United States Government Accountability Office

GAO Report to the Committee on Armed 

Services, U.S. Senate 

DEFENSE 

CONTRACTING 

Improved Insight and 

Controls Needed over 

DOD’s Time-andMaterials Contracts 

June 2007 

 

GAO-07-273 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

June 2007

DEFENSE CONTRACTING 

Improved Insight and Controls Needed 

Highlights of GAO-07-273, a report to the over DOD's Time-and-Materials Contracts 

Committee on Armed Services, U.S. 

Senate 

Under time-and-materials 

contracts, payments to contractors

are made based on the number of

labor hours billed at hourly rates 

and, if applicable, other direct 

costs. Because of the risk they pose 

to the government, their use is

supposed to be limited to cases

where no other contract type is 

suitable. GAO was asked to identify

trends in the Department of

Defense’s (DOD) obligations under 

time-and-materials contracts; 

analyze what DOD is buying under 

these contracts; assess why DOD is 

using them and whether actions are 

being taken to ensure that they are 

used only when no other contract 

type is suitable; evaluate DOD’s

monitoring of contractor 

performance; and determine the

differences between the labor rates

prime contractors bill DOD and the 

rates in their subcontracts. GAO 

reviewed 82 time-and-materials 

contracts, agreements, and orders 

and examined prime contract and 

subcontract labor rates on 12 

additional contracts or agreements. 

What GAO Recommends

GAO is recommending that DOD 

require more diligence in justifying

the use of certain types of timeand-materials contracts, analyze 

the use of time-and-materials on 

indefinite-quantity contracts to

ensure that it does not become the 

default contract type, and require

monitoring plans to reflect the 

risks inherent in this contract type. 

In written comments on a draft of 

this report, DOD concurred with 

the recommendations. 

DOD’s reported obligations under time-and-materials contracts increased 

from almost $5 billion in 1996 to about $10 billion in 2005. But this dollar 

amount is understated because DOD has not been coding contract type for 

orders placed under federal schedules (e.g., General Services 

Administration’s schedule contracts). The accuracy of reported time-andmaterials dollars should improve starting with fiscal year 2007 because DOD 

transitioned to the federal government’s procurement information system, 

which requires contract type to be coded for every order. 

 

Over 75 percent of DOD’s reported time-and-materials obligations are 

concentrated in three service categories: professional, administrative, and 

management support services; information technology and communications; 

and equipment maintenance and repair. Over 80 percent of these obligations 

are against task orders. DOD is also using time-and-materials contracts to 

acquire contract services to supplement the government workforce. 

Examples include intelligence support, advisory and assistance services, and 

systems engineering. 

DOD is turning to time-and-materials contracts because they can be awarded 

quickly and labor hours or categories can be adjusted if requirements are 

unclear or funding uncertain. Contracting officers’ written determinations 

almost never included a rationale as to why a less risky contract type could 

not be used, and little attempt was made to convert follow-on work to a 

different contract type. Recent changes to federal acquisition regulations to 

allow for commercial services to be procured on a time-and-materials basis 

impose more stringent justification requirements, but most of the revisions 

do not apply to non-commercial procurements. 

Even though time-and-materials contracts call for appropriate government 

monitoring of contractor performance, there were wide discrepancies in the 

rigor with which monitoring was performed and most of the contracts and 

orders GAO reviewed did not include documented monitoring plans. In 

general, monitoring was based on contractor-provided monthly status 

reports showing the contractor’s activities and amount of funds expended. 

Under some time-and-materials contracts, the prime contractor charged 

DOD at prime contract hourly rates for subcontracted labor. According to 

the Defense Contract Audit Agency, this practice can result in the prime 

contractor earning additional profits. GAO’s analysis of billing rates under 

13 contracts and agreements showed that when the prime contractor 

charged prime contract hourly rates for subcontracted labor, the difference 

between the prime’s rates and those in their subcontracts ranged from 

negative 40 percent to 192 percent, with most in the 6 to 53 percent range. 

Recent revisions to federal acquisition regulations will mitigate this practice 

for certain types of acquisitions. 

www.gao.gov/cgi-bin/getrpt?GAO-07-273.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Katherine V. 

Schinasi at (202) 512-4841 or 

schinasik@gao.gov. 
Contents 

Letter 1

Results in Brief 3

Background 6

Overall Trend in Time-and-Materials Obligations Is Incomplete 

Because of Missing Data 10 

Most of DOD’s Time-and-Materials Obligations Are for Three 

Categories of Services 13 

DOD Frequently Did Not Justify Why Time-and-Materials Contracts 

Needed but Used Them for Ease and Flexibility 16 

Contractor Performance Monitoring Often Did Not Reflect 

Inherent Risks of Time-and-Materials Contract Type 26 

DOD Is Paying More Than Actual Costs for Subcontracted Labor 

on Some Contracts 28 

Conclusions 36

Recommendations 36

Agency Comments and Our Evaluation 37 

Appendix I Scope and Methodology 39 

Appendix II Comments from the Department of Defense 45 

Appendix III GAO Contact and Staff Acknowledgments 49 

Tables 

Table 1: Categories of Services Acquired Most Using Time-andMaterials Contracts, Fiscal Year 2005 14 

Table 2: Reported Time-and-Materials Obligations by 

Contract/Order Type for Service Acquisitions, Fiscal Year 

2005 14 

Table 3: Contract Types Used for Largest Dollar Value Contracts in 

Our Sample 17 

Table 4: Selected Examples of Differences in Labor Rates between 

Prime Contracts and Subcontracts 33 

Table 5: Governmentwide Provisions and Those in DOD’s Interim 

Rule Regarding Billing for Subcontracted Labor under 

Time-and-Materials Contracts 35 

Page i GAO-07-273 DOD Time-and-Materials Contracts
Table 6: Characteristics of GAO’s Sample of 28 Contracts, 

Agreements, and Orders 41 

Figures 

Figure 1: Contract Types 7 

Figure 2: DOD Reported Obligations against Service Contracts 11 

Figure 3: Percentage of DOD Reported Obligations, Sorted by 

Contract Type, for Service Acquisitions, Fiscal Years 1996

through 2005 12 

Figure 4: Percentage Differences between Prime Contract and 

Subcontract Labor Rates for 628 Labor Categories on 13 

Contracts or Agreements 30 

Figure 5: Range of Percentage Differences between Prime Contract 

and Subcontract Labor Rates for 628 Labor Categories in 

24 Orders 32 

Page ii GAO-07-273 DOD Time-and-Materials Contracts
Abbreviations 

COR Contracting Officer’s Representative

DCAA Defense Contract Audit Agency 

DCMA Defense Contract Management Agency 

DFARS Defense Federal Acquisition Regulation Supplement 

DFAS Defense Finance and Accounting Service 

DIA Defense Intelligence Agency 

DISA Defense Information System Agency 

DOD Department of Defense 

FAR Federal Acquisition Regulation 

FASA Federal Acquisition Streamlining Act of 1994 

GSA General Services Administration 

NIH National Institutes of Health 

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Page iii GAO-07-273 DOD Time-and-Materials Contracts
United States Government Accountability Office

Washington, DC 20548 

June 29, 2007 

The Honorable Carl Levin 

Chairman 

The Honorable John McCain 

Ranking Member 

Committee on Armed Services 

United States Senate 

The Honorable Carl Levin 

Chairman 

The Honorable John McCain 

Ranking Member 

Committee on Armed Services 

United States Senate 

The Department of Defense (DOD) uses time-and-materials and labor-hour 

contracts to acquire billions of dollars in services annually. Under these 

contracts, payments to contractors are based on the number of labor 

hours billed at a fixed hourly rate—which includes wages, overhead, 

general and administrative expenses, and profit—and the cost of materials 

if applicable. Services acquired under time-and-materials and labor-hour 

contracts span a breadth of activities—from administrative support and 

intelligence analysis to the installation of data and communications 

networks and maintenance of multimillion-dollar DOD weapon systems. 

These services can be provided by a single individual from a company or 

by companies utilizing scores of subcontractors. Time-and-materials and 

labor-hour contracts are considered high risk for the government because

they provide no positive profit incentive to the contractor for cost control 

or labor efficiency. A contractor operating under a time-and-materials 

contract could conceivably work less efficiently so that more hours could 

be charged to the government. Thus, the onus is on the government to 

prevent wasteful spending by monitoring contractor performance to 

ensure that the contractor is efficiently performing the work and 

effectively controlling costs. Even with appropriate monitoring, however, 

the government is not fully protected because contracting officers may not 

reduce payments for hours actually worked when, in their opinion, the 

work was performed inefficiently. Finally, federal regulations require 

contracting officers to justify in writing that no other contract type is 

suitable before using a time-and-materials contract. 

The Department of Defense (DOD) uses time-and-materials and labor-hour 

contracts to acquire billions of dollars in services annually. Under these 

contracts, payments to contractors are based on the number of labor 

hours billed at a fixed hourly rate—which includes wages, overhead, 

general and administrative expenses, and profit—and the cost of materials 

if applicable. Services acquired under time-and-materials and labor-hour 

contracts span a breadth of activities—from administrative support and 

intelligence analysis to the installation of data and communications 

networks and maintenance of multimillion-dollar DOD weapon systems. 

These services can be provided by a single individual from a company or 

by companies utilizing scores of subcontractors. Time-and-materials and 

labor-hour contracts are considered high risk for the government because

they provide no positive profit incentive to the contractor for cost control 

or labor efficiency. A contractor operating under a time-and-materials 

contract could conceivably work less efficiently so that more hours could 

be charged to the government. Thus, the onus is on the government to 

prevent wasteful spending by monitoring contractor performance to 

ensure that the contractor is efficiently performing the work and 

effectively controlling costs. Even with appropriate monitoring, however, 

the government is not fully protected because contracting officers may not 

reduce payments for hours actually worked when, in their opinion, the 

work was performed inefficiently. Finally, federal regulations require 

contracting officers to justify in writing that no other contract type is 

suitable before using a time-and-materials contract. 

At your request, we reviewed DOD’s use of time-and-materials contracts. 

Specifically, we (1) identified the overall trends in DOD obligations under 

time-and-materials and labor-hour contracts; (2) analyzed what DOD is 

buying under these contracts; (3) assessed the factors contributing to the 

department’s use of time-and-materials and labor-hour contracts and 

whether actions are being taken to ensure that they are only used when no 

other contract type is suitable; (4) evaluated DOD’s monitoring of 

At your request, we reviewed DOD’s use of time-and-materials contracts. 

Specifically, we (1) identified the overall trends in DOD obligations under 

time-and-materials and labor-hour contracts; (2) analyzed what DOD is 

buying under these contracts; (3) assessed the factors contributing to the 

department’s use of time-and-materials and labor-hour contracts and 

whether actions are being taken to ensure that they are only used when no 

other contract type is suitable; (4) evaluated DOD’s monitoring of 

Page 1 GAO-07-273 DOD Time-and-Materials Contracts
contractor performance; and (5) for selected contracts, determined the 

differences between the labor rates prime contractors charged DOD and 

the labor rates in their subcontracts. In this report, we use the term “timeand-materials contract” to refer to both time-and-materials and labor-hour 

contracts and agreements,

 1 unless otherwise noted. 

