Thus, the government bears the risk of cost overruns. The act also  specifies that DOD’s revised regulation shall ensure that the procedures  applicable to T&M contracts for commercial services may be used only for  the following:  services procured for support of a commercial item;  emergency repair services;  any other commercial services only to the extent that the head of the  agency approves a determination in writing by the contracting officer  that  the services to be acquired are commercial services;  the offeror has submitted sufficient information to evaluate  the price reasonableness of the services, if they are not  offered and sold competitively in substantial quantities in  the commercial marketplace;  such services are commonly sold to the general public  through use of T&M or labor-hour contracts; and  the use of a T&M or labor-hour contract type is in the best  interest of the government. From February 12, 2007, when the  FAR change that allowed T&M acquisitions for commercial services was  implemented, to December 31, 2008, $4.4 billion—less than 1 percent of  total federal obligations for services—was reported. From February 2007 to  December 2008, approximately $6 billion of the $47.6 billion in obligations  coded as T&M contracts were through the GSA schedule program, in  addition to the $3.1 billion that had been miscoded as having used FAR  Part 12. Agencies reported purchasing a variety of commercial services using T&M  contracts and orders during this time period. When we raised this confusion about contract type with officials from the  Office of Federal Procurement Policy (OFPP), they agreed that  clarification to the contracting community on what constitutes a fixed  price versus a labor hour contract would be beneficial. Of the 149 contracts and orders in our sample, 82 were subject to this D&F  requirement. We found  a general lack of awareness of the Part 12 D&F requirement at the  agencies in our review. We raised this issue with officials from OFPP, who were  concerned at the general lack of compliance with this key safeguard  pertaining to T&M contracts for commercial services. In some cases, contracting officers had incorrectly concluded that a D&F  was not necessary. The D&F stated that the market  research had identified an 8(a) company to provide the services. When awarding a contract for consulting services, a  contracting officer from that office prepared a Part 12 D&F in the file, but  it did not address all of the required elements. One contract file contained a partial Part 12 D&F,  one contained a Part 16 D&F, which is less rigorous, and the third had no  D&F. FAR Part 12 Safeguards Have Not Been Applied to GSA Schedules Program

The vast majority of reported obligations for commercial services acquired  through T&M contracts went through GSA’s schedules program from  February 2007 to December 2008, but the FAR Part 12 D&F requirement  has not been applied to the use of schedule contracts. .  . it  very difficult to ensure that prices are fair and reasonable.” GSA  stated, however, that it “has exercised the agency’s authority over the  Schedules program to create safeguards so as to mitigate the issues  presented by T&M commercial services contracts” and that existing  provisions in the GSA Acquisition Regulation (GSAR) and FAR Subpart 8.4  “satisfy any concerns about the use of T&M orders in the Schedules  program.”
It is not apparent to us that the regulations cited by GSA provide the  government with risk mitigation equivalent to that provided by the Part 12  D&F requirement that T&M contracts will only be used when no other  contract type is suitable. Further, we note that in section 8002(d) of FASA, as  amended, there is no indication that the D&F requirement cannot apply to  the purchase of any commercial item or service to include items or  services available for purchase under the GSA schedules program. Recommendations for Executive Action

To help ensure that the risks associated with T&M contracts are  understood and that safeguards are followed and to ensure consistency in  the use of T&M contracts regardless of which part of the FAR authorizes  their use, we recommend that the Administrator of the Office of Federal  Procurement Policy take the following three actions:  amend FAR Subpart 16.6 (T&M, Labor-Hour and Letter Contracts)  and FAR Subpart 16.2 (Fixed-Price Contracts) to make it clear that  contracts with a fixed hourly rate and an estimated ceiling price  are T&M or labor-hour contracts, not fixed-price-type contracts  and  amend FAR Subpart 8.4 (pertaining to the GSA schedules program)  to explicitly require the same safeguards for commercial T&M  services—i.e., the FAR Part 12 D&F and the justification for  changes to the ceiling price—-that are required in FAR section  12.207. Appendix I: Scope and Methodology

