Avoid overkill

The Office of Federal Procurement Policy's (OFPP) effort to ban time and materials (T&M) contracting on General Services Administration schedules, in which vendors are paid a predetermined hourly rate for work by labor category, is an example of Draconian overregulation.

There are situations in which T&M is appropriate. When the government needs developmental work or work in which the level of effort required is difficult to estimate, flexibly priced arrangements such as T&M make sense. Compared with cost-reimbursement contracting (the other major form of flexibly priced contracts), T&M has the advantage of avoiding large administrative costs to government and industry, and doesn't discourage predominantly commercial contractors from the government's complex cost- reimbursement rules, because the labor rate in a T&M contract is all-inclusive.

An all-inclusive rate also gives vendors an incentive to lower their overhead costs, because, in the short run, such savings go straight to the bottom line, unlike cost-reimbursement contracting.

Having said all this, I believe that the (justifiable) ruckus over OFPP's bull-in-a-china-shop behavior presents an occasion for a needed debate in our community about the role of T&M contracting. The fact is, it's tempting to use T&M contracting (like flexibly priced contracting in general) as an easy alternative to thinking through — and gaining the vendor's contractual commitment to — what one wishes the vendor to accomplish. There is a special danger with T&M contracting in that the vendor's profit is baked into the labor rate, thus reducing incentives for controlling costs.

The government needs to get much better at buying T&M in a smart way to reduce these pitfalls while still taking advantage of situations in which T&M makes sense. First, OFPP's line that T&M is "antithetical" to performance-based contracting lets users of flexibly priced contracts off the hook too easily. There is no reason a T&M contract can't have the same performance objectives written into it as a fixed-price contract does.

But the government can provide monetary incentives, and the promise of a better past-performance rating, to vendors who meet performance objectives at some pre-established total cost.

Similarly, the government already frequently provides incentives for controlling costs in cost-reimbursement contracts by establishing a target price and sharing savings with the vendor when the work is completed under that target. (This contract form is, somewhat misleadingly, known as "fixed-price incentive fee" contracting.)

This approach should be applied to T&M as well, especially because T&M contracts already often include a "not-to-exceed" ceiling price — often bid by the vendor — that could serve as the target.

Let's keep T&M in our toolkit. And let's do a better job of doing it smartly.

Kelman is professor of public management at Harvard University's Kennedy School and former administrator of the Office of Federal Procurement Policy. He can be reached at steve_kelman@ harvard.edu.