Time and Materials Contract (T&M)

A Time and Materials (T&M) contract pays the contractor a fixed hourly rate for each labor category specified in the contract plus the actual cost of materials, used when the extent or duration of work cannot be estimated with sufficient certainty to use a fixed-price arrangement.

What is a Time and Materials Contract?

T&M contracts are defined in FAR 16.601 and are used as a last resort when no other contract type is suitable. The FAR characterizes T&M as presenting the least amount of incentive for cost efficiency among all contract types and therefore requires specific justification and a ceiling price (a "not-to-exceed" limit).

A T&M contract has two components:

Labor component:

• Fixed hourly rates per labor category (LCAT)
• Rates are all-inclusive: they cover direct labor, fringe benefits, overhead, G&A, and profit
• The contractor is paid based on hours actually worked, multiplied by the fixed rate
• Example: Program Manager at $185/hour × 500 hours = $92,500

Material component:

• Actual costs of materials, subcontracted services, and other direct costs
• Government typically receives the contractor's actual purchase cost without markup (or with a specified material handling rate)
• Requires documentation of actual material costs

T&M contracts must include a ceiling price (a not-to-exceed dollar amount) that the contractor cannot exceed without a contract modification. Unlike CPFF contracts, the ceiling is firm, the contractor must stop work when the ceiling is reached.

Requirements for using T&M:

1. No other contract type is suitable
2. The contracting officer determines T&M is the most appropriate arrangement
3. The solicitation states that T&M may be used
4. For commercial items, specific FAR 12.207(b) requirements apply
5. A ceiling price must be established

T&M is common in IT services, professional consulting, contingency operations support, and emergency services where the extent of work cannot be defined in advance.

Why T&M matters for government contractors

T&M contracts are the most common structure in the labor-heavy IT services and professional services government market. The CLIN structure in a T&M contract lists each labor category with its fixed hourly rate, rates that are established at contract award and used for the duration of the performance period. Competitive T&M rates require accurate cost buildup: direct labor rate + fringe rate + overhead rate + G&A rate + profit = the fully burdened hourly rate. The GSA CALC tool provides market data on T&M rates for comparable labor categories across GSA Schedule holders, an essential benchmarking resource for competitive pricing. See our blog on labor rates and GSA CALC competitive pricing.

Example

A DHS cybersecurity support contract uses T&M with six labor categories: Security Architect ($225/hr), Senior Analyst ($175/hr), Analyst ($135/hr), Junior Analyst ($95/hr), Technical Writer ($90/hr), and Program Manager ($195/hr). The contract ceiling is $4.5M. In month 1, the contractor provides 40 hours of Security Architect, 120 hours of Analyst, and 20 hours of Program Manager. Invoice: (40 × $225) + (120 × $135) + (20 × $195) = $9,000 + $16,200 + $3,900 = $29,100. The government approves the hours as reasonable and pays within 30 days per the Prompt Payment Act.

Frequently Asked Questions

Why does the FAR call T&M the "least preferred" contract type?

Because the contractor earns the same hourly rate whether they are efficient or inefficient, there is no financial penalty for taking longer than necessary or no reward for completing work faster. A contractor with no incentive to be efficient may have incentive to bill more hours. FAR requires government oversight (typically surveillance by the COR) to verify that hours billed were actually worked and necessary.

What is the difference between T&M and Labor Hour contracts?

Labor Hour contracts are essentially T&M contracts without the materials component. All costs are priced as hourly rates for labor; no materials are purchased or reimbursed under the contract. Labor Hour contracts are appropriate when no significant materials, equipment, or subcontracting are required.

Can T&M contracts be converted to firm-fixed-price?

Yes, through bilateral modification. As understanding of the requirement improves through T&M performance, agencies sometimes convert to fixed-price for ongoing work. This requires agreement on a price that represents fair value for the remaining scope.

What is a "not-to-exceed" price in a T&M contract?

The ceiling price, the maximum the government will pay under the contract. When the contractor's cumulative billing approaches the ceiling, they must notify the government. The contractor cannot spend beyond the ceiling without a modification increasing it. This provides cost control analogous to a fixed price for total contract exposure, even though individual labor and material costs are reimbursable.