Time and Materials Contracts
Time and materials contracts are used when both parties agree to pay predetermined unit rates. Time and materials contracts are used when it has been impossible presenting an accurate estimate or where the schedule cannot be defined. This type of contract presents the highest risk for the owner and the most secure way for a contractor. Time and materials contracts are the least desirable contract type for the federal government.
Time and Materials Contracts Items
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.
- Material Mark-Up: T&M contracts usually add between a 15 and 35 percent onto material prices.
- 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 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 Material Contracting
Some federal agencies use time and material contract, although not popular among governmental agencies. Some of the agencies that use T&M Contracts are:
- Defense Information Systems Agency (DISA)
- Federal Transit Administration (FTA)
- U.S. Department of Defense (DOD)
Time and material contracts in the federal government can be used once the contracting officer determines that it is the most suitable contract that can be issued, and when the contract includes a not to exceed conditions.
The Federal Acquisition Regulations (FAR) explain that this demonstration may be made by establishing that it is not possible at the time of placing the contract, to estimate the extent or duration of the work accurately or to anticipate costs with any reasonable degree of confidence (FAR 16.601(c)). When using T&M, the government must also perform surveillance of contractor performance.
Time and Material Contracts Drawbacks
Time and material contracts also have some disadvantages, such as:
- Profit Limits: Some savvy customers will try to establish not to exceed conditions, will try to reduce mark-up on materials and even negotiate reduced billable per hour rates.
- Ignored Market Prices: Sometimes companies will set lower prices, based on their internal cost structure, than actual market rates or even vice-versa.
- Reduced Business: Customers are not used to work on time and material contract, so finding new business opportunities could be challenging. Customers will likely prefer fixed price contracts.
- Billing: Time and materials contracts should be structured in such way that the company will be able to bill sufficient amount of money to cover fixed costs. When the billing hours are reduced, fixed costs must also be reduced at the same rate as the billable hours.