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Payment and collection.

DFARS Sets the Example--FAR Catches Up with Final Rule Allowing Optional Withholding under Time-and-Materials and Labor-Hour Contracts

As we reported last year, the DOD issued a final rule adding DFARS 232.111(b) and DFARS 252.232-7006, Alternate A, that clarified determinations whether to withhold payments under time-and-materials and labor-hour contracts. (386) The new clause notes that "there should be no need to withhold payment for a contractor with a record of timely submittal of the release discharging the Government from all liabilities, obligations, and claims." (387) However when determined necessary to protect the government's interest, the Administrative Contracting Officer may issue a unilateral modification to withhold five percent of payment amounts due, up to a maximum of $50,000. (388)

Subsequently, the FAR Councils issued a final rule as FAC 2005-05 that also revised the FAR to allow optional withholding for Time-and-Materials and Labor-Hour Contracts. (389) The final rule amended FAR 32.111 and 52.232-7 by removing the prior withholding mandatory requirement to allow the contracting officer to issue a unilateral modification to withhold five percent of the payments due, up to a maximum of $50,000 if considered necessary to protect the government's interest. (390) In response to comments on the initial proposed rule, (391) the FAR Councils clarified that the $50,000 withhold ceiling applies to the entire contract and not to each individual order under a task order contract. (392)

"Ouch, that Hurts Mr. Taxman! Mr. KO, What is a Poor Contractor to do?"

The DOD has issued an interim rule through DFARS Case 2004-D033 addressing the effect of Internal Revenue Service ORS) collections of tax debts against an indebted contactor's payments for performance under DOD contracts. (393) This process of IRS debt collection is referred to as a levy and authorizes the government to continuously withhold up to one hundred percent of every contractor payment until the tax debt is satisfied. (394) Recognizing that there is a high risk of contract

non-performance from the application of an IRS levy, DFARS 232.7100 and 252.232-7010 were added "to ensure that all parties understand their rights and obligations related to the assessment of a levy." (395) The DOD noted in the interim rule that it should be the contractor's responsibility to identify and notify the government of any levy significantly impacting contract performance because it is the contractor's tax delinquency creating the situation. (396)

Accordingly, DFARS 252.232-7010(b) requires the contractor to promptly notify the Contracting Officer of any levy that will jeopardize contract performance. The notification must include the dollar amount of the levy, the rationale and adequate supporting documentation of how the levy will jeopardize contract performance, and explain if an inability to perform the contract will adversely affect national security. If the Contracting Officer determines in joint consultation with the Director, Defense Procurement and Acquisition Policy (DPAP) that a lack of performance will adversely affect national security, the DPAP will notify the IRS and "some or all of the monies collected will be returned to the contractor." (397)

Proposed Rule Issued to Clarify Payments under Time-and-Materials (T&M) Contracts

The FAR Councils through FAR Case 2004-015 proposed to amend FAR part 16.307 and specify that FAR clause 52.216-7, Allowable Cost and Payment, is included in T&M contracts. (398) The description of T&M contracts at FAR part 16.601 notes that supplies or services are acquired on the basis of "[d]irect labor hours at specified fixed hourly rates that include wages, overhead, , general and administrative expenses, and profit." (399) This pricing basis under a T&M contract would be the time portion and is usually referred to as loaded labor rates. The materials portion is for the materials used in contract performance "at cost, including, if appropriate, material handling costs." (400) Accordingly, the proposed rule would require the typical clause used in cost contracts, FAR part 52.216-7, "as applicable to the portion of the contract that provides for reimbursement of materials at actual cost." (401) Additionally, the definition of materials at FAR part 16.601 would be amended to include other typical costs under a T&M contract associated with material costs, such as, subcontract costs for supplies and services and applicable indirect costs (e.g., general and administrative expenses). (402)

Re-do--$45 Billion and Counting: Magnitude of Government Improper Payments Remains Unknown

As we reported have reported in prior years, Congress remains very interested in the identification and recovery of agency improper payments. (403) Thus, Congress enacted the Improper Payments Information Act of 2002 (IPIA) (404) that "requires each agency to annually identify all 'programs and activities that may be susceptible to significant improper payments' and report an annual estimate of improper payments to Congress." (405)

For FY 2004, the GAO reviewed Performance and Accountability Reports (PAR) from twenty-nine agencies and reported on the challenges remaining in meeting the aforementioned requirements of the IPIA. (406) Specifically the GAO noted that the federal government had made progress because twenty-three of the twenty-nine agencies reported they had completed identifying programs at risk for improper payments and seventeen of those agencies had estimated and reported over $45 billion of improper payments. (407) However, the full magnitude of the improper payments problem remains unknown because all of the reviewed agencies had neither completed identification of at-risk programs, nor provided an estimate of their improper payments in accordance with the IPIA. (408)

Specifically for the DOD, it reported that it had assessed all programs and estimated $100 million in improper military health benefit payments and $34 million in improper military retirement fund payments. (409) Finally, true success in resolving the improper payments issue and complying with the IPIA involves implementing actions to identify and recover improper payments as well as eliminating the initial occurrence. Although the report noted that the OMB reported federal agencies had "established a strong foundation for ... identifying and implementing the necessary corrective actions," the GAO had not specifically reviewed the effectiveness of improper payment identification and recovery actions. (410)

Lieutenant Colonel Karl Kuhn

(386) Defense Federal Acquisition Regulation Supplement; Payment Withholding, 68 Fed. Reg. 69,631 (Dec. 15, 2003).

(387) DFARS, supra note 347, at 232.111(b)(ii).

(388) Id. at 232.111(b)(iii).

(389) Federal Acquisition Regulation; Payment Withholding, 70 Fed. Reg. 43,580 (July 27, 2005).

(390) Id. at 43,581.

(391) Federal Acquisition Regulation; Payment Withholding, 69 Fed. Reg. 29,838 (May 25, 2004).

(392) 70 Fed. Reg. at 43,580.

(393) Defense Federal Acquisition Regulation Supplement; Levy on Payments to Contractors, 70 Fed. Reg. 52,031 (Sept. 1, 2005).

(394) See 26 U.S.C.S. [subsection] 6331-6332 (LEXIS 2005).

(395) 70 Fed. Reg. at 52,031.

(396) Id.

(397) Id.

(398) Federal Acquisition Regulation; Payments Under Time-and-Materials and Labor-Hour Contracts, 70 Fed. Reg. 56,314 (Sept. 26, 2005).

(399) FAR, supra note 274, at 16.601.

(400) Id.

(401) 70 Fed. Reg. at 185.

(402) Id.

(403) See 2003 Year in Review, supra note 367, at 163.

(404) Pub. L. No. 107-300, 116 Star. 2350 (2002) [hereinafter IPIA].

(405) 2003 Year in Review, supra note 367, at 163 (quoting IPIA, [section] 2(a), 116 Star. 2350).


(407) Id. at 3.

(408) Id. at 9.

(409) Id. at 21.

(410) Id. at 4.
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Title Annotation:optional withholding of payment under time, materials and labor hour contracts
Author:Kuhn, Karl W.
Publication:Army Lawyer
Date:Jan 1, 2006
Previous Article:Non-FAR transactions.
Next Article:Performance-based service acquisitions (PBSA).

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