Labor-Hour (LH)
What It Is
A labor-hour (LH) contract is a variation of the time-and-materials contract that pays only for labor at fixed hourly rates; the contractor does not furnish materials. It is governed by the same FAR 16.601 rules as T&M, including the requirement that it be used only when no other type is suitable, the documented determination, the ceiling price, and the surveillance obligation. The difference is simply that there is no materials component — every billed dollar is labor.
Who Carries the Risk
Same as T&M — the government carries efficiency risk and pays for hours worked; the fixed rates protect the contractor and the ceiling price caps the government.
When the Government Uses It
- Pure-labor services — staffing, technical support, professional services — where materials are not part of the contractor's scope.
- Situations where the extent or duration of the effort cannot be estimated with confidence at award.
- Only after the contracting officer documents that no other contract type is suitable (same D&F as T&M).
Key Features
| Feature | What It Means |
|---|---|
| Labor only | You bill labor categories at fixed hourly rates that include indirect cost and profit. There is no materials line. |
| Fixed hourly rates | Each labor category has a contractually fixed billing rate. You are paid for hours actually worked at those rates. |
| Ceiling price (NTE) | A not-to-exceed amount; performing beyond it without a modification is at the contractor's risk. |
| Surveillance | As with T&M, the lack of a cost-efficiency incentive means the government must monitor performance closely. |
What It Means for an SDVOSB
Labor-hour is essentially a pure-labor staffing arrangement, which makes the limitations on subcontracting especially direct: with no materials to pass through, the 50% self-performance test on services under 13 CFR 125.6 is measured squarely on the labor you perform versus what you sub to firms that are not similarly situated. If most of the contract is bodies in seats, most of those hours need to be yours (or a similarly situated sub's). Model it with the limitations-on-subcontracting calculator.
Common Pitfalls
- Treating LH like T&M with materials — there is no materials component, so the self-performance math is all about labor.
- Subcontracting most of the staffing to non-similarly-situated firms and breaching the 50% limit on services.
- Billing beyond the not-to-exceed ceiling without a modification.
Run the Numbers
Frequently Asked
What is the difference between a labor-hour and a time-and-materials contract?
A time-and-materials contract pays fixed hourly labor rates plus the actual cost of materials. A labor-hour contract is the same arrangement with no materials component — the contractor supplies only labor at fixed hourly rates. Labor-hour is treated as a variation of T&M under FAR 16.602 and follows the same rules, including the determination-and-findings, ceiling price, and surveillance requirements.
Does the 50% self-performance rule hit harder on labor-hour work?
It is more direct. Because a labor-hour contract is all labor with no pass-through materials, the services limitation on subcontracting (at least 50% performed by the prime and similarly situated entities under 13 CFR 125.6) is measured straight against the labor. If you subcontract most of the staffing to firms that are not similarly situated, you can quickly breach the limit.
Primary Sources
Plain-English reference, not legal advice. Contract-type selection is a contracting-officer judgment and the FAR is periodically amended — always confirm the contract type, clauses, and how the limitations on subcontracting are measured against the solicitation and your contracting officer before relying on this.
Change log (1)
- LaunchedPublished the federal contract types reference covering the pricing and delivery arrangements an SDVOSB encounters on set-asides — firm-fixed-price (FFP), fixed-price with economic price adjustment (FP-EPA), fixed-price incentive (FPIF), the cost-reimbursement family (CPFF, CPIF, CPAF), time-and-materials and labor-hour, the indefinite-delivery vehicles (IDIQ, requirements, definite-quantity), and letter contracts — each with a who-carries-the-risk callout, a key-features table, an SDVOSB-specific angle tying the type to the limitations on subcontracting, common pitfalls, FAQPage, Article, Dataset, and BreadcrumbList structured data, primary-source FAR Part 16 citations, and cross-links into the glossary, regulation explainers, how-to guides, FAQ, and the limitations-on-subcontracting and price-to-win calculators.