Why is contracts placed on a time and materials (T&M) basis? There is no profit incentive for a contractor to effectively manage either the time expended or the amount of materials used. Overwhelming risk is with the buying organisation. The risk can be somewhat mitigated if stringent measures are taken throughout the procurement process to manage the contractor. What have Brian Farrington Limited found on audit of T&M contracts?
- That the estimated contract sum has been
exceeded, sometimes in excess of 300%. - Invoices have been paid, unsupported by signed
time sheets and/or independent accountability through the client’s time
recording system. - Despite the contract setting out agreed hourly
rates for specific labour skills, work being done by less qualified staff. - No control over time expended off-site,
including no knowledge of actual work being carried out. - Inadequate contract management/surveillance.
- Absence of robust statements of work and
specific deliveries. - Overtime being paid for when the specific
‘working day’ is not defined in the contract. - Work outputs accepted by not subjected to a
formal quality acceptance regime. - Absence of a procurement strategy to document
the reasoning for a T&M contract. - Absence of a documented process to review
contractor’s progress and, in some instances, no contract review meetings being
held. - Contract managers appointed who have not
received any training. - Travel costs being claimed, hotel costs being
claimed without a policy being in place or receipts being provided. - Work being sub-contracted without the buying
organisation’s knowledge or agreement (40% of the work in one instance) - Despite a contractor bidding for work against
specific labour categories and rates they later said, “That as they build their team to perform the
contract it became apparent almost immediately that the labour categories and
rates were not adequate”.
We could provide many other examples! In the table below is an extract from an invoice relating to a USA
military contract:
Cost Category | Amount $ |
Travel | 68,067.43 |
Other Direct Costs | 238,053.60 |
Heavy Equipment | 4,462.00 |
Consultants | 166,799.78 |
Subcontractors | 1,108,200.69 |
Inter-Company Transfers | 25,912.08 |
Total Other Direct Costs | 1,611,495.58 |
What would you check before authorising payment? Then guess whether it was done in reality? No prizes for a correct answer!
Risk abounds. That is a fact – the question is ‘Where is it in your organisation and who knows?’
Procurisk® is a robust tool to identify the issues – contact Brian Farrington Limited for more information on +44 (0)1744 20698