T&M (Time and Materials)

What is TMTIMEAND (Materials)?

Time and Materials (T&M) contracts are a specific type of contract used in government contracting where the government reimburses the contractor for direct labor hours at a pre-negotiated hourly rate, and also reimburses the contractor's actual costs for materials. This contract type is used when it's difficult to estimate the required level of effort or the specific materials needed at the beginning of the contract.

Definition

A T&M contract falls under the broader category of cost-reimbursement contracts. It is defined within the Federal Acquisition Regulation (FAR) Subpart 16.6. The distinguishing feature of a T&M contract is its hybrid nature: It combines aspects of both fixed-price and cost-reimbursement contracts. The labor portion behaves like a fixed-price arrangement (predetermined hourly rates), while the material portion is cost-reimbursable. A key aspect of T&M contracts is that they should only be used when other contract types are not suitable. This is because they provide less incentive for the contractor to control costs than fixed-price contracts. The government bears a greater risk of cost overruns under a T&M arrangement.

Key Points

• Suitable Scenarios: T&M contracts are appropriate when the exact nature of the work or the precise quantity of materials cannot be accurately determined upfront. This includes research and development projects or certain service contracts.
• Hourly Rates: Labor rates must be negotiated and agreed upon before the contract is awarded. The rates typically include direct labor costs, overhead, general and administrative (G&A) expenses, and profit.
• Material Costs: Material costs are reimbursed at the contractor's actual cost, without any markup unless specifically negotiated in the contract. These costs must be auditable and directly attributable to the contract.
• Oversight and Control: Government oversight is critical to managing T&M contracts. This includes monitoring labor hours, reviewing invoices, and ensuring material costs are reasonable and necessary. Many T&M contracts include a "not-to-exceed" (NTE) ceiling price.

Practical Examples

1. Software Development: A government agency hires a contractor to develop a new software application. Because the exact features and functionalities are not fully defined at the outset, a T&M contract is used to allow for flexibility in the development process. The contractor bills the agency for the hours of software developers, project managers, and other personnel involved in the project, as well as for the cost of software licenses and other materials.
2. Maintenance Services: A government facility requires ongoing maintenance services for its building systems. A T&M contract is used to cover the cost of labor for technicians to perform repairs and preventative maintenance, as well as the cost of replacement parts and materials.
3. Research and Development: A government agency funds a research project to explore a new technology. Due to the uncertain nature of research, a T&M contract is used to compensate the researchers for their time and effort, as well as for the cost of laboratory equipment, materials, and other expenses.