Labor Hour Contract

A Labor Hour contract pays contractors at fixed hourly rates for each labor category for hours actually worked, a variant of the Time and Materials contract used when no significant materials, equipment, or subcontracting are required.

What is a Labor Hour Contract?

A Labor Hour contract is defined in FAR 16.602 as a variant of the Time and Materials (T&M) contract in which the contractor does not supply materials. Like T&M, the Labor Hour contract pays for actual hours worked at fixed hourly rates per labor category (LCAT), but there is no provision for material cost reimbursement under the contract.

Key characteristics identical to T&M:

• Fixed hourly rates per labor category established at contract award
• Rates are fully burdened (direct labor + fringe + overhead + G&A + profit)
• Government pays for actual hours worked, not estimated hours
• Ceiling price required, the contract cannot exceed the not-to-exceed amount without modification
• Requires specific justification as the least preferred contract type
• Requires government oversight (COR surveillance) to validate hours

Key distinctions from T&M:

• No material component, the contractor provides only labor
• Simpler administration (no material cost tracking or validation)
• Used for pure services, consulting, analysis, design, advisory, staffing

Common applications: management consulting, IT advisory services, policy analysis, legal support services, staff augmentation, and other purely labor-based professional services where the government supplies or directly procures any needed materials and equipment.

Why Labor Hour contracts matter for government contractors

Labor Hour contracts are the standard structure for staff augmentation and consulting work in the government market. A typical staff augmentation Labor Hour contract lists 10-20 LCATs ranging from junior analysts to senior architects, with ceiling hours per category. Revenue is direct: hours billed × fixed rate. Competitive Labor Hour pricing requires understanding the market rate for each LCAT at the specific agency, geography, and security clearance level. Using GSA CALC data alongside agency-specific historical award data reveals the competitive rate range for each category. Companies that price Labor Hour contracts too high lose competitions; those that price too low win but erode margins over multi-year performance periods.

Example

A federal civilian agency awards a Labor Hour contract for strategic management consulting support. The contract includes five LCATs: Principal Consultant ($245/hr, ceiling 500 hours), Senior Consultant ($195/hr, ceiling 1,500 hours), Consultant ($155/hr, ceiling 3,000 hours), Analyst ($115/hr, ceiling 2,000 hours), and Research Analyst ($85/hr, ceiling 1,500 hours). The contract ceiling is $1.2M for the base year. The agency's COR approves task assignments and verifies hours monthly. The contractor invoices bi-weekly with time sheets attached showing hours worked per consultant per task. There is no material billing, all resources and technology are government-furnished.

Frequently Asked Questions

Can a Labor Hour contract include ODCs (Other Direct Costs)?

ODCs (travel, training, printing, etc.) can sometimes be added to Labor Hour contracts through a separate CLIN priced at cost. When ODCs are included, the contract is functionally a hybrid between Labor Hour and T&M. The distinction from pure T&M is that the materials or equipment the contractor provides are incidental to the labor, not a primary component.

What documentation is required to invoice a Labor Hour contract?

Invoicing requires time sheets or equivalent records showing: contractor employee name, labor category, date of service, hours worked, and task or project code. The contracting officer's representative reviews and approves timesheets before invoices are certified for payment. Accurate, detailed timekeeping is a compliance requirement, not optional.

How are fixed hourly rates set in a Labor Hour contract?

Rates are negotiated at contract award and remain fixed for the base period. Option year rates may include negotiated escalation or be re-priced at option exercise. Rate development starts with the contractor's direct labor cost, then applies fringe benefit rate, overhead rate, G&A rate, and profit to calculate the fully burdened rate. GSA CALC provides market benchmarks for most common federal labor categories.

Is a Labor Hour contract appropriate for construction work?

No. Construction work involves materials, equipment, and subcontractors that are not incidental to labor, making T&M (not Labor Hour) the appropriate vehicle if a cost-reimbursable approach is needed. Most construction uses firm-fixed-price contracts with sealed bidding, not Labor Hour arrangements.