Time and Materials Contracts: Improper Labor Classification is Risky

Improper labor category classification under U.S. government time and materials (T&M) contracts can result in cost disallowance, investigation, fines — and even jail time.

T&M contracts involve two elements: Time and Materials. Under U.S. government T&M contracts, the time portion is billed based on the labor category rates in the contract multiplied by the number of hours worked by individuals in each category. A key risk area is proper classification of individuals to the labor categories in which they are billed.

U.S. T&M contracts for commercial items include the contract clause specified in Federal Acquisition Regulation (FAR) 52.212-4, Alternate I, while T&M contracts for noncommercial items are covered by FAR 52.232-7. Both contract clauses include a provision that states:

“The rates shall be paid for all labor performed on the contract that meets the labor qualifications specified in the contract. Labor hours incurred to perform tasks for which labor qualifications were specified in the contract will not be paid to the extent the work is performed by individuals that do not meet the qualifications specified in the contract, unless specifically authorized by the Contracting Officer.”

To assure compliance with this provision, it is important to consider the labor descriptions during both the pre‑award and post-award stages of the contract. This mitigates potential contracting officer disallowance of costs resulting from billing individuals that are not properly classified and/or do not qualify under any of the labor categories in the contract. This also avoids additional potential negative actions.

For example, where improper labor category classifications are systemic, U.S. government auditors and/or contracting officers will often refer the issue for investigation as intentional wrongdoing.

The level of detail in the descriptions among contracts varies significantly. Some descriptions can be very detailed, while others are at a much higher level. This is often the case regardless of whether the government provides the category descriptions as part of the Request for Proposal or the contractor is provided the flexibility to propose their own labor category descriptions.

In regards to the pre-award stage, where the Government provides the description, the contractor needs to assure that:

  • An adequate number of current individuals are available that meet the Government description, and/or
  • There is an adequate plan for taking on additional individuals that meet the required qualifications.

Where the contractor provides the description, the language should be written to assure that the individuals anticipated to work on the contract meet the qualifications provided by the contractor.

From a post-award perspective, it is important to implement adequate internal controls assuring individuals meet the qualifications of the labor category to which they are performing and billed. Billing the effort of individuals at a rate higher than their appropriate classification could result in severe administrative and potentially criminal penalties.

Tips:

For T&M contracts, it is important to consider labor category descriptions and classifications during both the pre-award and post-award process.

  1. Pre-award:
  • Prior to T&M contract award, assure existing staff and/or staffing plans adequately address the qualifications required to meet the labor category descriptions in the contract.
  • Where provided the flexibility by your customer to propose your own labor categories, write the descriptions consistent with the qualifications of the individuals that are anticipated to work on the contract.
  1. Post-award:
  • Prepare or assemble appropriate documentation demonstrating that the individuals performing contractual efforts meet the labor category descriptions for the efforts they are performing and to which they are billed.
  • Provide a written description to individuals performing under the T&M contract describing their specific duties, responsibilities and limitations.
  • Assign personnel to review the propriety of labor category classifications during the billing process.

Perform periodic internal reviews to ensure compliance with related contractual terms and conditions.

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