Federal agencies award time and materials contracts when they can't define scope or duration upfront, which puts different demands on your team than fixed-price work. You're billing actual hours at locked rates, recovering material costs with receipts, and staying under a ceiling that caps total obligations. That structure requires daily timekeeping, qualified labor in the right categories, and documentation that survives DCAA review without triggering deficiency findings.

TL;DR

• T&M contracts pay for actual hours at fixed rates plus materials, shifting schedule risk to the government.

• Federal agencies spent $139B on T&M between 2017-2021 when scope uncertainty makes fixed-price impractical.

• You need rigorous timekeeping systems and DCAA-compliant documentation to avoid payment holds or audit deficiencies.

• FAR 16.601(d) requires a determination and findings plus a not-to-exceed ceiling on most federal T&M work.

• GovDash automates T&M contract tracking, monitors burn rates against ceilings, and generates compliant status reports.

What Is a T&M Contract

A time and materials (T&M) contract pays contractors for actual hours worked at fixed hourly rates plus material costs. Labor is billed at predetermined rates that cover wages, overhead, G&A, and profit. Materials are reimbursed at cost, sometimes with a handling fee.

FAR 16.601 positions T&M contracts between firm-fixed-price and cost-reimbursement arrangements. Federal agencies can use them when work scope or duration can't be estimated accurately upfront. The government assumes more risk since final cost depends on how long the work takes, making T&M suitable for undefined scopes or evolving requirements.

Key Components of Time and Materials Contracts

Every T&M contract needs three core elements to work properly.

Fixed hourly labor rates bundle direct wages, benefits, overhead, and profit into a locked rate for each role. A GS-12 equivalent might bill at $85 per hour for the entire period.

Materials are reimbursed at actual cost plus an optional handling fee. Receipts and invoices prove what you spent on supplies, equipment, or subcontractor services.

The ceiling price caps total billings. FAR requires a not-to-exceed limit on most federal T&M awards, preventing overruns without a formal modification.

When Federal Agencies Use T&M Contracts

The current section covers: 1. Situations when agencies use T&M contracts (uncertain scope/duration) 2. FAR regulatory requirements and justification 3. Government spending data from FY 2017-2021 4. Comparison between civilian agencies and DOD usage

Word limit: 83 words (current is ~120 words)

Key points to preserve:

• Uncertain scope/duration drives T&M use

• FAR 16.601(d) requirements

• $139B spending statistic

• 11% civilian vs 1% DOD split

Must remove:

• Any govdash.com links (none present)

• Reduce wordiness while maintaining substance

• Keep citation on $139B figure

Agencies use T&M contracts when scope or duration remains undefined at award. Emergency repairs, cybersecurity incidents, technical studies, and prototyping involve uncertain workloads that make fixed pricing impractical.

FAR 16.601(d) permits T&M only when other contract types fail. Contracting officers must document why fixed-price or cost-reimbursement won't work. Between fiscal years 2017 and 2021, the government obligated $139 billion on T&M contracts. Civilian agencies used T&M for 11 percent of obligations versus 1 percent at DOD.

T&M vs Fixed Price Contracts

Fixed-price contracts shift cost risk to the contractor. You agree to deliver specified work for a set amount, regardless of actual hours or expenses. If the job takes longer than planned, you absorb the overrun. If you finish early, you keep the savings.

T&M reverses that equation. The government pays for actual time spent, so schedule uncertainty flows to the buyer. You face less financial risk but gain less upside from efficiency gains. Budget certainty favors fixed-price when requirements are stable. T&M suits evolving missions where locking scope early would force guesswork and inflated pricing.

Advantages of T&M Contracts for Government Contractors

T&M contracts let you respond to changing requirements without renegotiating price. When the agency shifts direction mid-stream, you can pivot labor hours and resources to match the new scope without bearing cost risk.

You invoice for actual hours worked, which removes the estimating risk found in fixed-price bids. If the work takes longer than expected, you're still reimbursed at the agreed rates. Materials are recovered at cost, preventing losses on supply price swings.

Quick starts become possible. You can begin performance within days of award instead of spending weeks refining specifications and finalizing pricing.

Disadvantages and Risks of T&M Contracts

T&M contracts demand rigorous timekeeping and accounting systems. Every hour worked must be documented and defensible under DCAA audits. Labor categories, billing rates, and material invoices are subject to close government scrutiny throughout performance.

The profit incentive that drives efficiency in fixed-price work disappears. Since revenue increases with hours billed, agencies worry about inflated timesheets and require enhanced oversight. Expect frequent reviews of labor records and justifications for material purchases.

The administrative burden grows heavier. You need compliant accounting practices, detailed time-tracking procedures, and documentation that survives audit. Small businesses without mature billing infrastructure often struggle with these demands.

FAR Requirements for Government T&M Contracts

FAR 16.601(d) requires contracting officers to prepare a determination and findings (D&F) before awarding a T&M contract. The D&F must explain why no other contract type is suitable and how the government will protect against cost risk.

Contracts above the simplified acquisition threshold need head-of-contracting-activity approval, similar to approval requirements for other contract vehicles. This higher scrutiny reflects the government's concern about open-ended obligations.