The objectives of this review were to assess (1) the extent to which  agencies have reported using time-and-materials (T&M) contracts and  General Services Administration (GSA) schedule T&M orders for  commercial services and what they are acquiring using this contract type,  (2) the degree to which agencies complied with the FAR Part 12  safeguards and (3) the applicability of these safeguards to the GSA  schedule program.
Why GAO Did This Study

Federal agencies have used time-and-materials (T&M) contracts to purchase billions of dollars in services. These contracts are risky because the government bears the risk of cost overruns. Effective February 2007, the Federal Acquisition Regulation (FAR) was revised, pursuant to a statutory change, to allow T&M contracts to be used to acquire commercial services under FAR Part 12, which uses a streamlined procurement process. Certain safeguards were included in FAR Part 12, including a requirement that contracting officers prepare a detailed determination and findings (D&F) that no other contract type is suitable. Based on a mandate to review the use of T&M contracts for commercial services, we assessed (1) agencies' reported use of such contracts and what they acquired, (2) the degree to which agencies complied with the new safeguards, and (3) the applicability of the safeguards to General Services Administration (GSA) schedule contracts. GAO reviewed contracts and orders at DOD and civilian agencies and spoke with contracting officials.

What GAO Found

From February 2007 to December 2008, agencies reported using commercial item procedures under FAR Part 12 to buy a variety of services through T&M contracts; examples include emergency nursing services on Indian reservations and gunsmith services for the FBI. The reported value of these contracts was $4.4 billion--or less than 1 percent of the total federal dollars obligated for services during this period. Of the $4.4 billion, $3.1 billion had gone through GSA's schedules program. GAO identified about another $6 billion, in addition to the $3.1 billion, in T&M obligations for commercial services under GSA schedule contracts. The reliability of the data reported as T&M contracts using FAR Part 12 procedures is questionable. Of the 149 contracts GAO reviewed, 28 had been miscoded as acquiring commercial services or as T&M contracts. Another issue that indicates a potential underreporting of T&M contracts for commercial services is that contracting officials across the agencies had the mistaken impression that the fixed labor rate in T&M contracts makes these contracts fixed-price. GAO raised this issue with officials from the Office of Federal Procurement Policy (OFPP)--chair of the federal acquisition regulatory council--who agreed that clarification on what constitutes a fixed-price versus labor hour contract would be beneficial. Further, GAO found that contracting officials had different opinions of what generally constitutes a commercial service. Some viewed services intended to meet a specific government requirement as noncommercial, while others viewed similar services as commercial. The Part 12 D&F was rarely used for the contracts GAO reviewed. The D&F must incorporate four elements, such as a description of the market research conducted. Of 82 contracts reviewed that were explicitly subject to this D&F requirement, only 5 included all the required elements, and 9 partially met the requirement. Of the remaining contracts, 33 had no D&F at all and 35 included the less stringent D&F applicable to noncommercial T&M services. GAO found a general lack of awareness of the Part 12 D&F requirement at the agencies in this review. Agencies' internal management and legal reviews generally did not detect the failure to include the D&F. OFPP officials expressed concern about the lack of compliance with the D&F requirement. The Part 12 D&F requirement has not been applied to the GSA schedules program. GSA officials stated that the GSA Administrator has discretion about what procedures apply to the program. In a legal opinion to GAO on whether the statutory changes regarding T&M contracts for commercial services apply to the schedules program, GSA concluded that the applicability is uncertain but stated that existing regulations satisfy concerns about use of T&M under the schedules program. GAO notes that these regulations do not require the same level of detailed analysis as does the Part 12 D&F. Further, there is no indication that the statutory requirements cannot apply to items or services under the schedules program. GSA officials said they are in the process of developing a Part 12 D&F for the entire schedules program, but it is not clear how this D&F will act as a safeguard when T&M orders are used.