Overview
FAR 16.601 defines Time-and-Materials (T&M) contracts as a method of procurement that pays for direct labor at fixed hourly rates (inclusive of profit) and materials at actual cost. This contract type is reserved for situations where it is impossible to accurately estimate the extent, duration, or cost of work at the time of award.
Key Rules
- Pricing Components: Payment is based on direct labor hours at specified fixed hourly rates (covering wages, overhead, G&A, and profit) and the actual cost for materials.
- Government Surveillance: Because T&M contracts provide no profit incentive for the contractor to control costs or improve labor efficiency, the government is required to maintain oversight to ensure efficient performance.
- Ceiling Price: Every T&M contract must include a ceiling price that the contractor exceeds at their own risk; any increase to this ceiling requires a formal analysis and documentation by the Contracting Officer.
- Determination and Findings (D&F): A CO cannot use this contract type without a D&F stating no other contract type is suitable. If the performance period exceeds three years, the D&F must be approved by the Head of the Contracting Activity (HCA).
- Inter-organizational Transfers: Labor rates for services transferred between a contractor’s affiliates or divisions generally must not include profit unless the services meet specific "commercial service" criteria.
Practical Implications
- Last Resort Status: T&M contracts are considered high-risk for the government, meaning contractors should expect rigorous justification processes and higher levels of administrative scrutiny compared to fixed-price arrangements.
- Cost Accounting Rigor: Contractors must maintain precise records of labor hours and material receipts, as the government’s right to surveillance and the "actual cost" reimbursement for materials necessitate high levels of transparency and audit readiness.