To identify trends in the use of time-and-materials contracts, we analyzed

data on all obligations for fiscal years 1996 through 2005 from DOD’s 

procurement information system—the DD350 database. The 2005 data was 

the most recent available when we performed our analysis. During the 

course of our review, we discovered a potentially significant 

underreporting of time-and-materials contracts in this database. To 

address this limitation, we developed a methodology to estimate the 

magnitude of the gap. The other key DD350 contract information that we 

used to select our contracts for review was present in the contract files we 

examined. The system’s information, except for the time-and-materials 

coding issue, was deemed sufficiently reliable for our purposes. We also 

used DD350 data to analyze what types of services DOD is buying under 

time-and-materials contracts. To obtain more detailed information on 

services procured under specific contracts, to assess the factors 

contributing to DOD’s use of this contract type, and to evaluate DOD’s 

monitoring of contractor performance, we conducted an in-depth review 

of 28 time-and-materials contracts, agreements, and orders from among 

those identified in DOD’s database as active in fiscal years 2004 and/or 

2005. Twenty of the 28 were DOD contracts and the remaining 8 were 

under other agencies’ contracts. None were coded as commercial 

acquisitions, but DD350 data for three of the non-DOD contracts did not 

indicate whether they were commercial or non-commercial acquisitions. 

We made our selection taking into account dollar value, military 

organization, location of the buying activity, and type of contract. For 

contracts or agreements that allowed DOD to place individual orders for 

services (such as the General Services Administration’s (GSA) federal 

supply schedules or multiple award schedules),2 we also selected timeand-materials orders for review. In many cases, these contracts also 

permitted orders to be issued using contract types other than time-andmaterials. In all, we reviewed a total of 82 contracts, agreements, and 

orders. For each, we reviewed the contract file and collected 

 1

 Agreements include blanket purchase agreements and basic ordering agreements. 

2

 Under the GSA schedules program, GSA establishes long-term governmentwide contracts

with commercial firms, and agencies place orders under these contracts. 

Page 2 GAO-07-273 DOD Time-and-Materials Contracts
documentation related to the choice of contract type and monitoring of 

contractor performance. We interviewed the contracting officer and the 

individual responsible for the monitoring. Although our sample size did 

not allow us to develop statistical estimates that would enable us to 

project our results to the entire universe of DOD’s time-and-materials 

contracts, we identified recurring issues related to DOD’s use and 

management of time-and-materials contracts, regardless of the contract 

dollar value or buying activity. 

To determine the differences between the rates prime contractors charged 

the government for subcontracted labor and their own prime contract 

rates, we selected, in addition to 1 blanket purchase agreement from our 

sample of 28 contracts, agreements, and orders that permitted this billing 

practice, an additional 12 (6 blanket purchase agreements and 6 large

service contracts) for further review. In all, we analyzed 24 orders and 

628 associated labor rates under these 13 contracts and agreements. We 

reviewed contract clauses, contractor proposals, subcontracts, and other

documents related to the contracts and contacted prime contractor 

representatives to obtain more information on the subcontract labor rates. 

We also examined Defense Contract Audit Agency (DCAA) audit reports 

issued between December 2004 and November 2006 that are related to 

DOD’s use of this billing practice. 

Appendix I contains additional details on our scope and methodology. We 

conducted our review between February 2006 and May 2007 in accordance 

with generally accepted government auditing standards. 

DOD’s reported obligations under time-and-materials contracts have 

nearly doubled, from almost $5 billion in fiscal year 1996 to about 

$10 billion in 2005. This increase was at a somewhat greater rate than the 

overall rise in DOD’s spending on services. But the dollar amount is 

understated because the reported dollars did not include DOD’s time-andmaterials orders placed under federal schedules, such as GSA’s schedules 

program. Because DOD spends billions of dollars a year on schedule 

orders, the unreported time-and-materials dollars are likely to be 

substantial. The data were not available because defense acquisition 

instructions and procedures, starting in 1997, directed officials not to 

specify contract type—such as time-and-materials—for schedule orders in 

DOD’s procurement information system. The accuracy of reported timeand-materials dollars should be improved starting in fiscal year 2007, 

because that is when DOD transitioned to the federal government’s 

Results in Brief 

Page 3 GAO-07-273 DOD Time-and-Materials Contracts
procurement information system, under which users are required to code

contract type for schedule orders. 

Over 75 percent of DOD’s time-and-materials obligations, as reported in 

DOD’s procurement information system, are concentrated in three service 

categories: professional, administrative, and management support 

services; information technology and communications; and maintenance, 

repair, and rebuilding of equipment. Our reviews of contract files and 

discussions with DOD officials showed that DOD is also using time-andmaterials contracts to acquire contract services to supplement the 

government workforce. Examples included subject matter experts in the 

intelligence field, systems engineering support, and advisory and 

assistance services. The workforce increasingly reflects a “blend” of 

government and contractor personnel. Government personnel are finding 

themselves working side-by-side with contractors, often performing 

similar roles. 

Contracting and program officials frequently failed to ensure that timeand-materials contracts were only used when no other contract type was 

suitable. According to DOD officials, the main reasons time-and-materials 

contracts are used are the speed with which contracts can be awarded and 

the flexibility they provide in adjusting labor hours or labor categories in 

light of changing priorities, unclear requirements, or funding uncertainties. 

Most of the written determinations we examined did not include a 

rationale showing why another contract type could not be used instead. 

For some task orders, no determination had been prepared when required 

by ordering guidance for the underlying contract. Further, with a few 

exceptions—such as a Navy contract for aircraft upgrades that changed 

from time-and-materials to fixed-price once sufficient knowledge about 

costs was attained—we found that little effort had been made to convert 

follow-on work to a less risky contract type when historical pricing data 

existed, despite guidance to do so. In February 2007, federal acquisition 

regulation revisions implementing the new provisions in the Services 

Acquisition Reform Act of 2003 pertaining to the use of time-and-materials 

contracts for commercial acquisitions went into effect. The revisions 

require more stringent justifications for the use of time-and-materials 

contracts, including a requirement to justify their use at the task order 

level, but most of the changes apply only to commercial acquisitions. 

Even though time-and-materials contracts call for appropriate government

monitoring of contractor performance, we found inconsistencies in the 

rigor with which the monitoring occurred. Most of the contracts and 

orders we reviewed did not include documented plans for monitoring, as 

Page 4 GAO-07-273 DOD Time-and-Materials Contracts
required. Such plans are intended to assist program officials and 

contracting officers’ representatives in knowing what contractor activities 

they should be monitoring and how they should monitor them. In general, 

contracting officers’ representatives performed their monitoring based on

information that contractors provided about the status of ongoing work 

and “burn rates,” or how quickly the money was being spent. In a few 

instances though, we found plans and reporting requirements, designated

performance monitors, or evidence that program officials had actively 

monitored spending in labor categories. Some contracting officers 

obtained timesheets along with billing submissions, providing program 

managers with the necessary information to closely monitor labor hours 

according to specific labor categories. 

DOD time-and-materials contracts typically allow prime contractors to bill 

DOD in one of four ways for subcontracted labor, one of which involves 

the prime charging the government for subcontract labor at the prime 

contract labor rate. According to DCAA, this practice can result in the 

prime contractor earning additional profit. Indeed, our analysis of billing 

rates under 13 contracts showed that when the contract allowed the prime 

to charge its own hourly rates for subcontracted labor, the differences 

between the prime contract rates and those in subcontracts ranged from 

negative 40 percent to 192 percent, with most in the 6 to 53 percent range. 

In addition, DCAA has questioned costs pertaining to subcontractor 

billing. In one case, DCAA found a prime contractor billed DOD for 

subcontracted labor at rates that ranged from 20 to 95 percent higher than

the rates the primes paid their subcontractors. An interim rule to DOD’s 

acquisition regulations supplement effective in February 2007 requires the 

prime contractor to propose separate labor rates for itself and its 

subcontractors for non-commercial, competitively awarded acquisitions 

under time-and-materials contracts, but—like new federal acquisition 

regulation provisions that apply governmentwide—does not require 

separate rates for commercial acquisitions. 

We are recommending that the Secretary of Defense direct the Director of 

Defense Procurement and Acquisition Policy to require a similar level of 

justification for use of time-and-materials for non-commercial services as 

is now required for commercial acquisitions. We are also recommending 

that DOD analyze the use of time-and-materials orders under indefinitequantity contracts to ensure that it does not become the default contract 

type when other types of orders are also allowed. Finally, we recommend 

that plans outlining government monitoring of contractor performance 

under time-and-materials contracts should include specific activities 

needed to ensure adequate oversight under this contract type. In its 

Page 5 GAO-07-273 DOD Time-and-Materials Contracts
written comments on a draft of this report, DOD concurred with the 

recommendations. DOD’s comments are printed in their entirety in 

appendix II of this report. 

Federal agencies, including DOD, can choose among different contract 

types or pricing arrangements, including time-and-materials contracts, to 

acquire products and services. This choice is the principal means that 

agencies have for allocating cost risk between the government and the 

contractor. Various contract types can be employed to meet the 

government’s needs. For example, time-and-materials can be used in 

conjunction with stand-alone contracts; indefinite-quantity contracts, 

including those under GSA schedules; blanket purchase agreements; or 

basic ordering agreements. These choices are illustrated in figure 1. 

Background 

Page 6 GAO-07-273 DOD Time-and-Materials Contracts
Figure 1: Contract Types 

CONTRACT TYPES

Stand-alone contracts Indefinite-quantity

contracts (also known as 

task order contracts)

Basic ordering agreements Blanket purchase

agreements

Do not allow for individual

orders to be placed against

the contract.

Provide for an indefinite

quantity, within stated limits, 

of products or services

during a fixed period. 

Government places orders

for individual requirements

under these contracts. GSA 

schedule contracts are often 

indefinite-quantity contracts.

May be used to expedite 

contracting for uncertain 

requirements for products

or services when specific 

items, quantities, and prices

are not known at the time 

the agreement is executed. 

Basic ordering agreements

are not contracts.

Are a simplified method of 

filling anticipated repetitive 

needs for products and 

services by allowing agencies to establish “charge 

accounts” with qualified 

vendors. These agreements

may be established under 

a GSA schedule contract. 

Blanket purchase agreements are not contracts.

The government’s basis for payments, contractor’s obligations, and the party assuming more risk for 

cost overruns changes depending on whether the contract is fixed price, cost reimbursable, or time-and-materials.

Fixed price Cost reimbursable Time-and-materials (focus of this

report)

Government pays fixed price even if 

actual total cost of product or service 

falls short of or exceeds the contract 

price. May also pay an award or 

incentive fee related to performance. 

Contractor provides an acceptable 

deliverable at the time, place, and

price specified in the contract. 

Who assumes risk of cost overrun?

Contractor.

Government pays contractor’s allowable 

costs. Also pays a fee, which may be 

related to performance.

Contractor makes good faith effort to 

meet government’s needs within the 

estimated cost.

Who assumes risk of cost overrun?

Government.

Government pays fixed per-hour labor 

rates that include wages, overhead, 

general administrative costs, and 

profit; government might reimburse 

contractor for other direct costs, such 

as travel and materials costs.

Contractor makes good faith effort to 

meet government’s needs within the 

ceiling price.

Who assumes risk of cost overrun?

Government.

Sources: FAR, Defense Federal Acquisition Regulation Supplement, DOD Contract Pricing Guide (data); 

GAO (presentation and analysis).

