Time-and-Materials (T&M) Contract
A contract type that pays contractors fixed hourly labor rates plus the actual cost of materials, typically used when the scope of work cannot be precisely defined at contract award.
A Time-and-Materials (T&M) contract provides for acquiring supplies or services on the basis of direct labor hours at fixed hourly rates, plus the actual cost of materials. T&M contracts are used when it is not possible to estimate the extent or duration of the work or to anticipate costs with reasonable certainty at the time of contract award.
When T&M Is Appropriate
FAR 16.601 states that T&M contracts may be used only when no other contract type is suitable. Agencies must justify the use of T&M in writing and generally apply it to on-call IT support, emergency response services, maintenance and repair work where the scope cannot be predicted, and research activities where the level of effort cannot be reliably estimated. T&M is sometimes used for the initial phases of a project before sufficient information exists to move to FFP.
Structure of T&M Rates
The hourly rate in a T&M contract includes direct labor, overhead, general and administrative costs, and profit. Materials are reimbursed at actual cost with no markup unless the contract specifies a handling rate. Because the government is paying for hours worked rather than a defined deliverable, the FAR requires a ceiling price above which the contractor is not authorized to proceed without additional funding.
Government Oversight Requirements
Because T&M contracts provide minimal incentive for cost control, FAR 16.601 requires government oversight sufficient to give reasonable assurance that efficient methods and effective cost controls are being used. Contracting officers often assign a COR to monitor contractor hours and labor mix closely on T&M contracts. Overbilling hours or charging non-contract labor categories are common compliance risks.
T&M vs. Labor Hour Contracts
A Labor Hour (LH) contract is a variant of T&M that covers only labor and not materials. Labor Hour contracts are used when the services required do not involve furnishing supplies, such as professional advisory services or consulting. The same hourly rate structure and government oversight requirements apply.
Frequently asked questions
What is the ceiling price on a T&M contract?
FAR requires T&M contracts to include a ceiling price the contractor may not exceed without prior written approval from the contracting officer. The ceiling protects the government from open-ended spending. Contractors must notify the CO when costs are expected to approach the ceiling so additional funds can be obligated or the scope can be adjusted.
Can a T&M contract convert to FFP?
Yes. It is common for agencies to use T&M for the early, uncertain phase of a program and then convert to FFP once requirements are well understood. This hybrid approach is sometimes called a phased contract strategy and gives both parties the flexibility of T&M early while achieving the cost discipline of FFP as the program matures.