Time & Material Contracts: Pros & Cons - Research Paper

Introduction

Among the most popular pricing model in IT are Time and Materials (T&M) and Cost Price Percentage of Costs contracts. (T & M) also known as Labor and Hour contract entail mutual parties approving on prearranged unit rates for both labor and materials and there is no current value for construction. It is used when it is not possible to acquire a precise approximation of the entire project cost, when the agenda is impossible to distinct, or when modifications are likely to be made during construction (Garrett, 2008). Cost Price Percentage of Costs Contracts is different from T &M as it presumes that the entire financial plan on the project has been approved before construction begins and remains unaffected. Also before construction begins the precise deadline must be agreed and threats of late completing of works will be abided by the contractor. Typically, a contract with Cost Price Percentage of Costs Contracts is often used for small projects with severely inadequate functionality, which absolutely won't be altered, while T &M is mostly developed for multifaceted solutions for large and medium-sized businesses.

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Jumia, a big online seller, is constructing a new delivery center. Turnkey, a marketable contactor, is preparing several proposals. Turnkey could possibly settle on Time and Material costing contract. Because Turnkey will not make any yield on the materials, all of their costs - managerial, direct work, and expenses such as transportation of materials- all could be integrated into their stated hourly rates. Time is the chief unit but there cannot be only one rate-Turnkey could possibly have a billing rate for managers, architects and the entire laborer as plumber and electrician. With Time and Material contract, the seller, Turnkey, can keep trail of the time they spend on the project and the resources they buy. Then they bill Jumia on an agenda set forth in the contract- basically either per month or when a certain dollar sum of expenses is built up. Alternatively, they could use cost plus fixed fee, where Jumia pays the costs of the project, including a fixed fee agreed upon during the contract negotiations with Turnkey. The fixed fee, in this case, will be a dollar sum, not a percentage and will not be amended- even though the project costs more or less than predicted (Manuel, 2010). In this contract along with direct work expenses, Turnkey will have to account for indirect labor costs, such as administration.

All federal agencies use fixed-price contracts, to ensure chances for contractors are many and extensive. In March 2009, President Obama formally certified a preference for fixed-price contracts to heads of executive departments and agencies. T &M contracts could only be used when conditions do not allow the organization to define its necessities adequately to permit for a fixed price type of contact. Typically, T &M present the highest risk to the government and lower risk to the contractor, and thus the least desirable contract type for DoD. If an agency decides to use T &M contract then it must:

• Include a description of market research which was conducted to reach the conclusion.
• Establish that it is impossible at the time of contracting to correctly approximate the level of a period of the work or anticipate the costs.
• Establish that the obligation is planned to increase the use of firm-fixed-price with economic value modification contract in future acquisition for the same necessities.

The Federal Acquisition Regulation (FAR) allows T&M contracts to be used to obtain commercial services but one had to meet various safeguards, including a requirement that contracting administrator organize comprehensive willpower and findings that no other contract type is appropriate. For T&M, noncommercial contracts awarded delegate and intercompany labor attempt is based on its own rates, and not the rates of the prime contractor (Cohen and Ellman, 2017). The subcontract and intercompany labor endeavor is priced and billed using different labor rates for every subcontractor and intercompany transfer for every labor group. These requirements also affect commercial contracts awarded without competition. For commercial contracts which are competitively awarded, FAR allows for pricing and billing prime, subcontract and intercompany labor rates either as split rates or blended rates (Martin, 2013). A blended rate stands for one rate per labor group which contains the prime, subcontract and or intercompany rates.

In reference to GAO Decision B-411464 Aug 4, 2015, Alutiq Technical Services LLC, the requirements of this contract- technical, price and past performance, are viable requirements for awarding a tender as they ensure the most beneficial company to the procurement in various aspects is awarded. The requirements help to emphasize on quality, efficiency, value for money and performance values. The contract enhanced long term performance through the selection of a contractor, Vista Technical Services, who is most advantageous to the procurement entity while considering price and other factors. When Alutiiq Technical Services, LLC, competed with Vista Technical Services, through the contract requirements, the quality differentiation plan offered the most value to the procurement entity, Vista Technical Services, with the preferred price.

In addition to FAR and DFARS, Time and Materials contracts are documented in Service Acquisition Reform Act (SERA), Armed Services Procurement Regulation Manual for Contact Pricing and The Department of Defense Contract Pricing Reference Guides, DoD publications.

References

Ellman, J., Cohen, S., Hunter, A. P., Johnson, K., McCormick, R., Sanders, G., Coll, G., ... Center for Strategic and International Studies (Washington, D.C.). (2017).

Defense acquisition trends, 2016: The end of the contracting drawdown.

Garrett, G. A., & Commerce Clearing House. (2008). Cost estimating and contract pricing: Tools, techniques and best practices.

Riverwoods, Ill: CCH. Manuel, K. M., & Library of Congress. (2010). Contract Types: An Overview of the Legal Requirements and Issues.Martin, M. G. (2013). The Government Manager's Guide to the Statement of Work. Oakland: Berrett-Koehler Publishers, Incorporated.