Time-and-materials contracts comprise the highest contract type risk to 

the government, according to the organizations who are responsible for 

promulgating federal acquisition regulations. Like cost-reimbursable 

contracts, they require that the contractor use its best efforts to provide 

Page 7 GAO-07-273 DOD Time-and-Materials Contracts
the goods or services at the stated ceiling price.3

 If the contractor performs 

work pursuant to the contract, the contractor is entitled to be reimbursed 

for labor at agreed-upon rates, which include wages, overhead, general 

and administrative expenses, and profit; and for materials purchased at 

cost. If the services delivered do not meet contract requirements and the 

government exercises its right to have the contractor correct the 

deficiencies, the government pays the additional labor and material costs 

to do so, excluding the portion of the labor rate attributable to profit.4

Because of the risks involved, the Federal Acquisition Regulation (FAR) 

directs that time-and-materials contracts should only be used when it is 

not possible at the time of award to estimate accurately the extent or 

duration of the work or to anticipate costs with any reasonable degree of 

confidence.5

 The regulation also states that this type of contract may only 

be used after the contracting officer executes a written justification, 

known as a determination and findings, that no other contract type is 

suitable. Time-and-materials contracts also must include a ceiling price 

that the contractor exceeds at its own risk. In addition, because these 

contracts do not include a positive profit incentive for the contractor, 

appropriate government monitoring of contractor performance is required

to give reasonable assurance that efficient methods and effective cost 

controls are being used. Documentation that the monitoring occurred is 

required by the FAR.6

 

The question of whether time-and-materials contracts could be used for 

commercial acquisitions has been an issue of some contention. During 

discussion of proposed provisions in the Services Acquisition Reform 

 3

 We note that time-and-materials contracts also exhibit characteristics of fixed-price 

contracts. The labor rates in a time-and-materials contract are similar to a fixed-price 

contract in that these rates are fixed, regardless of the contractor’s actual labor costs or

indirect expenses. The contractor assumes the cost risk associated with these labor rates 

but can also maximize its profit by finding individuals who meet the qualifications of a

labor category at the lowest possible cost. 

4

 FAR Part 52.246-6(f), Inspection—Time-and-Material and Labor-Hour. Additional 

provisions in FAR Parts 52.246-6(g) and (h) describe alternate actions the government may

take if the delivered services do not meet contract requirements. 

5

 FAR Part 16.601(b)(1). 

6

 FAR 52.246-6(b), Inspection—Time-and-Material and Labor-Hour and FAR 46.104, 

Contract Administration Office Responsibilities. The FAR uses the term “surveillance”; 

however, for clarity we use the term “monitoring” in this report. 

Page 8 GAO-07-273 DOD Time-and-Materials Contracts
Act of 2003,7

 which explicitly authorized the use of time-and-materials 

contracts to purchase commercial services under certain circumstances, a 

former Administrator of the Office of Federal Procurement Policy noted

that the issue of whether time-and-materials contracts should be 

authorized under the FAR’s commercial acquisition procedures appeared

to trigger more public dialogue than any other provision of the act. While 

some believed that increased use of time-and-materials contracts would 

encourage more commercial firms to compete for government business, 

others, such as the DOD Inspector General, opposed the idea of expanding 

use of this contract type for commercial item purchases. In fact, although 

the FAR explicitly prohibited agencies from purchasing commercial items 

or services using time-and-materials contracts until February 2007 when it

implemented the act’s provisions, government agencies were doing so 

under GSA schedule contracts. According to GSA officials, this practice 

was allowed based on the agency’s interpretation of the Federal 

Acquisition Streamlining Act of 1994 (FASA)8

, which required that fixedprice contracts be used to the “maximum extent practicable” for 

commercial acquisitions and remained silent on whether time-andmaterials contracts were allowed. Viewing the FAR as more restrictive 

than FASA, in March 1998 GSA executed a FAR deviation to allow for the 

use of time-and-materials contracts for commercial services. But this 

deviation applied only to Information Technology Schedule 70, one of the 

many GSA schedules. GSA officials were unable to provide us with 

additional FAR deviations that allowed time-and-materials orders under 

the other GSA schedules, such as those with contracts for professional, 

administrative, and management services, despite our requests. 

Commercial companies avoid time-and-materials contracts in most 

situations. In a prior review,9

 we surveyed 23 companies—22 of which 

used time-and-materials contracts in their commercial practices, either as

a buyer or a seller. The companies represented 18 different industries. 

They reported using time-and-materials contracts when they could not 

complete a well-defined scope of work and when risk could be managed 

by monitoring costs and contractor performance. Company 

representatives told us they use this contract type in the early stages of 

 7

 Services Acquisition Reform Act of 2003, Title XIV of National Defense Authorization Act

for Fiscal Year 2004, Pub. L. No. 108-136 (Nov. 24, 2003). 

8

 Federal Acquisition Streamlining Act of 1994, Pub. L. No. 103-355 (Oct. 13, 1994). 

9

 We presented a briefing entitled “Time and Materials Contracting: Survey of Private 

Sector Practices” to the Office of Federal Procurement Policy in January 2005. 

Page 9 GAO-07-273 DOD Time-and-Materials Contracts
projects, in situations when work is not easily definable (such as 

emergency repairs) or is prone to change because of unforeseen 

conditions. One representative response from industry was that they use 

time-and-materials only when the risk and cost of the deal is low and/or 

they truly do not know what they want. 

The Acquisition Advisory Panel, which the Services Acquisition Reform 

Act established to review acquisition laws and regulations regarding many 

different acquisition issues—including time-and-materials contracts—

issued its draft report to the Office of Federal Procurement Policy and the 

Congress in December 2006. The panel expressed concern about risks 

associated with the time-and-materials contract type, particularly in the 

areas of price and contract management. The panel’s Commercial 

Practices Working Group noted that commercial buyers who spoke to the 

panel provided many sound reasons not to use time-and-materials 

contracts, but when they do use this contract type, they “endeavor to 

maintain tight controls over the contracting process, costs, and levels of 

effort.” The panel made several recommendations regarding time-andmaterials contracts, including (1) current policies limiting their use should 

be enforced; (2) whenever practicable, procedures should be established 

to convert work to a performance-based effort; and (3) the government 

should not award time-and-materials contracts unless the overall scope of

the effort, including the objectives, has been sufficiently defined to allow 

for efficient practices and effective government oversight. 

From fiscal years 1996 through 2005, DOD’s obligations against time-andmaterials contracts rose from almost $5 billion to over $9.6 billion, 

according to DD350 data. This rate of increase was somewhat greater than 

the increase in DOD’s overall service spending. Not shown in DD350 data,

however, is DOD’s spending through time-and-materials contracts for 

orders placed against GSA and other federal schedules. The data gap is the 

result of DOD instructions and procedures that directed users not to code 

contract type when the action was an order under a federal schedule. 

These instructions were in effect from fiscal year 1997 until fiscal year 

2007. Reporting should improve starting in fiscal year 2007, with DOD’s 

transition to the government’s Federal Procurement Data System-Next 

Generation. In that system, a contract type is identified for all orders, 

including those under GSA schedule contracts. 

Overall Trend in Timeand-Materials 

Obligations Is 

Incomplete Because 

of Missing Data 

Figure 2 illustrates the growth rate of DOD’s reported time-and-materials 

obligations and the growth rate of DOD’s overall service contract 

obligations.

Page 10 GAO-07-273 DOD Time-and-Materials Contracts
Figure 2: DOD Reported Obligations against Service Contracts 

Sources: DOD DD350 database (data); GAO (analysis and presentation).

Fiscal years

DOD reported obligations against time-and-materials contracts,

in billions of constant fiscal year 2005 dollars

$10

8

6

4

2

0

’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’05 ’04

Fiscal years

DOD reported obligations against service contracts,

in billions of constant fiscal year 2005 dollars

$150

120

90

60

30

0

’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’05 ’04

When comparing contract types, DOD’s reported use of time-and-materials 

for service acquisitions has remained relatively steady over the past 

10 years. Contracts reported as time-and materials ranged from 5.9 percent 

to 6.8 percent of service contract dollars. Figure 3 depicts the obligations 

coded as time-and-materials as well as those where contract type was not 

coded—i.e., schedule orders. 

Page 11 GAO-07-273 DOD Time-and-Materials Contracts
Figure 3: Percentage of DOD Reported Obligations, Sorted by Contract Type, for Service Acquisitions, Fiscal Years 1996

through 2005 

Sources: DOD DD350 database (data); GAO (analysis and presentation).

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

DOD reported obligations, in percent, by contract type

100

Fiscal years

Contract types not specified

Time-and-materials contracts

Cost-reimbursable contracts

Firm-fixed price contracts

80

60

40

20

6.8% (or $9.6 billion) of DOD’s service 

acquisitions reported in fiscal year 2005

involved the use of time-andmaterials contracts

4.9% (or nearly $7 billion) of DOD’s

reported service acquisitions did not 

specify contract type; we estimate that

at least $1 billion of these services were 

acquired through time-and-materials

contracts

As the use of GSA schedules has grown, so has the size of DOD’s 

knowledge gap. Reported data on DOD’s schedule orders for services 

show an increase of almost 200 percent over the past 10 years, from 

$2.4 billion in fiscal year 1996 to $6.9 billion in 2005. None of these entries 

include a contract type. To shed light on the potential magnitude of the 

missing data, we calculated the percentage of obligations with a reported 

contract type of time-and-materials for each of the 24 categories of 

Page 12 GAO-07-273 DOD Time-and-Materials Contracts
services in the DD350 database. We then applied this same percentage, for 

each service category, to the dollars that were uncoded—i.e., schedule 

orders. For example, in fiscal year 2005, contract type was not coded for

$3.4 billion in obligations related to the acquisition of professional, 

administrative, and management support services. Of reported obligations

in this service category for which DOD did record a contract type, almost 

17 percent was obligated against time-and-materials contracts. We applied 

the 17 percent to the $3.4 billion to estimate that $570 million of 

obligations in this service category was likely to be time-and-materials. In 

looking at a single year, fiscal year 2005, our conservative estimate is that 

over $1 billion of the $6.9 billion in services acquired through federal 

schedules was obligated against time-and-materials contracts. For fiscal 

year 2005, this would represent an over 10 percent increase in the dollars 

attributed to time-and-materials contracts. Estimates from others place the 

amount higher. The GSA Inspector General in 2003 reported that use of 

time-and-materials was prevalent under schedule contracts and that 

65 percent of the 1,976 task orders for professional services purchased by 

several agencies under the schedules it surveyed were priced on a timeand-materials basis.10 In 2005, the GSA Assistant Inspector General for 

Auditing told the Acquisition Advisory Panel that recent studies of 

523 GSA Federal Technology Service contract awards, valued at over 

$5.4 billion, found over 60 percent of all orders were awarded on a timeand-materials basis. 

Over 75 percent of DOD’s reported time-and-materials purchases are for 

professional, administrative, and management support services; 

information technology and communications; and maintenance, repair,

and rebuilding of equipment. These are three of the largest and among the 

fastest growing categories of DOD service acquisitions. Obligations for 

professional, administrative, and management support services, for 

example, increased 161 percent from 1996 to 2005. Table 1 shows the 

percentage of DOD contract dollars spent using time-and-materials 

contracts for these three categories. 

Most of DOD’s Timeand-Materials 

Obligations Are for 

Three Categories of 

Services 

 10 GSA Inspector General, Audit of Procurement of Professional Services from the Federal

Supply Service’s Multiple Award Schedules, Report Number A020243/F/A/V03009 

(Arlington, Va.: July 31, 2003). 

Page 13 GAO-07-273 DOD Time-and-Materials Contracts
Table 1: Categories of Services Acquired Most Using Time-and-Materials Contracts, Fiscal Year 2005 

Type of service

DOD obligations

 in fiscal year 2005

DOD obligations

 using time-and-materials 

 contracts in fiscal year 2005

Time-and-materials 

obligations as a

 percentage of DOD’s total

 fiscal year 2005 obligations

Professional, administrative, and 

management support services

$28.3 billion $4.2 billion 15 percent

Information technology and 

communications

10.3 billion 1.8 billion 18 percent

Maintenance, repair, and 

rebuilding of equipment 

11.4 billion 1.3 billion 12 percent

Sources: DOD DD350 database (data); GAO (presentation and analysis). 

Note: Percentages may not calculate within table due to rounding.

Table 2 shows that DOD is most often making its time-and-materials 

purchases by issuing task orders under indefinite-delivery contracts, 

according to reported obligations. 

