A time-and-materials contract, often shortened to T&M, acquires supplies or services on the basis of direct labor hours at specified fixed hourly rates that include wages, overhead, general and administrative expenses and profit, plus actual cost for materials. That is the federal acquisition definition (FAR 16.601(b)). Under it, profit sits inside the hourly rate rather than being paid as a separate fee, and that is the line separating this type from the arrangements it gets grouped with. Neither side knows the final invoice at signing, because it is whatever the hours and materials come to, up to any ceiling the contract sets.
What Counts as Materials
Materials is defined wider than the word suggests. It covers direct materials, subcontracts for supplies and incidental services for which there is not a labor category specified in the contract, other direct costs such as travel and computer usage charges, and applicable indirect costs (FAR 16.601(a)). Direct materials themselves are those that enter directly into the end product, or that are used or consumed directly in connection with furnishing the end product or service.
Material handling is the boundary case. When those costs are included as part of material costs they must include only costs clearly excluded from the labor-hour rate, though they may include all appropriate indirect costs allocated to direct materials in accordance with the contractor’s usual accounting procedures, consistent with the part 31 cost principles (FAR 16.601(c)(3)). That restriction stops the same overhead being recovered once inside the hourly rate and again inside the material handling pool.
Actual cost governs the materials leg, with a narrow exception inside the contractor’s own group. Materials, supplies and services sold or transferred between divisions, subdivisions, subsidiaries or affiliates under a common control are allowed on the basis of cost incurred. Allowance may instead be at price when the transferring organization’s established practice is to price such transfers at other than cost for commercial work, the item qualifies for an exception under FAR 15.403-1(b), and the contracting officer has not determined the price to be unreasonable (FAR 31.205-26(e)). Where such a commercial product or commercial service moves at a price based on a catalog or market price, the contractor should adjust that price to reflect the quantities being acquired (FAR 31.205-26(f)).
When a Time and Materials Contract Can Be Used
The type is a fallback, not a default. It may be used only when it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence (FAR 16.601(c)).
The restraint is built into the economics. A time-and-materials contract provides no positive profit incentive to the contractor for cost control or labor efficiency, so appropriate Government surveillance of contractor performance is required to give reasonable assurance that efficient methods and effective cost controls are being used (FAR 16.601(c)(1)).
Two limitations run alongside it. The contracting officer must prepare a determination and findings that no other contract type is suitable, signed before the base period or any option periods are executed and approved by the head of the contracting activity when the base period plus options exceeds three years. The contract or order must also include a ceiling price that the contractor exceeds at its own risk (FAR 16.601(d)).
The Labor-Hour Variant
A labor-hour contract is a variation of the time-and-materials contract, differing only in that materials are not supplied by the contractor (FAR 16.602). The same application and limitation rules apply to it, so the materials leg is the whole of the difference.
Cost plus is the other close neighbor, and the separation is where the profit sits. It is inside the hourly rate here, and it is a separate fee paid alongside reimbursed allowable costs on a cost plus contract.
What a Time and Materials Engagement Does to the Books
The rate card drives revenue, not a fee schedule. The contract has to specify separate fixed hourly rates covering wages, overhead, general and administrative expenses and profit for each category of labor (FAR 16.601(c)(2)(i)), so what gets billed depends on which category recorded the hour, and how those pools get built is set out in overhead and direct costs versus indirect.
Until an invoice goes out, hours recorded against a job and valued at their rate sit as unbilled work in progress. The time record is therefore the billing record, and an hour nobody wrote down is revenue nobody can invoice. Which period that revenue belongs to is a separate question, answered in revenue recognition principle.
Realization, the share of a job’s standard value (recorded hours priced at the firm’s own rate card) that actually gets billed, moves with the hours that never reach an invoice and with any gap between the contract rate and that rate card. On a fixed fee the hours are a cost story told after the price is set, and here they are the invoice.
Common Questions
Say a contract sets two labor categories at fixed hourly rates, and the job consumes the hours below with materials passed through at what they cost.
Senior technician 40 hours @ $95/hour = $3,800
Junior technician 60 hours @ $65/hour = $3,900
Materials at actual cost = $2,450
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Invoiced $10,150Those two rates are not costs waiting for a markup. They are the contract’s fixed hourly rates for those labor categories, profit already inside them, so only the material line moves at actual cost.
A firm-fixed-price contract sets a price that is not adjusted on the basis of the contractor’s cost experience, so the contractor carries the cost risk (FAR 16.202-1). A time-and-materials contract fixes the rate and leaves the quantity open, so the buyer carries that risk instead, up to the ceiling price.
Firms carrying clients who bill this way can test whether the time record and the rate card survive a handoff through Accountably’s trial task on their own work.
