Time-and-Materials (T&M)
What It Is
A time-and-materials (T&M) contract pays for labor at specified fixed hourly rates — rates that already include wages, overhead, G&A, and profit — and reimburses materials at actual cost (with allowable handling). Because the government pays for hours worked rather than a defined outcome, T&M provides no positive profit incentive to control cost or labor efficiency, so the FAR treats it as a last resort: it may be used only when no other type is suitable and the contracting officer documents a determination and findings. Every T&M order carries a ceiling price (not-to-exceed) the contractor exceeds at its own risk.
Who Carries the Risk
Significant risk on the government, which pays for hours regardless of efficiency; the contractor's protection is the fixed rates, and the ceiling price caps the government's exposure.
When the Government Uses It
- Repairs, maintenance, and engineering or support services where the extent or duration of work cannot be estimated with confidence at award.
- When it is not possible at the time of award to estimate the extent or duration of work or to anticipate costs with any reasonable confidence.
- Only after the contracting officer documents that no other contract type is suitable (a required D&F).
Key Features
| Feature | What It Means |
|---|---|
| Fixed labor rates | Each labor category has a fixed hourly billing rate that includes wages, indirect costs, and profit. You bill hours actually worked at those rates. |
| Materials at cost | Materials are reimbursed at actual cost (plus any allowable handling). There is no profit loaded on materials. |
| Ceiling price (NTE) | A not-to-exceed amount you cannot bill beyond without a modification. Work past the ceiling is at the contractor's own risk. |
| Surveillance | Because there is no incentive for labor efficiency, the government must provide appropriate surveillance of performance. |
What It Means for an SDVOSB
T&M is common for SDVOSB services work, and it carries a distinct limitations-on-subcontracting wrinkle: SBA measures the 50% self-performance requirement on services T&M work by reference to the labor (often the labor hours / labor cost) the prime performs, not total invoiced dollars including materials. Get this wrong and you can blow the 13 CFR 125.6 limit even while materials are flowing through subs. Confirm how the contract defines and reports labor, and use the limitations-on-subcontracting calculator to test your teaming plan before award.
Common Pitfalls
- Billing past the not-to-exceed ceiling — the government is not obligated to pay beyond it absent a modification.
- Mapping people to the wrong labor category, so billed rates do not match the qualifications the contract requires.
- Forgetting the limitations on subcontracting are measured on the labor you self-perform — subbing out too much of the labor breaches 13 CFR 125.6 even if materials run through subs.
Run the Numbers
Frequently Asked
Why does the FAR call time-and-materials a last resort?
Because a T&M contract pays for hours worked rather than a defined outcome, it gives the contractor no positive profit incentive to control labor cost or be efficient. FAR 16.601 therefore allows it only when no other contract type is suitable, requires the contracting officer to document that determination, and requires the government to provide appropriate surveillance of performance.
How do the limitations on subcontracting work on a T&M services contract?
On a services contract the prime (with similarly situated entities) must perform at least 50% of the work, and on T&M services that test is generally applied to the labor — the cost of the labor or labor hours the prime performs — rather than total invoiced dollars that include pass-through materials. That means you can breach 13 CFR 125.6 by subcontracting too much of the labor even while materials flow through subs. Confirm how your contract defines and reports labor and model it with the limitations-on-subcontracting calculator.
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.