Table 2: Reported Time-and-Materials Obligations by Contract/Order Type for Service Acquisitions, Fiscal Year 2005 

Dollars in billions 

Contract/order type

DOD obligations

 in fiscal year 2005 

Percentage

 of obligations

Order under an indefinite-delivery contract $7.928 82 

Definitive contract 0.832 9

Blanket purchase agreement order under federal schedule 0.761 8

Order under an agreement 0.066 less than 1 

All other contracts 0.099 1

Sources: DOD DD350 database (data); GAO (analysis). 

Notes: Reported information does not include orders placed off federal schedules (e.g., GSA 

schedule contracts). “All other contracts” include letter contracts, orders from Federal Prison 

Industries or the Javits-Wagner-O’Day Program for the blind or severely disabled, and awards under 

FAR Part 13 simplified acquisition procedures. 

In addition to reported data in DOD’s procurement information system, 

our analysis of contract files and discussions with DOD officials showed 

that the department is using time-and-materials contracts and orders to 

acquire contract services to supplement the government’s workforce. For 

example, under one of the contracts we reviewed, the Defense Intelligence 

Agency (DIA) hired subject matter experts in the intelligence field for such

things as assisting in the implementation of defense intelligence 

operational planning, including identifying requirements; establishing an 

Page 14 GAO-07-273 DOD Time-and-Materials Contracts
in-theater contract management branch to oversee contractor personnel 

acquisitions, performance, and training; research and analysis in support 

of human intelligence collection operations; and serving as a security 

officer. According to a DIA official, contractor personnel were needed to

backfill the government workforce in light of changing and increased 

operational requirements. Many of these contractor personnel were 

former DIA employees. In another case, the Air Force signed a 1-year 

contract to acquire advisory and assistance services11—specifically, 

27 contract employees to provide systems engineering and technical 

assistance—to support the Air Force Deputy Chief of Staff for Warfighter 

Integration. During a pre-award review of the statement of work, the 

contracting specialist indicated that it was necessary to use the word 

“assist” to describe certain activities, such as acquisition strategy 

development, so that the statement of work did not show the contractor 

performing inherently governmental functions. 

Government personnel are increasingly finding themselves working sideby-side with contractors, often performing similar roles. The Acquisition 

Advisory Panel, in its December 2006 draft report, found that, as the 

workforce increasingly reflects a “blend” of government and contractor 

personnel, issues have arisen with respect to the proper roles and 

relationships of federal employees and contractors. It pointed in particular 

to uncertainties about the scope and application of what are “inherently 

governmental” functions, the practical difficulties of enforcing the current

FAR prohibition on personal services contracts,12 and the increasing 

probability of, and need to protect against, organizational conflicts of 

interest. The report also noted that, with the growth of a workforce in 

which contractor employees are working alongside federal employees, 

performing identical functions, questions have been raised about whether 

the contractor employees should be required to comply with certain ethics 

 11 Advisory and assistance services include services provided under contract to support or

improve such things as organizational policy development, decision making, or

management and administration. It can also mean the furnishing of professional advice or 

assistance rendered to improve the effectiveness of federal management processes or 

procedures. All advisory and assistance services are classified in one of the following 

definitional subdivisions: management and professional support services; studies, analyses,

and evaluations; or engineering and technical services. FAR 2.101. 

12 The key indicator of a personal services contract is whether the government exercises 

relatively continuous supervision and control over the contractor personnel performing the 

services. The FAR lists elements that may indicate whether a personal services contract

exists. FAR 37.104. 

Page 15 GAO-07-273 DOD Time-and-Materials Contracts
rules that apply to government personnel. It made a number of 

recommendations pertaining to these issues. 

DOD contracting and program officials frequently did not justify why timeand-materials contracts were the only contract type suitable for the 

procurement. The main reasons time-and-materials contracts are used, 

according to the officials we interviewed, are the speed with which 

contracts can be awarded and the flexibility they provide in adjusting 

labor hours or labor categories in light of changing priorities—often as a 

result of requirements that are not firm—or funding uncertainties. Existing 

management controls, such as contracting officers’ written justifications 

and acquisition plans, could help decision makers to ensure that time-andmaterials contracts are used only when appropriate. However, for most of 

the contracts we reviewed, the justifications did not include a rationale

showing why no other contract type was suitable, nor did the acquisition 

plans. With a few exceptions, little attempt was made to convert follow-on 

contracts or task orders to a different contract type, even when historical 

data existed. Recent revisions to the FAR implement a number of stricter 

requirements for contracting officers to justify use of time-and-materials 

contracts, but most pertain only to commercial acquisitions. 

Contracting and program officials told us that their decisions to use timeand-materials contracts were driven by the flexibility this contract type 

provides to deal with unknowns related to the acquisition—particularly a 

lack of firm requirements—and the ability to award these contracts 

quickly, not because this contract type was the only one suitable. The 

combination of indefinite-quantity contracts and time-and-materials allows 

contracting officers to get new work on contract quickly, because labor 

rates have been pre-negotiated. In fact, based on DD350 data, for the five 

largest contracts we examined—each with obligations of more than 

$250 million through fiscal year 2005—that permitted various contract 

types,13 time-and-materials was by far the predominant type used, as 

shown in table 3. 

DOD Frequently Did 

Not Justify Why Timeand-Materials 

Contracts Needed but 

Used Them for Ease 

and Flexibility 

Lack of Firm 

Requirements, Funding 

Uncertainties, and 

Pressure to Award 

Contracts Drive Use of 

Time-and-Materials

 13 Contracts may include various contract types for different line items. 

Page 16 GAO-07-273 DOD Time-and-Materials Contracts
Table 3: Contract Types Used for Largest Dollar Value Contracts in Our Sample 

Dollars in thousands 

Fixed price Cost reimbursable Time-and-materials Total

Contract 1 $456 0 $1,510,146 $1,510,602 

0.03% 0 99.97% 100.00%

Contract 2 2,053 0 1,341,109 1,343,161 

0.15% 0 99.85% 100.00%

Contract 3 43,558 $4,906 612,213 660,677 

6.59% 0.74% 92.66% 100.00%

Contract 4 118,539 3,494 200,360 322,393

36.77% 1.08% 62.15% 100.00%

Contract 5 24,634 22,493 218,014 265,141 

9.29% 8.48% 82.23% 100.00%

Sources: DOD DD350 database (data); GAO (analysis). 

Note: Totals may not add due to rounding. 

Use of time-and-materials under indefinite-quantity contracts also allows 

contracting officers to keep adding work to the orders, since hours and 

funds are only limited by the ceiling price of the contract. For example: 

• The original value of a Defense Information System Agency (DISA) task 

order for installation, de-installation, and maintenance services related 

to the Defense Information System Network was $20.7 million for a 

1-year period. The value of the order has grown to over $386 million 

and has been in place for over 5 years. According to a DISA official, 

instead of issuing a new task order, the task order is “renewed” on a 

yearly basis.14

• The value of a 1-year task order under the Air Force’s Contractor Field 

Team contract for the maintenance of aircraft deployed to support 

Operation Iraqi Freedom increased from $23.9 million to over

$221 million. 

Contracting and program officials also noted that time-and-materials 

contracts provide DOD the flexibility to shift the skill sets being acquired 

by adjusting the distribution of hours between labor categories. However, 

 14 According to a DISA official, DISA’s legal office concurs that it is administratively 

prohibitive to issue new task orders, in part due to foreign logistics requirements. 

Page 17 GAO-07-273 DOD Time-and-Materials Contracts
this type of flexibility is only needed if DOD is unable to define its 

requirements in terms of outcomes. The need for improved requirements 

definition was also addressed by the Acquisition Advisory Panel in its 

December 2006 draft report. The panel found that the government fails to 

invest in the acquisition planning phase of procurement, focusing on rapid 

awards rather than on defining requirements. The testimony the panel

heard was consistent in identifying the major contributors to this problem 

as the cultural and budgetary pressure to quickly award contracts or 

orders, combined with a lack of market expertise in an already-strained 

acquisition workforce. 

The pressure to get to award was evident in several of the contracts we 

examined and contributed to the use of time-and-materials contracts over 

other contract types. According to the contracting officers, this pressure 

was the result of such factors as the need to get supplemental funding on 

contract, the expiration of an existing contract, or urgent customer 

demands. They told us they turned to time-and-materials contracts or 

orders in these situations because they require less up-front effort than 

cost-reimbursable contracts to determine that prices, in the form of labor 

rates, are fair and reasonable; require less specific requirements than are 

needed to support a fixed-price bid; or had been previously used. For 

example, the Air Force had been acquiring advisory and assistance 

services under a time-and-materials contract when it determined that the

work was out of the contract’s scope. It quickly put in place a new 

contract, again under a time-and-materials arrangement even though there 

was historical data available, because, according to an Air Force official, it

was expedient and the customer was comfortable with this contract type.

According to contracting and program officials, budget pressures are also 

driving contracting officers to accept more risk by using time-andmaterials contracts. Army officials told us that cost-reimbursable and timeand-materials contracts are being chosen over fixed-price contracts in part 

because of the way funding is allocated. They stated that funding is being 

allocated to Army programs and offices on a quarterly basis, based on 

shifting priorities. Without a stable funding stream with which to fully fund 

fixed-price contracts, contracting officers are looking to the flexibility 

provided by time-and-materials contracts, which allow them to take 

actions such as adjusting the number of hours being purchased. Similarly, 

Air Force officials told us that when the military service was directed to 

cut spending on contractor support services by 29 percent in 2006, it was 

easier and less costly to change or eliminate requirements on time-andmaterials contracts than on fixed-price contracts. 

Page 18 GAO-07-273 DOD Time-and-Materials Contracts
When choosing to use time-and-materials contracts, the FAR requires 

contracting officers to provide a written justification, known as a 

determination and findings, that no other contract type is suitable for the 

acquisition.15 The determination and findings is required to set forth 

enough facts and circumstances to clearly and convincingly justify the 

determination made.16 Contract type is also addressed in acquisition plans, 

which set forth the overall strategy for managing the acquisition.17 These 

management controls are designed to help decision makers ensure that a 

time-and-materials contract is appropriate.18 In most cases, however, the 

justifications and plans we examined did not include a rationale showing 

why less risky contract types could not be used for the procurement. The 

GSA and DOD Inspectors General have also reported on a lack of 

determinations and findings and contract files with minimal information to 

support the use of time-and-materials contracts.19

Contracts and Orders 

Lacked Justifications or 

Rationale Showing Why 

Time-and-Materials Was 

Needed 

We found that some contracting officers’ justifications for use of time-andmaterials contracts quoted language from the FAR20—such as stating that 

it was not possible at the time of awarding the contract to estimate 

 15 FAR 16.601(d)(1) and 1.701. Under the FAR, “contract” is defined to include all types of 

commitments that obligate the government to an expenditure of appropriated funds and 

that, except as otherwise authorized, are in writing. In addition to bilateral instruments, 

contracts include (but are not limited to) awards and notices of awards; job orders or task 

letters issued under basic ordering agreements; letter contracts; orders, such as purchase 

orders, under which the contract becomes effective by written acceptance or performance; 

and bilateral contract modifications. FAR 2.101. 

16 FAR 1.704. 

17 FAR 7.102 and 7.105(b)(4). 

18 An October 2, 2006, DOD policy implementing Section 812 of the National Defense 

Authorization Act for Fiscal Year 2006 requires senior DOD officials or their designees to 

review and approve the acquisitions of services valued at $250 million or above for noninformation technology service acquisitions and $500 million and above for information 

technology services. This review should consider the anticipated pricing arrangement. We

recently reported on DOD’s review structure in the context of the department’s overall 

management of its service acquisitions. See GAO, Defense Acquisitions: Tailored

Approach Needed to Improve Service Acquisition Outcomes, GAO-07-20 (Washington,

D.C.: 

Nov. 9, 2006). 

19 GSA Inspector General, Compendium of Audits of the Federal Technology Service 

Regional Client Support Centers (Washington, D.C.: December 2004); and DOD Inspector

General, Contracts for Professional, Administrative, and Management Support Services, 

D-2004-015 (Arlington, Va.: October 2003). 

