SAIC and a Time and Materials Contract
SAIC and a Time and Materials Contract
Science Applications International Corporation (SAIC) is a provider of technical workforce and solutions to governmental and commercial clients, with a focus on information technology (IT). It has approximately 38,000 employees and its headquarters is located in McLean, Virginia with a second major location in San Diego, California. The company has a diverse range of specialties, with departments including commercial outsourcing, criminal justice, cybersecurity, federal contract vehicles, financial, geospatial, health solutions, IT, life sciences, maritime, national security, process improvement and capability maturity model integration (CMMI) support, software development, space, and training. The company’s mission statement says that it is “dedicated to delivering best-value service and solutions based on innovative application of science and technology.” (SAIC, 2013).
In 2010, about 25% of the company’s revenue was civilian with the remaining 75% being earned in governmental work. That year SAIC earned approximately $5.5 billion dollars in revenue and was ranked number five in companies for government contract work. One important client for SAIC is the National Aeronautic and Space Administration (NASA) where SAIC provides information technology services to the Marshall Space Flight center and all NASA centers, including NASA headquarters (Washington Technology, 2011). Since the publication of the top 100 federal government contractors in 2003, SAIC has been within the top ten companies every year. Recently the company’s stock has been in decline, however, as is the case with many companies that rely heavily on the federal government for their business (Caplinger, 2013).
In October 2006, SAIC announced it was awarded a five-year time and materials contract to provide IT services and support for the Health Resources and Services Administration (HRSA). The HRSA is a federal agency that provides health care service to uninsured, isolated, or medically vulnerable people (HRSA, 2013) and SAIC would be providing Web and database applications for the grant program run by the agency. In particular, SAIC would be working for the Maternal and Child Health Bureau (MCHB), the HIV/AIDS Bureau (HAB), and the Bureau of Health Professions of the HRSA (SAIC, 2006). Beyond the IT support work, SAIC would be lending their expertise in grant administration in order to put processes in place to ensure those receiving the grants are performing as required. Notably, SAIC has developed and would continue to develop an Internet tool called the Geospatial Data Warehouse that provides those working within the HRSA one online area to access program materials, share information, collaborate, and produce reports with the goal of focusing resources effectively (SAIC, 2006).
A time and materials contract is a special type of cost reimbursement contract. A cost reimbursement contract estimates the total cost and establishes a ceiling that the contractor may not exceed, except at their own risk (48 CFR Subpart 16.3). A time and material contract estimates the total cost, establishes a ceiling, and also includes an hourly rate has been negotiated for each type of worker and estimates of how long the job will take. It should be noted that SAIC’s overhead and profit margin are included in the hourly rate that is being charged. As is typical for this type of contract, it has a one year base, with four additional years of possible extension. SAIC states that if all four years are exercised, the contract would have an estimated value of $33.9 million (SAIC, 2006).
Time and materials contracts are commonly used by the federal government when contracting for service employees. The government will utilize a time and materials contract only when “it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence” (48 CFR Subpart 16.601). Thus, the regulations acknowledge that these kinds of contracts carry extra risk for the government. Because of these extra risks, a requirement for governmental surveillance of the contractor is included in the contract. The greatest risk to the government with this kind of contract is the possibility of overtime or cost overruns that were not anticipated in the original estimate, as the government will be the responsible party for these additional costs, at least up to the agreed upon ceiling price. The government also has the risk that work will be unfinished at the end of the full duration of the contract. Because of these types of significant governmental risks, time and materials contracts are likely awarded only in unusual circumstances and/or only to companies with long contracting experience with the government.
In this case, SAIC has a long history contracting with the government and has been working specifically with HRSA since 1998 (SAIC, 2006), so it is not unexpected that this company would be able to acquire a time and materials contract. Also, the work being done is IT development work which is notorious for being unpredictable in duration, so the use of this type of contract is perhaps justified in this case. It should be noted that the risk is not only on the governmental side for this contract. SAIC also has a significant risk if labor costs increase over the duration of the contract, as the rates of pay have been negotiated upfront. Thus, there is an impact of how the market for those required to do this work moves over the course of the contract. If workers depart and more expensive labor needs to be acquired during the project than what was anticipated during negotiation because of labor shortages for this kind of skilled workers, this could significantly impact the ability of SAIC to make a profit.
