Time and Materials Contracts

Time and materials contracts (or T&M contracts) are one of the many contract types used by governments. These types of contracts allow federal, state local and education government purchasing officials to procure supplies or services based on direct labor hours and actual material costs.

Government entities will often work with private providers of goods and services to fulfill their needs.

Generally, once a federal government agency has determined a need for a particular good or a service, it conducts program management activities and develops a specific acquisition strategy. Part of this strategy involves determining which kind of government contract is going to be the best fit to meet their needs. A time and materials contract is the best fit when the cost and time scope of the project are unknown.

FAR (Federal Acquisition Regulation) states that “A time-and-materials contract may be used only when 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.” (FAR Part 16.601)

Most government contracts over $250,000 go through a competitive bidding process overseen by a contracting officer. This process can be conducted either through sealed bidding or negotiated procurement.

Sometimes, but not always, a government will choose a time and materials contract as the route to procure its services. This happens more frequently with larger-scale projects for which it is harder to make an accurate cost and time estimate, such as in the construction field.

A time and materials contract is generally selected by a government only when it is not possible to accurately estimate or anticipate the extent or duration of the overall work. These types of contracts are somewhat less common in the federal government, as time and materials contracts can present the highest risk to the government and lowest risk to the contractor. But under the right circumstances, a time and materials contract can make the most sense for the government.

There are a few steps that a government will go through in order to partner with one or more government contractors on a time and materials contract.

• Determine that a time and materials contract is the right fit: If the government has a project that they would like completed, but they do not have a clear or accurate estimate of how much time it may take or what cost it might entail, a time and materials contract may make sense. If not, it may be worth considering a fixed-price contract or a cost-reimbursement contract.
• Select a government contractor to work with: Vendors seeking to win government contracts will submit their best proposals to provide the work. Often, the company that is the best prepared for the opportunity, and the one that has built the best relationship with the government in question, will be best placed to win the time and materials contract.
• Agree to a contract and begin the project: The government will select the winning contractor (or contractors, depending on the scope of the opportunity) and the parties will enter into an agreement. They will set terms like labor rates, maximum hours to work, when the contractor will be paid, and other relevant guidelines.

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When a government goes to market and determines that it needs to source new products or services and wants to do so in the form of a time and materials contract, it must first rule out the possibility of seeking the work through a different type of contract.

While there are many differences across types of government contracts depending on the government agency and the products or services in question, two of the main other types of contracts are fixed-price contracts and cost-reimbursement contracts.

Fixed-Price Contracts

Fixed-price contracts are used by all federal agencies and generally provide a firm price for the work completed or items supplied. However, an adjustable price level is sometimes used for a ceiling price, a target price (including the target cost), or both.

Cost-Reimbursement (Or Cost-Plus) Contract

Cost-reimbursement, or cost-plus, is a type of contract where a contractor is paid for each of its allowed expenses up to a set limit, plus some additional payment to allow the company to make a profit.

In a cost-reimbursement contract, the final pricing will be determined when the contract is completed, or at some other previously established date in the contracting period. A total cost estimate will be determined before contract work commences, which allows the agency to set a budget for the project and to establish a maximum amount for reimbursement.

For federal governments the primary benefit of time and materials contracts is as a way to procure goods and services from a private company when the cost and time of a project is unknown at the start.

For government buyers, time and materials contracts are low-risk and easily adjustable, since labor rates are generally set front (along with other specifications like maximum hours or materials markups), but the total cost is not set up front and it can adjust to match the scope of the work.

Preparation is key when attempting to win a government time and materials contract.

Vendors should seek to identify the federal agencies that spend the most money on their product or service. This will help build agency profiles, create buyer agency target lists and develop relationships with key agency decision makers.

Participating in pre-proposal conferences and/or industry days is also useful to gather more information about the government entity in question, along with potential partners and competitive companies.

On a regular basis, government contractors should assess the environment and stay abreast of current agency needs and related policy issues. Having access to a comprehensive source of government market intelligence like GovWin IQ can make this much easier for business development teams to use strategic capture planning and prepare a winning proposal.

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