Time and Materials Contracts: How T&M Works and When to Use It

A Time and Materials (T&M) contract pays the contractor based on:

• Labor — Negotiated hourly rates × hours actually worked
• Materials — Cost of materials, typically with handling markup

How T&M works:

1. You propose hourly rates by labor category
2. Government negotiates rates and establishes a ceiling price
3. You perform work and track hours by labor category
4. You invoice: (hours × rates) + materials + markup
5. Payments continue until work complete or ceiling reached

Labor Hour (LH) variant:

Labor Hour contracts are identical to T&M but include no materials — labor only. Common for professional services where materials are minimal.

Why T&M exists:

T&M fills a gap between fixed price and cost-plus:

• vs. Fixed Price: Requirements too uncertain to price fixed
• vs. Cost-Plus: Contractor doesn't have/need adequate accounting system for cost-type

FAR requirement (16.601):

T&M is only appropriate when it's not possible to estimate costs with sufficient accuracy to use fixed price, and government decides not to use cost-reimbursement.

Labor rate buildup:

Your T&M hourly rates must cover all costs:

• Direct labor — Base hourly wage
• Fringe benefits — FICA, health insurance, PTO
• Overhead — Facility, management, support costs
• G&A — General and administrative
• Profit — Your margin

Example rate calculation:

Direct Labor (base pay):        $50.00/hour
Fringe (35%):                   $17.50
Labor + Fringe:                 $67.50
Overhead (80%):                 $54.00
Subtotal:                      $121.50
G&A (15%):                      $18.23
Total Cost:                    $139.73
Profit (10%):                   $13.97
Billed Rate:                   $153.70/hour
        

Materials pricing:

• Materials typically reimbursed at cost plus handling
• Material handling rate negotiated in contract (commonly 0-5%)
• Must be supported by invoices/receipts
• Government may require prior approval for material purchases over threshold

Subcontractor labor:

Subcontractor rates may be:

• Billed at sub's rates (pass-through)
• Marked up at negotiated percentage
• Included in your labor categories (if equivalent qualifications)

Read your contract carefully for sub handling requirements.

The ceiling price:

Every T&M contract has a ceiling price — the maximum the government will pay. You cannot exceed the ceiling without a contract modification.

• Ceiling represents government's maximum liability
• You continue working until ceiling reached or work complete
• If you hit ceiling before work is done, you must stop (unless modified)
• Exceeding ceiling without authorization = you eat the cost

Ceiling vs. funding:

Understand the difference:

• Ceiling — Maximum contract can pay (contract term)
• Funding — Money actually obligated (may be less than ceiling)

Contract might have $1M ceiling but only $500K funded initially. You can only spend funded amounts.

Notification requirements:

T&M contracts typically require you to notify the CO when:

• 75% of funding expended
• You expect to reach funding/ceiling before work complete
• Additional funding needed to continue

Managing toward ceiling:

• Track expenditures against ceiling and funding continuously
• Forecast to completion regularly
• Notify CO early if ceiling increase needed
• Don't assume ceiling will be increased — it may not be

T&M has specific compliance requirements, particularly around timekeeping and materials.

Timekeeping requirements:

• Accurate, contemporaneous records — Time recorded when worked, not after the fact
• By labor category — Hours tracked by the category billed
• Employee signature — Each employee certifies their time
• Supervisor approval — Review and approval of timesheets

Labor qualification requirements:

Personnel billed under a labor category must meet that category's requirements:

• Education requirements (degree, certifications)
• Experience requirements (years of relevant experience)
• If person doesn't qualify for category, you can't bill them at that rate

Material documentation:

• Invoices/receipts for all materials
• Evidence of competitive sourcing (for significant purchases)
• Prior approval if required by contract

Invoice support:

T&M invoices should include or be supported by:

• Hours worked by labor category and employee
• Billing rates applied
• Material costs with receipts
• Cumulative expenditure vs. ceiling

Audit exposure:

T&M contracts are subject to audit. Auditors verify:

• Hours actually worked match hours billed
• Personnel meet labor category requirements
• Materials were actually purchased and used
• Rates match contract rates

T&M vs. Firm Fixed Price:

Factor	T&M	FFP
Risk	Shared	Contractor
Profit potential	Built into rates	Unlimited if efficient
Accounting needs	Timekeeping focus	Minimal
Best for	Uncertain scope	Defined requirements

T&M vs. Cost-Plus:

Factor	T&M	Cost-Plus
Accounting system	Basic timekeeping	Full cost system
Rate structure	Fully loaded rates	Direct + indirect
Audit intensity	Moderate	High (DCAA)
Fee visibility	Hidden in rates	Separate line item

When T&M makes sense:

• Scope uncertain but not high-risk R&D
• Staff augmentation / support services
• You lack cost-type accounting system
• Government prefers simplified administration

Rate competitiveness:

T&M competitions often focus heavily on rates. Strategies for competitive rates:

• Right-size labor categories — Match categories to actual work requirements
• Efficient indirect structure — Lower overhead = lower rates
• Competitive direct labor — Know market rates for your geography
• Reasonable profit — Don't price yourself out of competition

Technical approach:

Even on T&M, technical matters. Demonstrate:

• Understanding of requirements
• Qualified personnel (meet labor category requirements)
• Management approach
• Relevant experience

Staffing plan:

• Show how you'll staff the contract
• Identify key personnel if required
• Demonstrate depth of qualified candidates

Past performance:

T&M evaluations consider past performance on similar work:

• Prior T&M contract performance
• Timekeeping compliance history
• Customer satisfaction

Avoiding common mistakes:

• Don't underprice rates to win — you'll struggle to deliver quality
• Ensure proposed personnel actually meet category requirements
• Verify your rates cover all costs including profit

Burn rate management:

On T&M, you're spending against a fixed ceiling. Manage carefully:

• Track hours and costs vs. ceiling weekly (at minimum)
• Project burn rate to completion
• Alert customer early if ceiling increase needed
• Never exceed ceiling without authorization

Efficiency incentives:

Unlike cost-plus, T&M creates some efficiency incentive:

• Profit is built into rates — faster work = same profit, less risk
• Finishing under ceiling leaves good impression for follow-on
• But don't sacrifice quality for speed

Scope management:

T&M doesn't mean unlimited work. The contract still has scope:

• Understand what's in scope vs. out of scope
• Document direction from customer
• Request ceiling increases for significant additional work

Labor category compliance:

Throughout performance, ensure personnel continue to meet requirements:

• Track certifications and their expiration
• Document experience accrual
• Get CO approval for personnel substitutions

Transition planning:

As ceiling approaches, plan for:

• Contract extension/modification if needed
• Orderly wind-down if not extended
• Knowledge transfer
• Staff reassignment