/Labor Hour (T&M./LH) solicitations for non-commercial item acquisitions, where the price is expected to be based on adequate price competition.
Key Requirements: T&M/LH contracts provide for reimbursement to the contractor based on a fixed hourly rate for each labor category listed in the contract. Under the current FAR T&M payment clause for noncommercial items, subcontractor costs for labor categories specified in the contract are also reimbursable at the fixed hourly rates in the contract. The purpose of this FAR solicitation is to state whether the contractor is required to propose a separate rate for each subcontractor or is allowed to use a single rate. For example, if the contract proposes a labor category for a Senior Engineer, can the contractor propose a single fixed hourly rate (e.g., $200 per hour) for all Senior Engineers performing under the contract, or must the contractor propose separate rates (e.g., $200 per hour for a Senior Engineer of the Prime Contractor, $180 per hour for a Senior Engineer of Subcontractor A, $210 per hour for a Senior Engineer of Subcontractor B, etc.).
Under FAR 52.216-29, the contractor has the option of proposing a single fixed hourly rate or separate rates, i.e., the contractor is not required to propose a separate fixed hourly rate for each subcontractor. However, FAR 16.601(f)(1) permits the contractor officer to alter this provision and require separate rates if authorized by agency procedures. As of this date, only the Department of Defense (DoD) has provided specific agency authorization. In fact, DoD requires, through the DFARS, that the contracting officer require separate rates for all solicitations for non-commercial items that are anticipated to be awarded on the basis of adequate price competition. In addition, the Department of Homeland Security (DHS) has issued a proposed rule that would include the same requirements as DoD. However, that rule is not final, and therefore that requirement does not currently apply to DHS solicitations.
Compliance Verification: Compliance verification is performed by numerous Government representatives, including the cognizant auditor, Contract Specialists, Government price analysts, and/or the Contracting Officer.
Remedies: For DoD proposals, when the Government determines that the offeror has failed to propose separate rates for each subcontractor, the proposal may be deemed as non-responsive and the offeror eliminated from award consideration. In other cases, the Government may, depending on the circumstances of the particular issue, provide the offeror an opportunity to revise the proposal to include separate rates. It is strongly recommended that offerors comply with the solicitation provision to preclude the possibility of being eliminated from award consideration.
Background: In the early 2000’s, revisions were made to the T&M payment clause for noncommercial items and a payment clause was implemented for T&M contracts for commercial items. Both of these clauses specifically provided for subcontractors to be reimbursed at the fixed hourly rates in the contract. Prior to these FAR changes/amendments, FAR provided for reimbursement of subcontracts under T&M contracts at actual cost. As a result of these changes/amendments, it became necessary for the FAR Council to address whether or not T&M contracts should provide for a single fixed hourly rate for each labor category, or separate fixed hourly rates by contractor/subcontractor. During the deliberations of this issue, it became apparent that the determination of whether to use a single fixed hourly rate or separate fixed hourly rates would differ depending on (a) whether the acquisition was commercial or non-commercial, and (b) whether the acquisition was awarded based on adequate price competition.
For acquisitions that are commercial and awarded on the basis of adequate price competition, there were differing opinions among the agencies as to whether or not separate rates should be required. As a result, the FAR clause does not require separate rates, but does give each agency the ability to authorize contracting officers to include such a requirement.
Other Key Information: For DoD contracts (and possibly future DHS contracts), the contractor will be required to propose separate rates. However, the following is an acceptable submission for proposing those separate rates:
Labor Category Fixed Hourly Rate
Senior Engineer – Prime Contractor $200
Senior Engineer – Subcontractor Q $200
Senior Engineer – Subcontractor R $200
Since the Government will perform price analysis on the proposal (looking at price, not what it cost to provide the service), proposing separate rates that are all the same dollar amount complies with the provisions of FAR 31.205-29. However, if the Prime Contractor adds a new subcontractor after award (e.g. Subcontractor S is added), the contractor will then need to provide some support for whatever rate is proposed for that new subcontractor. The contractor cannot just propose $200 with no support, because the review of that rate by the price analysis will involve cost analysis (the new proposed rate was not submitted in a competitive environment). In such cases, the contractor should have a copy of the proposed or actual agreement that specifies the rates to be paid to the new subcontractor, and the support for any indirect costs and/or profit that was added to that rate. It is this aspect of the issue (adding a new subcontractor after the award) for which the provision at FAR 31.205-29 adds value to the Government. It prevents a contractor from adding a new subcontractor, paying that subcontractor $75, billing at the $200 rate that was originally proposed in the competitive award, and then pocketing the difference of $125 ($200 minus $75).