Profit on T&M Contracts

Contractors can earn profit on the labor component of T&M contracts but not on the material component.

The Government uses time-and-materials (T&M) contracts when it is not possible at the time of placing a contract to accurately estimate the extent or duration of the work or to anticipate costs with any reasonable degree of confidence. A T&M contract provides no positive profit incentive to the contractor for cost control or labor efficiency. Therefore, the Government usually increases its level of surveillance of contractor performance to provide reasonable assurance that efficient methods and effective cost controls are being used. T&M contracts are quite common even though the use of T&M as a contracting mechanism, is discouraged within FAR.

T&M contracts have a labor component and a materials component. The labor component consists of separate fixed hourly rates that include wages, fringe, overhead, general and administrative expenses and profit for each category of labor. The materials component is more broadly defined than what is typically considered material costs. Materials, in a T&M scenario, include direct materials, supplies, and other direct costs (e.g. incidental services for which there is not a labor category specified in the contract, travel, computer usage charges, etc.) and applicable indirect costs (FAR 16.601(a)). Note the absence of “profit” in this definition of materials. The actual contract clause included in T&M contracts, states it more specifically; “…the Government will not pay profit or fee to the prime Contractor on materials.”