Overview
Time-and-materials (T&M) contracts are a hybrid of fixed-price and cost-reimbursement contracts. They present a blended risk to buyer and seller.
Time-and-materials (T&M) contracts may be used for acquiring supplies or services. These contracts provide for the payment of labor costs on the basis of fixed hourly billing rates which are specified in the contract. These hourly billing rates would include wages, indirect costs, general and administrative expense, and profit. There is a fixed-price element to the T&M contract - the fixed hourly billing rates. But these contracts also operate as cost-type contracts in the sense that labor hours to be worked, and paid for, are flexible. Materials are billed at cost.
Before using a T&M/labor hour contract, the contracting officer must establish that no other contract type is suitable. For a commercial item, this requirement can be met by establishing that it is not suitable to acquire the service using either a firm-fixed-price contract or a fixed-price contract with economic price adjustment.
T&M and labor hour contracts may be used:
Only after the contracting officer executes a determination that no other contract type is suitable
Only if the contract includes a ceiling price that the contractor exceeds at its own risk.
Not possible to correctly estimate the duration of the work.
Not possible to correctly estimate the cost & scope of work.
The buyer determines that 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.
When using T&Ms, the buyer must also perform surveillance of contractor performance.
T&M contracts provides for acquiring 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
Actual cost for materials
Labor Hour Contract. The labor hour contract is a type of T&M contract that excludes materials supplied by the contractor.
Hedging used for T&M contracts by buyers:
When using time and materials contracts, the following items could be negotiated:
Labor Rate- Specifying a fixed rate for all labor including administrative personnel. If you are using T&M on large projects, be sure to offer discounted labor rates to reduce total project cost.
Not-to-Exceed- The Time and Material not to exceed, is a contract in which the contractor can bill the work being performed but there is a cap that could be used as the maximum amount being charged by the contractor. This type of variation can be used to increase contractor’s efficiency and it assumes the excessive costs. It also provides the owner with a cap that will guarantee that contractor will not exceed from that cap.
Maximum Labor Hours- In addition to the not-to-exceed condition, time and material contracts, a maximum number of labor hours could be set. When the contractors exceed a specified amount, those additional hours shall not be billed to the other party. This avoids the “less efficiency = more money” issue of time and materials contracts.
Time-and-materials (T&M) contracts are a hybrid of fixed-price and cost-reimbursement contracts. They present a blended risk to buyer and seller.
Time-and-materials (T&M) contracts may be used for acquiring supplies or services. These contracts provide for the payment of labor costs on the basis of fixed hourly billing rates which are specified in the contract. These hourly billing rates would include wages, indirect costs, general and administrative expense, and profit. There is a fixed-price element to the T&M contract - the fixed hourly billing rates. But these contracts also operate as cost-type contracts in the sense that labor hours to be worked, and paid for, are flexible. Materials are billed at cost.
Before using a T&M/labor hour contract, the contracting officer must establish that no other contract type is suitable. For a commercial item, this requirement can be met by establishing that it is not suitable to acquire the service using either a firm-fixed-price contract or a fixed-price contract with economic price adjustment.
T&M and labor hour contracts may be used:
Only after the contracting officer executes a determination that no other contract type is suitable
Only if the contract includes a ceiling price that the contractor exceeds at its own risk.
Not possible to correctly estimate the duration of the work.
Not possible to correctly estimate the cost & scope of work.
The buyer determines that 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.
When using T&Ms, the buyer must also perform surveillance of contractor performance.
T&M contracts provides for acquiring 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
Actual cost for materials
Labor Hour Contract. The labor hour contract is a type of T&M contract that excludes materials supplied by the contractor.
Hedging used for T&M contracts by buyers:
When using time and materials contracts, the following items could be negotiated:
Labor Rate- Specifying a fixed rate for all labor including administrative personnel. If you are using T&M on large projects, be sure to offer discounted labor rates to reduce total project cost.
Not-to-Exceed- The Time and Material not to exceed, is a contract in which the contractor can bill the work being performed but there is a cap that could be used as the maximum amount being charged by the contractor. This type of variation can be used to increase contractor’s efficiency and it assumes the excessive costs. It also provides the owner with a cap that will guarantee that contractor will not exceed from that cap.
Maximum Labor Hours- In addition to the not-to-exceed condition, time and material contracts, a maximum number of labor hours could be set. When the contractors exceed a specified amount, those additional hours shall not be billed to the other party. This avoids the “less efficiency = more money” issue of time and materials contracts.
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