Key clauses include FAR 52.216-29 (Time-and-Materials/Labor-Hour), which defines hourly rates and material handling fees, and FAR 52.216-31 (Time-and-Materials/Labor-Hour Proposal Requirements), which sets invoice and documentation standards. Contractors must track and report hours by labor category, submit receipts for materials, and justify any rate adjustments during performance.

Essential Elements to Include in Your T&M Contract

Your T&M contract needs a clear scope of work defining tasks, deliverables, and performance locations to prevent disputes over billable labor.

List each labor category with its fixed hourly rate. Break out positions such as project manager, engineer, or analyst with specific qualifications and billing amounts for each role.

Define how materials will be handled. State whether costs are reimbursed at actuals or include a markup percentage, and specify what documentation you'll provide.

Set the ceiling price prominently. FAR requires a not-to-exceed amount on most federal T&M work, and modifications need written approval before billing beyond that cap.

Billing and Invoicing Under T&M Contracts

Submit invoices monthly through your agency's payment system (typically IPP, WAWF, or legacy DFAS portals). Each voucher must itemize hours by labor category, list individual employee names or codes, and attach detailed timesheets showing daily work performed.

Material charges require original receipts, packing slips, and proof of payment. The contracting officer's representative reviews your submission for accuracy against approved rates and ceiling limits before authorizing payment.

Payment cycles run 30 days after approval. Discrepancies in labor hours or unsupported material costs trigger payment holds until you provide clarifying documentation, so front-load your quality checks before submission.

Timekeeping and Compliance Requirements

Record hours daily in a compliant timekeeping system that captures employee name, labor category, contract number, and work performed. Late or retroactive entries raise red flags during audits and can result in payment denials.

Verify each employee meets the education, certification, and experience requirements for their assigned labor category. Billing a junior analyst at a senior rate without proper qualifications constitutes mischarging and invites civil or criminal penalties.

DCAA reviews timekeeping systems periodically. Your records must show contemporaneous entry, supervisor approval, and separation between direct and indirect charges to support past performance evaluations. Missing signatures, generic task descriptions, or time charged after the fact trigger deficiency findings that can halt reimbursement.

Managing T&M Contracts Throughout the Lifecycle

Track burn rate weekly against your ceiling price. Calculate projected costs at current labor consumption to identify overruns before they happen, giving you time to request a modification or adjust scope with the contracting officer.

Document every scope change in writing. Verbal approvals from the COR don't protect you if billing disputes arise later. Confirm task additions or deletions via email and obtain written acknowledgment before charging hours to new work.

Share monthly status reports that show hours expended by labor category, ceiling balance remaining, and upcoming deliverables. Proactive transparency builds trust and prevents surprise conversations when funds run low.

Streamlining T&M Contract Management With GovDash

GovDash's Contract Cloud stores T&M contract files, modifications, and deliverables in one place so teams can skip searching email threads or SharePoint folders. The system tracks hours against ceiling prices and alerts you when burn rate approaches your limit, preventing unplanned overruns.

During the capture process, GovDash Pricer eliminates spreadsheet-based pricing drills for T&M bids. Extract labor categories and government estimates directly from solicitation documents, then sync them to contract line items with one click. Run interactive pricing scenarios by adjusting indirect rates, applying wrap rate structures, and modeling escalation factors like inflation or staffing changes. The platform calculates extended costs in real time as you test assumptions, letting capture managers pressure-test competitiveness before committing to a bid strategy.

Pipeline tools flag FAR 16.601 requirements and build compliance matrices covering labor categories, ceiling prices, and D&F justifications. Role-based controls let you hide sensitive pricing data from proposal writers while keeping capture and growth teams aligned on rates and competitiveness.

Final Thoughts on Federal T&M Contracts

Federal agencies use T&M contracts when uncertainty makes fixed pricing impractical, but that flexibility creates compliance burdens for contractors. You need compliant timekeeping, detailed material records, and constant vigilance on your ceiling price. Build these habits early and T&M work becomes a sustainable part of your contract portfolio.

FAQs

What's the difference between T&M and fixed-price contracts?

Fixed-price contracts lock in a total amount regardless of actual hours or costs, placing financial risk on the contractor. T&M contracts reimburse you for actual hours worked at predetermined rates plus material costs, shifting schedule uncertainty to the government while protecting you from cost overruns.

When can federal agencies legally use T&M contracts?

FAR 16.601(d) permits T&M only when scope or duration cannot be estimated accurately upfront and other contract types won't work. The contracting officer must prepare a determination and findings explaining why fixed-price or cost-reimbursement arrangements are unsuitable and how the government will control cost risk.

How do I bill materials on a T&M contract?

Submit original receipts, packing slips, and proof of payment with each invoice. Materials are reimbursed at actual cost, sometimes plus a handling fee if specified in your contract. The contracting officer's representative reviews documentation before authorizing payment, so attach supporting records to every voucher.

What timekeeping requirements must I follow under T&M contracts?

Record hours daily in a DCAA-compliant system showing employee name, labor category, contract number, and work performed. Late or retroactive entries trigger audit flags. Each timesheet needs supervisor approval and must demonstrate contemporaneous entry with separation between direct and indirect charges.

How do I avoid hitting the ceiling price on my T&M contract?

Track burn rate weekly by calculating projected costs at current labor consumption rates. Share monthly status reports showing hours expended by category and ceiling balance remaining. When you spot a potential overrun, request a modification from the contracting officer before you exceed the not-to-exceed limit.