20 FAR 16.601. 

Page 19 GAO-07-273 DOD Time-and-Materials Contracts
accurately the extent or duration of the work or to anticipate costs with 

any reasonable degree of confidence and that time-and-materials was the 

only suitable contract type—and did not set forth the rationale for why 

other contract types could not be used. In several of these cases, the 

determinations and findings did not include specifics related to the 

acquisition at hand. 

We also found two indefinite-quantity contracts, both of which allowed for 

only time-and-materials orders, that completely lacked written 

determinations and findings justifying the use of time-and-materials. One 

was a Navy contract for ongoing support related to F/A-18s sold through 

the foreign military sales program, and the other was a Navy contract for 

technical and engineering services regarding the maintenance of aging

aircraft. The contracting officers said they were unaware of the FAR 

requirement to prepare a determination and findings.21

As shown above in table 3, the vast majority of DOD’s reported time-andmaterials obligations are against orders under indefinite-quantity 

contracts. At the time of our review, the FAR did not require 

determinations and findings for task orders issued under indefinitequantity contracts. Consequently, many of the time-and-materials orders 

we reviewed—even those issued under contracts that allowed for multiple 

order types—did not have a determination and findings showing why no 

contract type other than time-and-materials was suitable. On some of the 

contracts we reviewed, the contracting officers relied on the initial 

determination and findings for the indefinite-quantity contract to justify 

subsequent time-and-materials orders, even when the scope of work 

allowed under the contract was very broad. For example, the Army’s 

Communications-Electronics Command prepared a class determination 

and findings for the use of time-and-materials under a contract for 

equipment and engineering services. The document noted that the 

statement of work included many tasks, including research and 

development, systems integration and engineering, test and evaluation,

studies, logistics support, training, and acquisition support. It stated that

“Due to the complexity and variety of tasks available to Federal 

 21 The FAR specifically required a determination and findings for time-and-materials

contracts, but was not explicit with respect to indefinite-quantity contracts. The FAR was 

recently amended for commercial acquisitions to require a determination and findings for 

indefinite-quantity contracts that only provide for the issuance of time-and-materials

orders. 

Page 20 GAO-07-273 DOD Time-and-Materials Contracts
customers, it is impossible to estimate the duration of work or to 

anticipate costs with any reasonable degree of certainty.” 

We also found cases where ordering guides for specific contracts required

a determination and findings before time-and-materials orders were used; 

in some of these cases, the contracting officers had not complied with the

requirement. 

• The Army placed an order for network and systems engineering 

services under a National Institutes of Health (NIH) governmentwide 

acquisition contract. The Army contracting officer did not complete a 

determination and findings for the order, stating that this was the 

responsibility of the NIH contracting officer. The NIH contracting 

officer told us that executing a determination and findings is normally 

the responsibility of the ordering agency. According to NIH’s ordering 

guide for this governmentwide acquisition contract, in the event that a

time-and-materials order was contemplated, the customer (in this case, 

the Army) was required to follow the FAR requirements for completing 

a determination and findings. 

• The DISA ordering guide for one of the indefinite-quantity contracts in 

our sample stated that a time-and-materials contract could only be used 

after the contracting officer executed a determination and findings that 

no other contract type was suitable. Such a determination had not been 

made for all three time-and-materials orders we reviewed under the 

contract. 

Finally, we found two cases where agencies had issued time-and-materials 

orders under blanket purchase agreements based on GSA schedule 

contracts, but had not prepared determinations. GSA’s schedule ordering 

guidance, under “frequently asked questions” on the agency’s Web site, 

states that time-and-materials orders under schedule contracts require a 

determination that it was not possible at the time of placing the order to 

estimate accurately the extent or duration of the work or to anticipate cost 

with any reasonable degree of confidence. According to a GSA official, this 

guidance was posted in March 2005. Of the nine orders discussed below, 

six were issued prior to this guidance; however, three were issued after it 

was posted.

• DIA awarded two blanket purchase agreements against GSA 

schedule contracts, one for three orders totaling $1.6 million for 

administrative operational support in the intelligence area and the 

other for three orders totaling $23 million for information 

technology engineering and intelligence support. A determination 

Page 21 GAO-07-273 DOD Time-and-Materials Contracts
had not been prepared for any of the orders. 

• The Defense Contract Management Agency (DCMA) issued a 

blanket purchase agreement and three subsequent task orders 

under a GSA schedule contract for information technology 

services. The contract files did not contain a determination 

justifying the use of the time-and-materials orders. For one order, 

the price negotiation memorandum stated that the decision to use 

a time-and-materials contract was driven by the customer (i.e., 

program officials). The document did not discuss the customer’s 

rationale for why no other contract type was suitable.

Acquisition officials at DCMA and DIA respectively attributed the lack of 

documentation to an understaffed acquisition workforce and inadequate 

agency acquisition policies. 

Little Attempt to Change 

Contract Type for Followon Efforts 

One way to decrease the risks inherent in time-and-materials contracts is 

to convert to a less risky contract type for follow-on efforts. In fact, a 

September 2004, Defense Procurement and Acquisition Policy

memorandum directed that, when preparing the requirements for a followon contract to an existing time-and-materials or cost-reimbursable service 

contract, program officials should work with the contracting officer to 

determine if any portion can be broken out and ordered on a fixed-price 

basis.22 The memorandum notes that the experience gained on the prior 

contract may serve as a basis to reasonably price similar future efforts on 

a fixed-price basis. The FAR, too, states that 

In the course of an acquisition program, a series of contracts, or a single long-term 

contract, changing circumstances may make a different contract type appropriate 

in later periods than that used at the outset. In particular, contracting officers 

should avoid protracted use of a cost-reimbursement or time-and-materials 

contract after experience provides a basis for firmer pricing.23

We found little evidence, however, that efforts are being made to convert 

time-and-materials to fixed-price for follow-on efforts or recurring 

services, even when historical information existed. Examples follow. 

 22 The memorandum did not specifically reference orders; however, we note that DOD is

obligating most of its time-and-materials dollars under orders. 

23 FAR 16.103(c). 

Page 22 GAO-07-273 DOD Time-and-Materials Contracts
• The Army has continued to use a time-and-materials order under a GSA 

governmentwide acquisition contract to acquire information 

technology services to support an online educational contest for 

middle school students in the areas of science, math, and technology. 

According to the acquisition plan, the original directive for the program 

was neither detailed nor specific. The effort has now been ongoing for 

4 years and is still priced on a time-and-materials basis. 

• In 1998, the Air Force signed a 10-year contract for B-52 engineering 

services that was a sole-source follow-on to a previously issued timeand-materials contract. Overall, the contractor had been providing 

similar support for the B-52 program since 1963. During the 

development of the acquisition strategy, the Assistant Secretary of the 

Air Force for Acquisition initially rejected the program’s plan to award 

a time-and-materials contract for this effort, advocating a cost-plus 

award fee contract instead. Eventually it was agreed that the time-andmaterials portion of the work would be limited to 50 percent. For the 

first year, under monitoring by Air Force headquarters, this target was 

met. In fiscal year 2000, the percentage of time-and-materials 

obligations was 59 percent before decreasing back to 49 percent in 

fiscal year 2001. However, the level of monitoring slackened after 2001, 

and for 2006, nearly all of the work was on a time-and-materials basis. 

• In 2005, DISA issued a request for proposal for Encore II, a follow-on to 

its Encore I indefinite-quantity contract. Encore I offered a variety of 

information technology services to organizations throughout DOD and 

other federal agencies.24 Although orders can be issued using various 

contract types, the contracting officer told us that most of the orders 

issued have been time-and-materials. The DOD Inspector General 

found that Encore II also allows for a significant portion of time-andmaterials task orders and raised concerns about contractors not being 

motivated to increase efficiency and maximize performance. In 

response, DISA plans to implement goals to decrease the time-andmaterials orders over the life of the contract. However, the Inspector 

General noted that these goals are based on a percentage of total 

dollars awarded in a calendar year. Therefore, DISA will not be able to 

determine whether it is meeting the established goal until the end of 

the year. 

 24 Encore I was a follow-on to DISA’s Defense Enterprise Integration Services I and II 

multiple-award, indefinite-quantity information technology contracts. 

Page 23 GAO-07-273 DOD Time-and-Materials Contracts
We found one case in which the Navy specified that a contract for aircraft 

structural inspections and repairs could be changed from time-andmaterials to fixed price once sufficient knowledge about costs was 

attained. Under this contract, the Navy agreed that the contractor would 

perform structural inspection and repairs on one aircraft and use the data

it collected, along with the cost history for similar efforts, to better define

the extent, costs, and duration of the work so that the remaining work 

could be completed on a fixed-price basis. As it turned out, the Navy was

able to use the data from the previous effort to convert all service and 

repair work to fixed price shortly after the contract was signed. 

New Rules Implementing 

Provisions in Services 

Acquisition Reform Act 

Strengthen Justifications 

for Time-and-Materials 

Contracts for Commercial 

Acquisitions 

On December 12, 2006, the Civilian Agency Acquisition Council and the 

Defense Acquisition Regulations Council (the Councils) agreed on a final

rule amending the FAR to implement section 1432 of the Services 

Acquisition Reform Act of 2003.25 The act authorized the use of time-andmaterials contracts for the following categories of commercial services: 

(1) commercial services procured for support of a commercial item26 and 

(2) any other category of commercial services that is designated by the 

Administrator of the Office of Federal Procurement Policy on the basis 

that 

• the commercial services in such category are of a type of commercial 

services that are commonly sold to the general public through use of 

time-and-materials contracts and 

• it would be in the best interests of the federal government to authorize 

use of time-and-materials contracts for purchase of the commercial 

services in such category. 

The final rule includes a number of stricter requirements for contracting 

officers that directly address many of the problems we found with the use 

of time-and-materials contracts. For example, contracting officers’ written 

justifications must describe actions planned to maximize the use of fixedprice contracts on future acquisitions for the same requirements, and they

must be prepared for task orders. However, most of the revisions pertain 

to commercial acquisitions only. In responding to public comments on the 

proposed regulations, the Councils acknowledged that the rule contained

more requirements for commercial determinations and findings than for 

 25The changes went into effect in February 2007. 

26 As described in 41 U.S.C. 403(12)(E).

Page 24 GAO-07-273 DOD Time-and-Materials Contracts
non-commercial. Their rationale was that the additional requirements 

were needed to encourage the preference for fixed-price contracts for 

commercial items. At the same time, though, the Councils stated that they 

believe additional controls are needed to ensure both commercial and

non-commercial time-and-materials contracts are only used when no other 

contract type is suitable. The DOD Acquisition Regulations Council chair 

at the time this FAR rule was being considered told us that discussions 

focused mostly on commercial acquisitions because the belief was that 

this was the area where tighter controls were needed. We note that none 

of the 28 time-and-materials contracts, agreements, and orders we selected 

for review were coded as commercial acquisitions in DOD’s procurement 

information system.27

The new provisions pertaining to commercial acquisitions of services on a 

time-and-materials basis include the following: 

• The determinations and findings must at a minimum (1) describe 

market research conducted; (2) establish that it is not possible at the 

time of placing the contract or order to accurately estimate the extent 

or duration of work or to anticipate costs with any reasonable degree

of certainty; (3) establish that the requirement has been structured to 

maximize the use of fixed-price contracts on future acquisitions for the 

same or similar requirements (e.g., by limiting the value or length of the 

time-and-materials contract or order or establishing fixed prices for 

portions of the requirement); and (4) describe actions planned to 

maximize the use of fixed-price contracts on future acquisitions for the 

same requirements. 

• Indefinite-delivery contracts must be structured to the maximum 

extent practicable to allow the use of fixed-price orders. For these 

contracts, each time-and-materials order under an indefinite-delivery 

contract must have a separate determination and findings. 

