(Via VAR Business)  There is currently a proposed DOD pricing amendment that will require prime contractors engaged in time and materials contracts with federal agencies to pass through subcontractor rates for firms added to a program after contract award. Unfortunately this will negatively impact the usage of small and mid-size subcontractors because it eliminates the ability of a prime contractor to make  necessary rate adjustments that includes risk and other factors.

Time and materials (T&M) contracts have long been a source of controversy due to the necessary surveillance of contractors’ performance, the billed hours, and the fixed hourly rates that are determined by blending wages, overhead, general and administrative expenses, and profit. These contracts have always been a source of concern and have been subjected to a great deal of scrutiny . As stated in the article,

“According to the Federal Acquisition Regulation, time and materials contracts require appropriate government oversight because there is no incentive for the contractor to control costs or be efficient,” the GAO said in the April 2005 report.

Currently, prime contractors on T&M contracts are allowed to ‘blend’ rates for firms added to a program after the initial award, according to the Information Technology Association of America (ITAA), “in a manner that reflects prime contractor risk and overhead.

This new amendment will eliminate the prime contractor’s ability to include all of the necessary components to configure appropriate subcontractors’ pricing in order to mitigate the prime’s risk. With the new amendment, primes will be less willing, and perhaps altogether against, working with subcontractors because the risk will be too large for the prime.

Could this be the end of T&M contracts? This amendment is focused on Department of Defense contracts, but if it were to pass there would be a possibility for a similar bill to pass for civilian agency contracts. The bill may greatly reduce the portion of business that could be awarded to small and mid-size businesses because prime contractors would be reluctant to assume the risks.

In many cases, large primes are able to deliver on their contracts as a result of their flexibility in finding and subcontracting work to smaller businesses that can operate and innovate faster and cheaper. Consequently, a bill like this could affect the caliber of the work received by the government. Primes may be unwilling to subcontract to smaller businesses with superior domain expertise due to the financial risks this bill may introduce, resulting in that prime taking longer (and therefore costing much more) to deliver the same outcomes. The ITAA’s President, Harris N. Miller, said in a release that

“The unintended consequence would be a loss of business to small and mid-sized companies. It would be very detrimental… If this amendment goes forward, we’re looking at a potential disaster for small and mid-size businesses in the federal marketplace… Time and materials contracts are used when the nature of the work makes the outcome difficult or impossible to assign a fixed price. These contracts are freighted with risk — risk that can be played out over a number of years… Asking prime contractors to assume this risk is simply unrealistic, and the consequence will be far fewer opportunities for smaller business participation in federal contracts.”