Our audit objective was to determine if U.S. Postal Service contracting officers (COs) are administering Time and Materials (T&M) and Labor Hour Contracts in accordance with Supplying Principles and Practices (SP&P).
A T&M contract is most commonly used when the exact work to be done cannot be predicted in advance. A labor hour contract is a variant of the T&M contract, differing only in that the supplier does not provide the materials. Due to the inherent risks, these contract types are the least preferred as they do not encourage effective cost control or labor efficiency by the supplier. As such, the Postal Service requires COs to establish and communicate a ceiling price to the supplier, include mandatory clauses, and document justification for increases to the ceiling price for T&M and Labor Hour contracts.
As of July 2017, there were 105 open T&M and Labor Hour contracts awarded during fiscal years (FY) 2006 – 2017, valued at $432 million. Our statistical sample included 70 contracts totaling over $294 million.
What the OIG Found
COs did not consistently administer T&M and Labor Hour contracts in accordance with SP&P. Specifically, we identified the following exceptions:
- Fifty-one percent (36 of 70) of the contracts – or 54 contracts projected over the universe – the CO did not explicitly communicate ceiling prices in writing to suppliers.
- Twenty-four percent (17 of 70) of the contracts – or 25 contracts projected over the universe – the CO did not include mandatory Clause 2-38, which establishes the requirements for payment submission and reviews, hourly rates, supplier payment withholdings, allowable costs, allowances, and ceiling prices.
- Ten percent (seven of 70) of the contracts – or 10 contracts projected over the universe – the CO did not document justification for ceiling price increases.
- Sixty-one percent (43 of 70) of the contracts – or 64 contracts projected over the universe – the CO did not withhold 5 percent of the supplier’s payment or waive the withholding as required in Clause 2-38.
These issues occurred due to inconsistent practices and interpretation of the SP&P among COs related to the use of ceiling price and contract funded amount; the lack of adhering to the process to ensure applicable clauses were included in contracts; inadequate contract administration practices among COs; and COs determination that the retainage requirement was not applicable due to the services provided.
When COs do not adhere to policy, there is an increased risk of cost overruns, disputes, or not achieving the objective or intent of that policy. Additionally, without applicable clauses in the contract, COs may not be able to enforce the terms and conditions established and intended to manage the risks associated with T&M and Labor Hour contracts. Unsupported contract costs totaled an annual average of $52 million for the two-year period.
What the OIG Recommended
We recommended management revise policy to better define ceiling price and the requirement to document the ceiling price in the Schedule; bring contracts missing required clauses into compliance and establish a process to promote adherence and accountability for contracting officers. We also recommended management emphasize through formal communication, requirements on documenting ceiling price changes and requirements to formally waive or withhold retention payments in T&M and Labor Hour contracts.