• If an indefinite-delivery contract only allows for time-and-materials 

orders, a determination and findings shall be executed to support the 

basic contract and shall also explain why providing for a fixed-price 

alternative is not practicable. Further, the determination and findings 

must be approved one level above the contracting officer. 

 27 The DD350 data for three non-DOD contracts in our review did not indicate whether or 

not they were commercial. 

Page 25 GAO-07-273 DOD Time-and-Materials Contracts
One new provision applies to all time-and-materials acquisitions—

commercial and non-commercial. It requires the determinations and 

findings to be signed before the execution of the base period and any 

option periods. If the period of performance exceeds 3 years, the 

determination and findings must be approved by the head of the 

contracting activity. According to the Councils, this provision is also 

intended to help avoid protracted use of non-commercial time-andmaterials contracts after experience provides a basis for firmer pricing. 

The FAR calls out the need for appropriate government oversight on timeand-materials contracts to give reasonable assurance that efficient 

methods and effective cost controls are being used, because this contract

type provides no incentive for the contractor to control costs or be 

efficient. In addition, DOD guidance requires adequate monitoring of 

contractor performance. This monitoring is to be properly documented, 

including a plan setting forth the required activities and, if applicable,

specific performance measures. For time-and-materials contracts, the 

plans could include activities such as ensuring that the labor categories 

and rates in the contract match those provided by the contractor. 

Monitoring of performance is typically performed by a contracting 

officer’s representative (COR), who is designated as such by the 

contracting officer.28 Duties associated with the monitoring include 

reviewing contractor costs to determine if there are variances from the 

budgeted or anticipated costs, such as by labor category. The COR is also 

responsible for assuring that the contract performance is consistent with 

the description and scope of the contract.29

Contractor 

Performance 

Monitoring Often Did 

Not Reflect Inherent 

Risks of Time-andMaterials Contract 

Type

Although we found that CORs were assigned in most cases, many of the 

contract files we reviewed did not include plans setting forth how the 

monitoring was to be accomplished, and we found wide discrepancies in 

 28 CORs are typically responsible for such things as verifying that the contractor performs

the technical requirements of the contract in accordance with contract terms, monitoring

the contractor’s performance, notifying the contractor of deficiencies, and directing 

appropriate action to effect correction. They are not authorized to modify the contract 

terms or conditions or to obligate the payment of any money by the government. 

29 According to Defense Procurement and Acquisition Policy and DCAA officials, oversight 

of contractor payment requests on time-and-materials contracts is conducted by DCAA. 

The officials noted that CORs are not responsible for certifying costs or performing cost

verifications, such as reconciling contractor labor cost records or material cost invoices to 

amounts included on public vouchers. 

Page 26 GAO-07-273 DOD Time-and-Materials Contracts
the rigor with which monitoring was performed. For example, on the 

Army’s $17 million Omnibus 2000 logistics support services contract, 

CORs told us that no monitoring plans or records were required and that 

they did not review invoices.30 Further, some CORs had a limited 

background in acquisition issues or were new to the role. A DIA COR, who 

was accustomed to working on contracts for goods and supplies, not 

services, told us the COR training received was not adequate and, as a 

result, it took some time to learn how to do the job. An Army customer on 

an Air Force maintenance contract hired a contractor to perform day-today monitoring. The official stated that between promotions and a lack of

experience, the Army lacked in-house government capability to provide 

adequate oversight. In general, on the contracts we reviewed, CORs 

performed their monitoring role based on information in monthly progress 

reports from the contractor that provided a status of ongoing work and 

information on how fast money was being spent, known as “burn rates.” 

On the other hand, we found a case in which DOD generated regular 

reports of contractor performance, based on a documented monitoring 

plan. An Air Force contract to meet surge requirements for field 

maintenance used a management plan that outlined monitoring 

responsibilities for contracting staff, required formal delegation of these 

responsibilities, and provided a standard government form for monthly 

reporting on all task orders. We also found a number of cases in which 

contracting officers obtained timesheets and other supporting 

documentation along with billing submissions. Doing so meant the 

program managers had the necessary information to closely monitor 

contractor performance using labor hours according to specific labor 

categories. On one DIA task order, the program manager used the 

information from invoices to monitor the charges in program management 

labor categories for the contractor. The program manager stated that if 

these costs exceeded 5 percent of the value of the hours billed during the 

period, the contractor would be questioned about the reasons for those 

charges. 

 30 Some of the contracting officials said that monitoring under the follow-on contract is

more substantial. 

Page 27 GAO-07-273 DOD Time-and-Materials Contracts
We found that contracts specified various ways prime contractors can be 

reimbursed for subcontracted labor. Some required the prime contractor 

to be reimbursed for the actual costs it paid for the subcontracted labor, 

others set forth separate rates for subcontractors, some contained 

“blended” prime and subcontract rates, and some permitted the prime 

contractor to be reimbursed for subcontracted labor at the prime’s own 

rates. The last category in particular has caused some concern within 

DOD. For example, DCAA audit reports have questioned costs under this 

billing arrangement, claiming the differential to be additional profit to the 

prime contractor. On the contracts we reviewed that allowed the prime 

contractor to bill DOD for subcontractor labor using its own prime rates,31

we found a wide range of differences between prime contract and 

subcontract labor rates. New FAR provisions and a Defense Federal 

Acquisition Regulation Supplement (DFARS) interim rule set forth 

different rules about how prime contractors are to be reimbursed for 

subcontracted labor under competitive versus non-competitive, and 

commercial versus non-commercial, procurements. 

DOD Is Paying More 

Than Actual Costs for

Subcontracted Labor 

on Some Contracts 

 31 Among the 28 time-and-materials contracts, agreements, and orders that we examined in 

depth, we reviewed one blanket purchase agreement that demonstrated this billing 

practice. We collected information on the difference between the prime and subcontract

labor rates under this agreement. Subsequently, we identified an additional 12 contracts 

and agreements that allowed the prime contractor to bill the government for subcontract

labor using the prime contract labor rates. 

Page 28 GAO-07-273 DOD Time-and-Materials Contracts
We analyzed the differential between 628 prime and subcontract labor 

rates within 13 contracts or agreements we reviewed that allowed the 

prime contractor to bill DOD for subcontracted labor using prime contract 

rates. The differential ranged from negative 40 percent to 192 percent, with 

most falling in the 6 to 53 percent range. Figure 4 shows these differences 

under the 628 different labor rates. Each rate is associated with a labor 

category (e.g., program manager, systems engineer, or senior analyst) that 

includes a description of the position, along with minimum education and 

experience requirements. 

Prime Contract Labor 

Rates Were Usually Higher 

Than Subcontract Rates on 

Contracts We Reviewed 

Page 29 GAO-07-273 DOD Time-and-Materials Contracts
Figure 4: Percentage Differences between Prime Contract and Subcontract Labor

Rates for 628 Labor Categories on 13 Contracts or Agreements 

Sources: Prime contracts, proposals, and subcontracts (data); GAO (analysis and presentation).

Number of instances (out of 628) in which the prime contract rate for a labor category was different than the subcontract rate

Percentage differences, in ranges, between labor rates that prime contractors charged DOD and the rates that 

subcontractors charged the primes

0

200

175

125

75

25

150

100

50

For 188 labor categories, the prime

contract rates charged to DOD were

11% to 20% higher than the rates in

subcontracts for those labor categories

From this point forward, prime contract labor rates are higher than rates in subcontracts

-40 to -31

-30 to -21

-20 to -11

-10 to 0

1 to 10

11 to 20

21 to 30

31 to 40

41 to 50

51 to 60

61 to 70

71 to 80

81 to 90

91 to 100

101 to 110

171 to 180

181 to 190

191 to 200

Note: The figure reflects a break in percentage ranges between 111% and 170% because there were 

no instances of rate differentials within these ranges. 

In most of these cases, the prime contract’s labor rates were higher than 

the rates in subcontracts; therefore, the prime contractor could realize 

additional profit by using these subcontractors. One contractor 

representative told us that the rate differential for his company, which 

ranged from 2 to 14 percent, consisted of overhead, material handling 

costs, and subcontract administration costs, as well as profit. In another 

case, a contractor representative told us that the labor rate in the prime 

Page 30 GAO-07-273 DOD Time-and-Materials Contracts
contract for a systems engineer was 108 percent more than the 

subcontract rate because the subcontractor provides temporary labor with 

a lower benefits package. 

The prime contract’s labor rates did not exceed the subcontract rate in all 

instances. In limited circumstances, we found that the subcontract rate for 

a given labor category was lower than the rate in the prime contract. For 

example, under one task order, the prime contractor was billing the 

government 38 to 40 percent less for one labor category than it was paying

its subcontractors. In this instance, subcontract labor hours represented 

less than 6 percent of total labor hours associated with the task order. 

Most of the contractor representatives told us that the subcontract rates 

were established by negotiating with the subcontractors or after accepting 

bids. However, one representative told us that some larger subcontractors 

are unwilling to accept lower labor rates. 

Of the 13 contracts and agreements we reviewed, all allowed task orders 

to be issued under them. In total, we reviewed 24 task orders associated 

with these contracts and agreements. While prime contract labor rates 

were almost always higher than subcontract rates, the magnitude of this 

difference varied, even within the same task order. Figure 5 shows the 

range of labor rate differentials within each of the 24 orders we reviewed. 

Page 31 GAO-07-273 DOD Time-and-Materials Contracts
Figure 5: Range of Percentage Differences between Prime Contract and Subcontract Labor Rates for 628 Labor Categories in 

24 Orders 

Percentage range, from highest to lowest

Prime contractor collects more money from DOD

than the prime pays its own subcontractors Prime collects less from DOD

200

150

100

50

0

-50

Sources: Prime contracts, proposals, and subcontracts (data); GAO (analysis and presentation).

Orders 1 through 24

Single line means difference was less than 2.25%

Highest percentage difference

Lowest percentage difference

Prime contractor earns additional profit

in labor costs from DOD when

the percentage rises above 0

Prime contractor loses money

with regard to labor costs when

the percentage falls below 0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 22 21 23 24

Note: The range for each order is shown as a solid line, but is made up of multiple observations. So 

even though 7 of the 24 orders show instances in which the prime contract rate was less than the 

subcontract rate, these instances are still rare among the 628 labor categories for which we collected 

this information. 

In some cases, the subcontract rates showed wide differences when 

compared to the prime contract rate, even within the same labor category. 

Table 4 provides examples of variations within and among labor 

categories. 

Page 32 GAO-07-273 DOD Time-and-Materials Contracts
Table 4: Selected Examples of Differences in Labor Rates between Prime Contracts and Subcontracts 

Contract Labor category Rate difference

Percent 

difference

Senior Analyst (Subcontractor 1) $11.23 16.48

Senior Analyst (Subcontractor 2) -10.43 -11.61

A 

Senior Analyst (Subcontractor 3) 12.73 19.10

Technician -7.92 -15.70

Technical Editor 19.34 75.19

B 

Engineer/Analyst 10.17 20.16

Program Manager Level 4 16.16 14.70

Systems Engineer Level 4 5.39 6.30

Systems Engineer Level 3 1.11 1.59

Systems Engineer Level 2 (Subcontractor 1) 2.55 4.41

C 

Systems Engineer Level 2 (Subcontractor 2) 31.39 108.24

Sources: Contractors and DOD (data); GAO (analysis). 