In governmental contracting, direct costs are any costs identified specifically with that contract. Some examples of SAIC’s direct costs involved with this contract are labor, travel, and materials specifically identified with the contract. Labor costs for SAIC in this contract include paying the various kinds of workers that will be needed to perform the duties outlined in the contract. For this kind of work, this would be expected to be IT specialists such as software engineers and database engineers as well as those with expertise in scientific grant administration and statistical data analysis. Travel expenses would be expected for the work as much of it would be done at the premises of the various HRSA bureaus involved. Materials such as computers and software would also be involved in this contract. SAIC took some of these direct costs into account when they formulated the hourly rate such as their estimated labor and travel costs. The materials, such as computers or software, will be supplied by SAIC and the actual cost will be directly reimbursed back to them by the government after proper reporting under this type of contract (48 CFR Subpart 16.601). An important part of SAIC’s responsibilities in being properly reimbursed for this contract and making a profit will be accounting and record-keeping of the actual cost of the materials and the ability to unambiguously associate those materials to the HRSA contract.
In governmental contracting, indirect costs include costs to SAIC that are not specific to this contract, but are still costs to the business. Some examples of SAIC’s indirect costs are facility expenses, rent, and employee benefits. This is the money that SAIC spends to run their business in general and cannot be specifically allocated to the contract with HRSA or any other particular contract. A common term for these kinds of expenses is overhead, although not everything traditionally defined as overhead is an indirect cost from a governmental contracting point of view and visa versa. In the case of a time and materials contract, SAIC took their indirect costs into account when they negotiated the hourly rate. But as with the labor costs, if these indirect costs were underestimated, there is a risk that profits figured into the rate would be lost to that error. A final component of the hourly rate that was negotiated by SAIC was the profit that they would like to make from the contract. This profit is slightly vulnerable, as discussed above, particularly to increased labor or indirect costs over the course of the contract life. However, an experienced governmental contractor like SAIC is not likely to misinterpret future costs given the long experience the business has with needing solid predictions to ensure the profits from their governmental contracts are realized.
SAIC is a company that makes much of its revenue off of providing the government with various kinds of scientific and technical workforce and expertise. They are extremely experienced at governmental contracting and have a long history of working with many departments of the government. One particular contract that SAIC was granted was a time and materials contract for IT work for the HRSA. Although a time and materials contract is relatively unusual, given the risks to the government with this type of contract, the company and projects involved were found to be best served by this kind of compensation. Briefly, an hourly wage is negotiated for each type of worker involved and estimates are made as to the duration of the work needed. Materials are provided by SAIC and reimbursed at an actual cost level. This particular contract has a one year base with four one year extensions possible. Given the experienced parties involved, it is likely that this contract was profitable to SAIC and the government obtained the IT work and grant administration expertise needed for the HRSA.
References
48 CFR Subpart 16.3 Cost-Reimbursement Contracts. Retrieved from
http://www.acquisition.gov/far/html/Subpart%2016_3.html
48 CFR Subpart 16.601 Time-and-Materials, Labor-Hour, and Letter contracts. Retrieved from
http://www.acquisition.gov/far/html/Subpart%2016_6.html
Caplinger, D. (2013 June 20). Will SAIC Stock Rise From Its Impending Split? The Motley Fool. Retrieved from
http://www.fool.com/investing/general/2013/06/20/will-saic-stock-rise-from-its-impending-split.aspx
Health Resources and Services Administration. (HRSA, 2013). HRSA. Retrieved from http://www.hrsa.gov/index.html
Science Applications International Corporation (SAIC, 2006, October 6). SAIC Awarded IT Support Contract by the Health Resources and Services Administration. [Press Release]. Retrieved from
http://investors.saic.com/phoenix.zhtml?c=193857&p=irol-newsArticle&ID=914615&highlight=
SAIC (2013). SAIC. Retrieved from http://www.saic.com/
Washington Technology (2011). 5 : Science Applications International Corp. Retrieved from
http://washingtontechnology.com/toplists/top-100-lists/2010/science-applications-international-corp.aspx?admgarea=TOP100_2011
