The Time and Materials (T&M) contract type is the “least preferred” type of contract awarded by the Federal government. To emphasize how few T&M contract awards the Federal government wants to see, before making any T&M contract award the Contracting Officer must make a determination and finding (D&F) that no other contract type (including cost-plus) is suitable for the contract award. (See FAR 16.601(d).) T&M contracts are tough to work with (and tough to write about) because applicable requirements differ by the award circumstances. For example, whether the award is made for a commercial item or a noncommercial item, or whether or not the award is made pursuant to competition, affect the applicable FAR/DFARS provisions and clauses—and thus also dictate the contract payment terms.

The T&M contract type is the least preferred because it is the hardest to manage for both Government and contractor. That assertion may be counter-intuitive for some readers. How can something so simple that’s used every day (i.e., number of hours x fixed billing rate = amount billed) be so hard to manage? But indeed, readers, such is the case. We will be exploring some of the problems with the T&M contract type in this article.

The first question to be addressed is, “What is a T&M contract type?” Many individuals can’t accurately answer that question. In fact, the FAR has different answers to that question, depending on which Part you’re looking at.

Some individuals (including DCAA auditors) categorize T&M contracts under “flexibly priced” contract types, along with cost-reimbursement types, because the final price isn’t known until all hours have been billed and any indirect costs allocated to the Materials portion have been finalized. Other individuals lean more toward categorizing T&M contracts under “fixed-price” arrangements, because the cost per billed labor hour is fixed and not subject to change if the contractor’s labor or labor overhead costs change.

FAR Part 16 states that T&M contract types are neither cost-plus nor fixed-price. Instead, they are a third category of contract types called “Time-and-Materials,” and they have their own FAR section at 16.6. Yet, FAR 30.6 (and the related 52.230-6 CAS Administration contract clause) requires that, when a T&M contract is included in a cost impact proposal, it must be broken into its constituent components, such that the “T” portion is included in the fixed-price section of the analysis while the “M” portion is included in the flexibly priced section.

The fact of the matter is that a T&M contract type is neither flexibly priced nor is it firm-priced. It’s not a hybrid type, either. Instead, it is its own type. The folks who feel compelled to look at the world in terms of black and white have a problem with this; but they are clearly wrong. While in some cases it may be helpful to think of the contract in terms of a fixed-price per labor hour plus cost-reimbursable non-labor costs, that’s about as far as it should go. Knowing management of fixed-price contracts won’t get you where you need to go on T&M types, nor will knowing management of cost-plus types. Instead, you need to develop an expertise in managing T&M contracts—and subcontracts, too.

The confusion over T&M contract type has been exacerbated by regulatory revisions. Historically, T&M contracts have been treated as delivery contracts, with the deliverable being labor hours. In other words, the contractor was required to deliver labor hours (and ancillary material) and there was no specified contractual outcome associated with those hours. Accordingly, payments of T&M contract billings were delivery payments, not interim payments. A payment meant that the Government had inspected and accepted the hours billed, and had no recourse when it turned out that not all billed hours were of equal productivity. This situation led to problems (particularly in the IT system implementation realm) where contractors had delivered 100% of the specified labor hours without completing the contemplated work. That was a problem for the Government, since it didn’t obtain what it wanted, but need to pay the contractor regardless. Consequently, the FAR was revised in the mid-2000’s to clarify that T&M payments were interim payments, not payments for partial deliveries. That revision was ill-advised, because it required revisions to a host of other provisions and clauses

For a good example of what we mean, take a look at this recent final FAR revision (issued July 26, 2012). It attempted to “harmonize” differing requirements for submitting final invoices with respect to T&M contract types. As the FAR Councils wrote—

FAR clause 52.232-7 provides for monthly invoicing and submission of the completion voucher no later than one year from the date of work completion. These provisions are in conflict with the corresponding provisions of FAR clause 52.216-7, which is invoked under a time-and-materials contract. FAR clause 52.216-7 provides for invoicing on a bi-weekly basis for large businesses, and more frequent invoicing for small businesses, and the submission of the completion voucher no later than 120 days after completion of work.

Thus, the final rule clarifies that the invoicing requirements of 52.232-7 apply to the fixed-price-per-hour “T” portion of the contract, but not to the reimbursable “M” portion, which is covered by the requirements of 52.216-7. (Readers should recall that, among other things, 52.216-7 requires submission of a final annual indirect cost rate proposal for audit and subsequent negotiation of final indirect rates. If you are a smaller business and only have one or two T&M contracts—with all others being FFP—then it seems absurd to go through this process. It seems even more absurd to be subject to the requirements of 52.216-7 if the amount of reimbursable “M” costs is immaterial in comparison to the “T” amounts.)

The foregoing example is just one of the myriad issues and inconsistencies created by the rule-makers, when they decided to make T&M contract payments interim payments, instead of payments for partial deliveries.

Another problem with the T&M contract type is increasing the hours being acquired, when it turns out the original amount ordered was insufficient to meet the Government’s needs. This is a problem because FAR 16.601(d)(2) requires that every T&M contract must include “a ceiling price that the contractor exceeds at its own risk”—and the CO must “document the contract file to justify the reasons for and amount of any subsequent change.” In contrast, while a cost-reimbursement type contract contains an estimated cost and fee, the estimated cost amount can (and frequently is) increased for changes that are within the originally contemplated contract scope of work.

On July 26, 2012, a proposed rule was published for public comment that would make it harder for COs to justify any increases to the original amount of ordered labor hours. If implemented as drafted, then any increase to ordered hours would need to be justified (by the CO) as “non-competitive new work.” In other words, instead of increasing the contract price to permit the contractor to deliver (and bill) additional labor hours, the correct approach is to recompete the additional work.

In another admission that their previous rule-making was ill-advised, the FAR Councils wrote—

FAR 16.601(d) has also been amended to make it clear that a D&F is required for T&M orders. This FAR change will clarify that a T&M D&F is required for each non-commercial item T&M order under a part 16 indefinite-delivery indefinite-quantity (IDIQ) contract. This change is necessary both to keep part 16 parallel with part 8 (which requires a D&F for each part 8 T&M order) and to clarify an unintended lack of clarity in the 2006 FAR changes that rewrote much of the T&M policies in the FAR (see FAC 2005-15, published in the Federal Register at 71 FR 74656 on December 12, 2006). Currently, only part 12 includes a direct requirement for T&M orders to be authorized by a T&M D&F, but this applies only to commercial items. This FAR case is adding a clarification to part 8 to repeat that policy to ensure that part 8 T&M orders are also each authorized by a T&M D&F. With this case, part 16 is also being changed to explicitly require T&M D&Fs for orders.

It should be clear that the T&M contract type is a difficult one for both the Government and the Prime Contractor. In the next Part of this analysis, we’ll take a look at subcontracts under T&M prime contracts. Readers, you ain’t seen nothin’ yet.