The final rule abandons the early proposed rule that would have allowed reimbursement for subcontract labor at hourly rates only if the subcontractor was listed in the contract. It introduces two new FAR clauses concerning listing hourly labor rates and prescribes use of one or the other depending on whether the CO determines the price to be based on adequate competition. These clauses apply to civilian agencies while there is an alternative clause to apply to DOD acquisitions when price competition is expected.
When Adequate Price Competition is Expected. When price competition is expected, all labor hours satisfying labor categories in the prime contract must be paid at the hourly rates specified in the prime contract. This approach is the same one adopted for commercial items, basically reasoning that competition is competition, whether for commercial or noncommercial items. A new FAR clause 52.216- 29 requires the offeror to specify whether each of the hourly rates apply to labor performed by the offeror, subcontractors or affiliates of the company. It instructs offerors to establish the hourly rates using one of the following methodologies: (1) separate rates for each labor category by the offer and each subcontractor and affiliate (2) blended rates for each labor category or (3) any combination of separate and blended rates for each labor category. These rates include wages, overhead, G&A and profit. The term “blended” indicates the rate applies to multiple entities and does not necessarily mean the rates must be based on a weighted calculation. The rule allows agencies the discretion to develop procedures that authorize COs to make one of the three methodologies mandatory where as we will see below, DOD has already done so.
When Adequate Price Competition is Not Expected. When price competition is not expected, the rule prescribes a different new FAR clause at 52.216-30 be used. This clause requires offerors to list separate sets of hourly rates for each subcontractor and affiliate. Such a different approach is based on the need for a more cautious approach without the safeguard of competition. The prime contractor may still include its profit (in addition to wages, overhead and G&A). The separate rates are intended to provide the CO with additional cost or pricing information along with any information required under the Truth in Negotiations Act to analyze the price reasonableness of the proposal. Another distinction for noncompetitive contracts is that hourly rates for services transferred between affiliates of the offer or may include profit for the prime contractor but not the transferring organization. However, an exception to this rule is if the transferred hourly rate meets the definition of a commercial item in FAR 2.101 in which case the transferred price would be based on established catalog or market rates which presumably do include profit.
DFARS Interim T&M Rule. The DOD rule provides a different approach when adequate price competition is expected by requiring offerors to specify the fixed hourly labor rates for each subcontractor and affiliate. The rule prescribes a separate DOD-unique clause DFARS 252-216-7002(c) which is substituted for the FAR 52.216-29 applicable when price competition is expected. Here, the blended rate approach is not permitted. The rationale for the different approach is the relatively large dollar value of many noncommercial DOD T&M contracts, recentincreased oversight of DOD contracting practices and the preponderance of noncommercial T&M contractors and subcontractors who already possess the necessary abilities to establish separate fixed hourly rates. It should be said the DFARS rule applies only to the requirement to separately list hourly rates for subcontractors and affiliates – it does not preclude the prime contractor from adding its profit to the labor rates designated for each subcontractor.
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