Defense Contract Audit 

Agency Identified 

Additional Profits Related 

to Subcontracted Labor 

At our request, DCAA queried its field offices to identify reports on 

questioned costs pertaining to the subcontractor billing issue. The query 

generated 11 audit reports that questioned over $4 million in billings based 

on the rates subcontractors billed to prime contractors under DOD 

contracts.32 The audit reports, issued between December 2004 and 

November 2006, contain varying levels of detail and reflect audits of 

incurred costs, final vouchers, and customer requested evaluations of 

billed amounts. They cover five different prime contractors. The audit 

agency, in accordance with the FAR payments clause for time-andmaterials contracts33 in effect at that time, considers as unallowable costs 

the amount that the prime contractor bills DOD in excess of the amount 

the subcontractor bills the prime contractor. In one case, DCAA found that

a prime contractor realized profits ranging from 20 to 95 percent based on

differences between billed amounts and the actual costs of subcontract 

labor. 

 32 DCAA provided two additional audit assignments that raised the issue of prime 

contractor billing for subcontracted labor without specifically questioning costs. According

to DCAA, one audit is in process and the questioned costs will be reported when the report 

is issued. The second assignment was cancelled at the customer’s request.

33 FAR 52.232-7(b)(4).

Page 33 GAO-07-273 DOD Time-and-Materials Contracts
The issue of how the government should reimburse prime contractors for 

subcontracted labor has been a matter of debate. For example, as noted 

above, DCAA has questioned contractors’ proposed costs or billings for 

subcontracted labor at amounts other than the actual costs when the 

standard time-and-materials payments clause was included in the contract.

In instances in which the contract specifically permitted the prime to bill 

for subcontracted labor at the prime contract rates, DCAA did not 

question those costs. In its official comments on proposed FAR cases 

pertaining to time-and-materials contracts,34 DCAA stated that such a 

practice places the government at a greater risk of paying costs higher 

than what prime contractors actually pay without receiving any additional 

benefits. DCAA noted that this practice will incentivize prime contractors 

to maximize profits by subcontracting out more work and that the 

government will have to expend additional resources to monitor the 

quality and efficiency of the subcontracted labor to ensure that it is 

receiving the level of service for which it had contracted. DCAA has held 

that, if the FAR payments clause is in the contract, it applies. Until 

recently, the payments clause stated that 

Debate Has Surrounded 

How Primes Should Be 

Reimbursed for 

Subcontracted Labor, but 

New Regulations 

Enumerate Acceptable 

Billing Practices 

the Government will limit reimbursable costs in connection with subcontracts to 

the amounts paid for supplies and services purchased directly for the contract 

when the Contractor has made or will make payments determined due of cash,

checks, or other forms of payment to the subcontractor....35

GSA has taken the position that prime contractors should bill for 

subcontracted labor at their own prime GSA schedule rates, posting this 

instruction on the agency’s Web site. Industry associations have argued 

that only reimbursing the prime contractors for the actual costs of 

subcontracted labor (without profit) fails to recognize the risk that prime 

contractors assume when they subcontract. These associations have also

indicated that requiring separate subcontract rates would be 

administratively burdensome for the government and the contractor and 

limit the ability to quickly bring on subcontractors. 

 34 FAR Cases 2004-015 “Payments under Time-and-Materials and Labor-Hour Contracts” (70 

Fed. Reg. 56,314 (Sept. 26, 2005)) and 2003-027 “Additional Contract Types” (70 Fed. Reg.

56,318 (Sept. 26, 2005)). These FAR cases resulted in FAR amendments effective February

12, 2007 (71 Fed. Reg. 74,656 (Dec. 12, 2006) and 71 Fed. Reg. 74,667 (Dec. 12, 2006)), 

respectively. 

35 FAR 52.232-7 (3)(B)(4)(ii). 

Page 34 GAO-07-273 DOD Time-and-Materials Contracts
Effective February 12, 2007, FAR provisions clarified under what 

circumstances prime contractors can bill the government for 

subcontractor labor at the prime contract’s labor rates. This billing 

practice is permitted now if the time-and-materials contract or order was 

competitively awarded or for a commercial service, but separate prime 

and subcontract rates are required if the contract was not competitively

awarded.36 An interim rule to DOD’s supplement to the FAR is stricter, 

requiring prime contractors to charge at separate prime and subcontractor

rates for all non-commercial, competitively-awarded contracts as well.37

Table 5 summarizes the new FAR rule38 and DOD’s interim rule. 

Table 5: Governmentwide Provisions and Those in DOD’s Interim Rule Regarding Billing for Subcontracted Labor under 

Time-and-Materials Contracts 

Noncommercial contracts 

Noncompetitive award Competitive award Commercial contracts 

(governmentwide) Governmentwide Non-DOD DOD interim rule 

Prime contractor is not required to 

propose separate rates for prime 

and subcontractor labora

 

Prime contractor is required to

propose separate rates for 

prime and subcontractor labor. 

Prime contractor is not

required to propose separate 

rates for prime and 

subcontractor laborb

Prime contractor is required 

to propose separate rates for 

prime and subcontractor 

labor. 

Sources: FAR and Federal Register (data); GAO (presentation and analysis). 

Note: Orders issued under GSA schedule contracts or associated blanket purchase agreements will 

fall into the commercial category.

a

However, the prime contractor must specify whether the fixed hourly rate for each labor category 

applies to labor performed by the prime and/or subcontractors. 

b

However, for each category of labor, the prime contractor must establish fixed hourly rates using one

of three options: separate rates for prime and subcontracted labor, blended rates, or a combination of

separate and blended; and the prime must specify whether the fixed hourly rate for each labor 

category applies to labor performed by the prime and/or subcontractors. 

Prior to these changes, we found that the Defense Finance and Accounting 

Service (DFAS) had acted proactively to limit the rate at which prime 

contractors bill for subcontracted labor. On one blanket purchase 

agreement under a GSA schedule contract, DFAS officials were concerned 

 36 71 Fed. Reg. 74,656 (Dec. 12, 2006) and 71 Fed. Reg. 74,667 (Dec. 12, 2006). The revised 

FAR payments clause for time-and-materials contracts conditions payment on hourly rates

that meet the labor qualifications as specified in the contract (FAR 52.212-4 and 52.232-7). 

37 71 Fed. Reg. 74,469 (Dec. 12, 2006) (to be codified at 48 C.F.R. parts 216 and 252). 

38 A DCAA official said that, despite the concerns it expressed in official comments on the 

proposed changes, DCAA concurred with the new rules. 

Page 35 GAO-07-273 DOD Time-and-Materials Contracts
that they were paying too much for subcontracted labor that was billed at

the prime contractor’s labor rates. According to the DFAS division chief 

for contract services, to mitigate this risk on other blanket purchase 

agreements, DFAS now includes language in the terms and conditions of 

the agreements specifying that the subcontractor’s actual costs shall be 

billed and that the labor rates in the blanket purchase agreement shall be 

used for prime contractor labor only. 

While time-and-materials contracts are appropriate when specific 

circumstances justify the risks, our findings indicate that they are often 

used as a default for a variety of reasons—ease, speed, and flexibility—

and that the risk posed to the government is not fully taken to heart by 

contracting and program officials. In our view, these reasons can also be

seen as symptomatic of broader problems related to requirements and a 

focus on awarding contracts quickly. Heightened management controls are 

needed, including thorough justifications specific to the individual 

procurements that provide insight to management about why time-andmaterials contracts are being used and continue to be used for recurring 

efforts, even when adequate information is available to convert to a less 

risky contract type. The FAR Council has recognized the need for more 

controls to address risks. While we understand that the focus of the new 

rules was commercial acquisitions, the conditions that called for the 

stricter controls also apply to non-commercial acquisitions, based on our 

findings. In addition, without appropriate monitoring of contractor 

performance when time-and-materials contracts are used, the risk of 

wasted government dollars is increased. 

To help ensure that all time-and-materials acquisitions receive the 

appropriate level of oversight, we recommend that the Secretary of 

Defense direct the Director of Defense Procurement and Acquisition 

Policy to amend the DFARS to require a similar level of justification for 

using time-and-materials for non-commercial services as that in the FAR 

for commercial services by taking the following four actions with regard to 

non-commercial acquisitions: 

Conclusions 

Recommendations 

1. Require the contracting officer to execute written justifications for 

each time-and-materials task order issued under an indefinite-quantity 

contract. 

2. Require that written justifications be prepared for indefinite-quantity 

contracts that allow only for time-and-materials orders. 

Page 36 GAO-07-273 DOD Time-and-Materials Contracts
3. Require that written justifications for the use of time-and-materials 

contracts and task orders 

• contain sufficient facts and rationale to justify that no other 

contract type authorized is suitable; 

• address the specific characteristics of the acquisition that prevent 

the use of either a cost-reimbursable or fixed-price contract;

• establish that the requirement has been structured to maximize the 

use of fixed price contract type on future acquisitions for the same 

or similar requirements; and 

• describe actions planned to maximize the use of fixed-price 

contracts on future acquisitions for the same requirements. 

4. Require that contracting officers, to the maximum extent practicable, 

structure indefinite-quantity contracts to allow issuance of fixed-price 

or cost-reimbursable orders, so that time-and-materials is not the only 

option. 

To monitor and minimize DOD’s use of time-and-materials contracts, we 

recommend that the Secretary of Defense direct the Director of Defense 

Procurement and Acquisition Policy to take the following two actions: 

1. For indefinite-quantity contracts that permit time-and-materials orders, 

require heads of contracting activities to analyze on an annual basis 

whether time-and-materials is being used as a default contract type 

when other pricing arrangements may be appropriate. The Secretary 

will need to determine appropriate risk-based criteria to select the 

contracts for such analysis. 

2. Direct that monitoring plans for time-and-materials contracts

recognize the risks inherent in this contract type and set forth specific 

activities to address these risks to the extent feasible. 

DOD’s Office of Defense Procurement and Acquisition Policy provided 

written comments on a draft of this report. These comments are reprinted 

in appendix II. 

Agency Comments 

and Our Evaluation 

DOD concurred with all six recommendations and has initiated two 

DFARS cases to consider changes to DOD’s acquisition regulations. DOD 

also stated that it will require military departments and defense agencies 

to develop plans for analyzing whether time-and-materials contracts are 

being used as a default contract type. In its response to the 

recommendations on amending its acquisition regulations to require a 

Page 37 GAO-07-273 DOD Time-and-Materials Contracts
similar level of justification as is contained in federal acquisition 

regulations for commercial services, DOD stated that it would evaluate or 

consider our recommendations during the defense acquisition regulation 

rulemaking process. While we understand DOD cannot commit to 

implementing our recommendations in advance of the public comment 

process, we would expect that the recommendations would be used as the 

basis for any proposed rules it offers. 

We are sending copies of this report to interested congressional 

committees; the Secretary of Defense; the Secretaries of the Air Force, the

Army, and the Navy; the Administrators of the General Services 

Administration and Office of Federal Procurement Policy; and the 

Directors of the Defense Contract Audit Agency, Defense Contract 

Management Agency, Defense Information Systems Agency, Defense 

Intelligence Agency, and Office of Management and Budget. We will 

provide copies to others on request. This report will also be available at no 

charge on GAO’s Web site at http://www.gao.gov. 

If you or your staff have any questions about this report or need additional 

information, please contact me at (202) 512-4841 or schinasik@gao.gov. 

Contact points for our Offices of Congressional Relations and Public 

Affairs may be found on the last page of this report. Staff 

acknowledgments are listed in appendix III. 

Katherine V. Schinasi 

Managing Director 

Acquisition and Sourcing Management 

Page 38 GAO-07-273 DOD Time-and-Materials Contracts
Appendix I: Scope and Methodology Appendix I: Scope and Methodology 

Our objectives were to (1) identify the overall trends in Department of 

Defense (DOD) obligations under time-and-materials contracts; (2) analyze 

what DOD is buying under time-and-materials contracts; (3) assess the 

factors leading to DOD’s use of this contract type and whether actions are 

being taken to use it only when no other contract type is suitable; (4) 

evaluate DOD’s monitoring of contractor performance under time-andmaterials contracts; and (5) determine the differences between the labor 

rates prime contractors used to bill DOD and the labor rates in their 

subcontracts, for selected contracts.

