T&M (Time and Materials)

A contract type where the government pays fixed hourly labor rates plus actual cost of materials used.

Full Definition

A Time and Materials (T&M) contract is a contract type authorized under FAR 16.601 where the government pays the contractor based on fixed fully-loaded hourly labor rates multiplied by actual hours worked, plus the actual cost of materials and supplies at cost or with an agreed-upon handling charge. The fixed hourly rates are negotiated in advance and include direct wages, fringe benefits, overhead, general and administrative expenses, and profit. T&M contracts may only be used when the contracting officer determines that no other contract type is suitable because the work scope or duration cannot be estimated with sufficient accuracy at the time of award. The contracting officer must execute a determination and findings (D&F) document justifying the T&M contract type, and the contract must include a ceiling price that the contractor may not exceed without written authorization.

Why It Matters

T&M contracts balance risk between the government and contractor for work with uncertain scope, making them common for IT professional services, maintenance and repair, engineering studies, and rapid-response task orders. For small businesses, T&M contracts require disciplined timekeeping systems and material cost tracking because invoices must substantiate every billed hour and material purchase. Invest in a compliant accounting system before pursuing T&M work, as the Defense Contract Audit Agency (DCAA) may audit your labor charging practices and indirect rate calculations. When proposing labor rates, ensure your fully-loaded rates are competitive by benchmarking against GSA Schedule rates and the Bureau of Labor Statistics data for your area. T&M contracts with a not-to-exceed ceiling protect the government while giving you flexibility to address evolving requirements.

Example

A small business wins a T&M contract for network engineering support at a military installation. The negotiated rates are $155 per hour for senior network engineers, $110 per hour for mid-level engineers, and $75 per hour for junior technicians. The contract ceiling is $800,000 over one base year. Monthly invoices document 320 labor hours at the appropriate rates plus $4,200 in actual switch and cable costs supported by vendor receipts and a 3 percent material handling charge.

Related Guide

Learn more about T&M (Time and Materials) →