Federal Contracting: Opportunities Exist to Reduce Use of Time-And-Materials Contracts
Fast Facts
The government spends billions on services every year (such as consulting and engineering services) using various types of contracts. We looked at the government's use of two contract types that are considered higher-risk because contractors bill by the hour. With hourly billing, contractors could conceivably work less efficiently in order to charge more hours.
From FYs 2017-2021, the government spent $139 billion on these contracts. We found agencies sometimes used these contracts when they could have switched to other, lower-risk types. We recommended that agencies look at ways to use other types of contracts.
Highlights
What GAO Found
When the government buys services, such as engineering or consulting services, contracting officers try to use a contract type that provides the right balance of risk and flexibility. As GAO previously reported, time-and-materials and labor-hour contracts (collectively referred to here as T&M contracts) are considered riskier since contractors bill the government by the hour and could conceivably work less efficiently so that they could charge more hours. GAO found that civilian agencies use T&M contracts more often than defense agencies. For fiscal years 2017 through 2021, about 11 percent of civilian agencies' contract obligations were for T&M contracts, compared to just 1 percent of Department of Defense (DOD) obligations (see figure).
DOD and Civilian Agency Use of Time-and-Materials and Labor-Hour Contracts
Contract documents GAO reviewed identified uncertain requirements—such as unpredictable mission needs—as a primary reason for using T&M contracts, which is consistent with federal regulations on use of T&M contracts.
To reduce risk, federal regulations encourage assessing T&M contracts periodically, such as when enough knowledge is available to convert portions or all of the work to a fixed price. GAO found instances of contracting officials finding opportunities to convert portions of their requirements to firm-fixed-pricing by identifying repetitive tasks or tasks with stable labor hours. GAO also found that some agencies—such as the Army and the Department of Homeland Security—have taken steps to ensure that they consistently take advantage of these opportunities. For instance, an Army command established a process that prompts contracting officers and their customers to consider if aspects of the work are sufficiently predictable for firm-fixed-pricing. In contrast, GAO found that some agencies, including the Air Force, the Department of State, and Social Security Administration, did not have additional efforts in place to identify similar opportunities, and increased their use of T&M contracts over the period GAO reviewed. Without increased leadership attention, these agencies may miss opportunities to use lower-risk contract types.
Why GAO Did This Study
The government buys services with a variety of different contract types, with varying risks and benefits. From fiscal years 2017 to 2021, the government obligated $139 billion on time-and-materials contracts. Prior GAO work highlighted the risks associated with these contract types, which lack incentives for contractors to control costs or use labor efficiently.
A Congressional committee included a provision in a report for GAO to review DOD's use of T&M contracts, which GAO expanded to include civilian agencies. This report addresses how extensively and under what circumstances agencies awarded T&M contracts, and any measures taken to reduce the use of T&M contracts.
GAO analyzed federal procurement data from 5 prior fiscal years and identified four defense and three civilian agencies with higher obligations on T&M contracts. From these seven agencies, GAO selected a non-generalizable sample of 21 T&M contracts awarded in fiscal year 2020—the most recent data available when it conducted this analysis—reviewed contract documents, and interviewed contracting and policy officials.
Recommendations
GAO is making four recommendations, including that the Air Force, Department of State, and the Social Security Administration assess steps they can take to use lower-risk contract types. DOD, Department of State, and the Social Security Administration agreed with the recommendations.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of State | The Secretary of State should ensure that the Department of State's Head of Contracting Activity updates the Department's Quality Assurance Plan policy by clarifying that a determination and findings justifying the use of a time-and-materials or labor-hour contract is required for orders placed under blanket purchase agreements. (Recommendation 1) |
The State Department agreed with this recommendation. As of August 2022, the Department of State's Senior Procurement Executive issued a policy memorandum update that states that a determination and findings is required for any award using time-and-materials or labor-hours, including task or delivery orders, purchase orders and any order under blanket purchase agreements.
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| Department of the Air Force | The Secretary of the Air Force should ensure that the Department of the Air Force's Heads of Contracting Activities assess steps they can take to identify opportunities to reduce the use of time-and-materials and labor-hour contracts by pricing all or part of such contracts on a firm-fixed-price basis. (Recommendation 2) |
The Air Force agreed with our recommendation. On June 14, 2022, the Air Force Head of Contracting Activity disseminated GAO's report findings in an Air Force contracting publication, and communicated the findings via email to all Air Force policy chiefs. Further, in early 2022, as GAO was completing its review, the Air Force revised its template for Determinations and Findings on use of time-and-materials and labor-hour contracts to more fully reflect Federal Acquisition Regulation requirements to plan for minimizing use of such contracts in future acquisitions for a given requirement.
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| Department of State | The Secretary of State should ensure that the Department of State's Heads of Contracting Activities assess steps they can take to identify opportunities to reduce the use of time-and-materials and labor hour contracts by pricing all or part of such contracts on a firm-fixed-price basis. (Recommendation 3) |
The State Department agreed with this recommendation. On October 27, 2022, the Department of State's Senior Procurement Executive issued policy that requires contracting officers to periodically--at minimum, prior to exercising any options for time-and-materials or labor-hour actions-assess requirements for the feasibility of pricing all or part of such contracts on a firm-fixed-price basis to reduce the use of time-and-materials and labor-hour contract actions in the future.
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| Social Security Administration | The Commissioner for the Social Security Administration should ensure that the Social Security Administration Heads of its Contracting Activities assess steps they can take to identify opportunities to reduce the use of time-and-materials and labor hour contracts by pricing all or part of such contracts on a firm-fixed-price basis. (Recommendation 4) |
The Social Security Administration agreed with this recommendation. As of January 2023, the department had completed training to remind contracting officers and contracting officer's representatives of the government's preference for competitively awarded firm-fixed price contracts, and the importance of considering hybrid contracts as a useful tool to minimize higher risk time-and-materials and labor hour contracts. These actions meet the intent of the recommendation.
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