To identify trends in the use of time-and-materials contracts, we analyzed

obligation data from DOD’s DD350 database for service contracts that 

were identified as either time-and-materials or labor hour contracts 

between fiscal year 1996 and 2005. The 2005 data was the most recent 

available. For this period, we examined trends in the contract types used 

for service acquisitions overall and for specific types of services. During 

our initial review of the DD350 data, we found that orders under federal 

schedules did not designate a contract type—a potentially significant 

limitation for this objective. To address this limitation, we developed an 

approach to estimate the percentage of these uncoded federal schedule 

orders that were time-and-materials and labor hour actions. We applied

the proportion of obligations reported as time-and-materials for each of 

the 24 service categories in the DD350 database to the obligations that 

were missing a contract type (i.e., federal schedule orders). We believe 

this methodology is conservative because it is likely to underestimate the 

obligations associated with time-and-materials contracts. Orders for 

services under federal schedules must be priced on a fixed-price or timeand-materials basis. However, cost-reimbursable contracts comprise 

16 percent and 57 percent, respectively, (adjusted to exclude contract 

dollars in these categories with a missing contract type) of the two service 

categories—professional services and information technology services—

that account for the large majority of contract dollars (78 percent or 

$5.4 billion) where contract type is not coded. In developing our estimate, 

we did not adjust the percentages to account for the fact that costreimbursable contracts cannot be used for schedule orders. 

To determine the major categories of services where DOD has obligated 

time-and-materials dollars and the growth in these categories of services 

over time, we analyzed data from the DD350 database from fiscal year 

1996 through fiscal year 2005. We also used information from the 

DD350 database for fiscal year 2005 to determine the extent to which DOD 

is obligating time-and-materials dollars under various types of contracts 

(such as indefinite-quantity contracts). To provide examples of types of 

Page 39 GAO-07-273 DOD Time-and-Materials Contracts
Appendix I: Scope and Methodology 

services DOD is procuring under time-and-materials contracts, apart from 

that reported in the DD350 system, we analyzed documents in the contract

files, such as statements of work and contractor proposals, for the 

contracts and orders in our review. We also interviewed contracting and 

program officials. 

We derived our sample of 28 contracts, agreements, and orders, analysis of 

which was used in developing the third and fourth objectives, as follows. 

During the design phase of our review, we extracted information from the 

DD350 database on all DOD actions in fiscal years 2004 and 2005 with 

obligations coded as time-and-materials or labor-hour. This analysis 

yielded a total of 4,785 actions. We selected seven contracts from this 

group, taking into account the location of the buying activity and type of 

contract (e.g., stand-alone, indefinite-quantity, or blanket purchase 

agreement). We subsequently selected 21 additional contracts and 

agreements for further detailed review in two steps. First, we selected the 

three time-and-materials contracts with the most reported obligations in 

fiscal year 2005. Each of these had over $300 million in fiscal year 2005 

obligations. Second, we selected an additional 18 contracts and 

agreements from a smaller population of 559 contracts that were coded as

time-and-materials and had over $1 million in cumulative obligations for 

fiscal year 2005. We made these selections randomly within groups based 

on type of contract/order, origin of contract, location of buying activity, 

and military service or “other DOD” organization. 

Of the 28 contracts and agreements in our sample, 21 used orders as the 

mechanism for putting work on contract.1

 For 18 of the 19, we chose 

3 orders to analyze as well. For the other, we examined the one order with 

time-and-materials obligations recorded in fiscal years 2004 and 2005. To 

further verify the DD350 data for the contracts we reviewed, we compared 

the reported information with documents in the contract files and found 

one order that had been miscoded as time-and-materials. We removed this 

order from the sample. Cumulatively, we reviewed a total of 82 contracts, 

agreements, and orders. 

The following table presents basic information about the 28 contracts, 

agreements, and orders in our sample. 

 1

 Nineteen were DOD contracts, one was a General Services Administration 

governmentwide acquisition contract, and one was a National Institutes of Health 

governmentwide acquisition contract. 

Page 40 GAO-07-273 DOD Time-and-Materials Contracts
Appendix I: Scope and Methodology 

Table 6: Characteristics of GAO’s Sample of 28 Contracts, Agreements, and Orders 

Organizations

Number in 

our sample Obligated dollars through fiscal year 2005 

Number in 

our sample

Air Force 7 Over $1 billion 2 

Army 8 $1 billion to $500 million 1 

Defense Contract Management Agency 1 $500 million to $100 million 3

Defense Information Systems Agency 2 $100 million to $50 million 5 

Defense Intelligence Agency 2 $50 million to $10 million 8

Navy 8 Less than $10 million 9 

Types of services 

Number in 

our sample Types of contract vehicles 

Number in 

our sample

Engineering and technical support 12 Indefinite-quantity contract 13

Information technology 11 Standalone contract 5 

Maintenance of equipment 3 Order off a schedule or governmentwide acquisition 

contract 

4 

Miscellaneous professional, administrative, and 

management support 

2 Blanket purchase agreement 4 

Basic ordering agreement 1 

Requirements contract 1 

Sources: Contract file documentation and DOD DD350 database (data); GAO (analysis).

To assess the actions DOD officials have taken to ensure time-andmaterials contracts are only used when no other contract type is suitable,

we reviewed applicable acquisition policies and regulations to identify 

governmentwide and DOD-specific criteria on when and how they should 

be used. We also held discussions with acquisition policy officials at the

Air Force, Army, Navy, Defense Information Systems Agency, Defense 

Intelligence Agency, and Defense Contract Management Agency to 

determine how each organization commonly utilized time-and-materials 

contracts and how they monitored the extent of their use. In addition, for

each of the contracts in our sample, we reviewed acquisition 

documentation including the determination and findings, if available;

acquisition plans; and business clearance memorandums to assess what 

factors were considered to determine and justify the use of the contract 

type. We also interviewed contracting officers and, in some cases, program 

officials to discuss the rationale used to support the decision to use a timeand-materials contract and the reasons this contract type was eventually 

chosen. 

Page 41 GAO-07-273 DOD Time-and-Materials Contracts
Appendix I: Scope and Methodology 

To evaluate the government’s monitoring of contractor performance, we 

reviewed documentation of contract monitoring for each of our sample 

contracts. This documentation included monitoring plans, contractorgenerated monthly status reports, government-generated contractor 

performance reports, and sample invoices. We used these documents to 

assess what measures were taken to monitor contractor performance and 

to what extent those measures were executed and documented in the 

contract file. We also interviewed the designated contracting officer’s 

representative and/or other individuals responsible for monitoring to 

corroborate and supplement the information in the contract file. 

To collect contract file documents and conduct interviews related to the 

use and monitoring of the time-and-materials contracts in our sample (our 

third and fourth objectives), we visited the following locations: 

Air Force: 

Air Force 11th Contracting Wing, Bolling Air Force Base, Washington, D.C. 

Air Force 554th Electronic Systems Group, Wright-Patterson Air Force 

Base, Dayton, Ohio 

Air Force 951st Electronic Systems Group, Hanscom Air Force Base, Mass. 

Air Force Aeronautical Systems Center, Wright-Patterson Air Force Base, 

Dayton, Ohio 

Air Force Air Logistics Center, Tinker Air Force Base, Oklahoma City, 

Okla. 

Air Force Cost Analysis Agency, Arlington, Va. 

National Air and Space Intelligence Center, Wright-Patterson Air Force 

Base, Dayton, Ohio 

Army: 

Army Aviation and Missile Command, Redstone Arsenal, Huntsville, Ala. 

Army Communications-Electronic Command, Fort Monmouth, N.J. 

Army Communications-Electronics Research, Development and 

Engineering Center, Fort Belvoir, Va.

Army Contracting Center of Excellence, Washington, D.C. 

Army Information Technology, E-Commerce and Commercial Contracting 

Center, Alexandria, Va. 

Department of the Army, G-8 Programs and Priorities, Washington, D.C. 

Page 42 GAO-07-273 DOD Time-and-Materials Contracts
Appendix I: Scope and Methodology 

Navy: 

Naval Air Systems Command, Patuxent River, Md. 

Naval Sea Systems Command, Washington Navy Yard, D.C. 

Naval Surface Warfare Center Carderock Division, West Bethesda, Md. 

Other DOD:

Defense Contract Management Agency, Springfield, Va. 

Defense Intelligence Agency, Washington, D.C., and Arlington, Va. 

We were able to obtain contract files from the Defense Information 

Systems Agency electronically. We conducted additional interviews by 

video conference or telephone. 

For the final objective on prime contract labor rates billed for

subcontracted labor, we first analyzed the 28 contracts, agreements, and 

orders in our sample to determine which permitted prime contractors to 

charge the government for subcontracted labor using their own, prime 

contract rates. We collected information on the difference between the 

prime and subcontract labor rates for one of the blanket purchase 

agreements in our sample. We then selected an additional 12 contracts and 

agreements for further, detailed review of the labor rates, based on 

congressional interest, for a total of 13 contracts and agreements to 

address this objective. We identified these additional 12 contracts and 

agreements from two sources. First, since the Defense Contract Audit 

Agency had identified this billing practice as an issue primarily with orders 

under General Services Administration schedule contracts, we examined 

DOD’s blanket purchase agreements under schedule contracts as reported 

in the DD350 database and selected six for further analysis. Second, we 

analyzed contracts that had been reviewed by DOD as a result of 

Sections 801 and 802 of the National Defense Authorization Act for Fiscal 

Year 2002 to identify those that had reported time-and-materials 

obligations, and selected six of these for further analysis. Because all 

13 contracts and agreements we reviewed under this objective were 

structured to allow task orders to be issued under them, we selected

orders from each to analyze. In all, we assessed the differential between 

the prime and subcontract labor rates for 24 task orders and 628 different 

labor categories within those orders. We analyzed contract documentation 

and interviewed prime contractors about the labor rates used to bill DOD 

for subcontracted labor. We queried Defense Contract Audit Agency about 

audit assignments it has conducted where it found this billing practice. We 

also reviewed recent revisions to the Federal Acquisition Regulation and 

Page 43 GAO-07-273 DOD Time-and-Materials Contracts
Appendix I: Scope and Methodology 

DOD’s supplement pertaining to how prime contractors can bill the 

government for subcontracted labor and discussed these revisions with 

officials from DOD’s Procurement and Acquisition Policy office. 

We performed our review from February 2006 to May 2007 in accordance 

with generally accepted government auditing standards. 

Page 44 GAO-07-273 DOD Time-and-Materials Contracts
Appendix II: Comments from the Department Appendix II: Comments from the Department of Defense 

of Defense 

Page 45 GAO-07-273 DOD Time-and-Materials Contracts
Appendix II: Comments from the Department 

of Defense 

Page 46 GAO-07-273 DOD Time-and-Materials Contracts
Appendix II: Comments from the Department 

of Defense 

Page 47 GAO-07-273 DOD Time-and-Materials Contracts
Appendix II: Comments from the Department 

of Defense 

Page 48 GAO-07-273 DOD Time-and-Materials Contracts
Appendix III: GAO

A

 Contact and Staff 

cknowledgments 

Page 49 GAO-07-273

Appendix III: GAO Contact and Staff 

Acknowledgments 

Katherine V. Schinasi (202) 512-4841 or schinasik@gao.gov

In addition to the contact listed above, Michele Mackin, Assistant Director; 

Ron Schwenn; Marie Ahearn; Nicholas Alexander; Elaine Boudreau; 

Lily J. Chin; Paula J. Haurilesko; Art James; Matt Keeler; Julia Kennon, and 

Patrick Peterson made key contributions to this report. 

 DOD Time-and-Materials Contracts

GAO Contact 

Acknowledgments 

(120512) 
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