Subpart 16.6 - Time-and-Materials, LaborHour, and Letter Contracts

Parent topic: Part 16 - Types of Contracts

16.600 Scope.

Time-and-materials contracts and labor-hour contracts are not fixed-price contracts.

16.601 Time-and-materials contracts.

(a) Definitions for the purposes of Time-and-Materials Contracts.

Direct materials means those materials that enter directly into the end product, or that are used or

consumed directly in connection with the furnishing of the end product or service.

Hourly rate means the rate(s) prescribed in the contract for payment for labor that meets the labor

category qualifications of a labor category specified in the contract that are-

(1) Performed by the contractor;

(2) Performed by the subcontractors; or

(3) Transferred between divisions, subsidiaries, or affiliates of the contractor under a common

control.

Materials means-

(1) Direct materials, including supplies transferred between divisions, subsidiaries, or affiliates of

the contractor under a common control;

(2) Subcontracts for supplies and incidental services for which there is not a labor category specified

in the contract;

(3) 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

(4) Applicable indirect costs.

(b) Description. A time-and-materials contract provides for acquiring supplies or services on the

basis of-

(1) Direct labor hours at specified fixed hourly rates that include wages, overhead, general and

administrative expenses, and profit; and

(2) Actual cost for materials (except as provided for in 31.205-26(e) and (f)).

(c) Application. 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. See 12.207(b) for the use of time-and-material contracts

for certain commercial services.

(1) Government surveillance. A time-and-materials contract provides no positive profit incentive to

the contractor for cost control or labor efficiency. Therefore, appropriate Government surveillance of

contractor performance is required to give reasonable assurance that efficient methods and effective

cost controls are being used.

(2) Fixed hourly rates.

(i) The contract shall specify separate fixed hourly rates that include wages, overhead, general and

administrative expenses, and profit for each category of labor (see 16.601(f)(1)).

(ii) For acquisitions of other than commercial products or commercial services awarded without

adequate price competition (see 15.403-1(c)(1)), the contract shall specify separate fixed hourly

rates that include wages, overhead, general and administrative expenses, and profit for each

category of labor to be performed by-

(A) The contractor;

(B) Each subcontractor; and

(C) Each division, subsidiary, or affiliate of the contractor under a common control.

(iii) For contract actions that are not awarded using competitive procedures, unless exempt under

paragraph (c)(2)(iv) of this section, the fixed hourly rates for services transferred between divisions,

subsidiaries, or affiliates of the contractor under a common control-

(A) Shall not include profit for the transferring organization; but

(B) May include profit for the prime contractor.

(iv) For contract actions that are not awarded using competitive procedures, the fixed hourly rates

for services that meet the definition of “commercial service” that are transferred between divisions,

subsidiaries, or affiliates of the contractor under a common control may be the established catalog

or market rate when-

(A) It is the established practice of the transferring organization to price interorganizational

transfers at other than cost for commercial work of the contractor or any division, subsidiary or

affiliate of the contractor under a common control; and

(B) The contracting officer has not determined the price to be unreasonable.

(3) Material handling costs. When included as part of material costs, material handling costs shall

include only costs clearly excluded from the labor-hour rate. Material handling costs may include all

appropriate indirect costs allocated to direct materials in accordance with the contractor's usual

accounting procedures consistent with part 31.

(d) Limitations. A time-and-materials contract or order may be used only if-

(1) The contracting officer prepares a determination and findings that no other contract type is

suitable. The determination and finding shall be-
(i) Signed by the contracting officer prior to the execution of the base period or any option periods of

the contracts; and

(ii) Approved by the head of the contracting activity prior to the execution of the base period when

the base period plus any option periods exceeds three years; and

(2) The contract or order includes a ceiling price that the contractor exceeds at its own risk. Also see

12.207 (b) for further limitations on use of time-and-materials or labor-hour contracts for acquisition

of commercial products and commercial services.

(e) Post award requirements. Prior to an increase in the ceiling price of a time-and-materials or

labor-hour contract or order, the contracting officer shall-

(1) Conduct an analysis of pricing and other relevant factors to determine if the action is in the best

interest of the Government;

(2) Document the decision in the contract or order file; and

(3) When making a change that modifies the general scope of-

(i) A contract, follow the procedures at 6.303;

(ii) An order issued under the Federal Supply Schedules, follow the procedures at 8.405-6; or

(iii) An order issued under multiple award task and delivery order contracts, follow the procedures

at 16.505(b)(2).

(f) Solicitation provisions.

(1) The contracting officer shall insert the provision at 52.216-29, Time-and-Materials/Labor-Hour

Proposal Requirements—Other Than Commercial Acquisition With Adequate Price Competition, in

solicitations contemplating use of a time-and-materials or labor-hour type of contract for the

acquisition of other than commercial products or commercial services, if the price is expected to be

based on adequate price competition. If authorized by agency procedures, the contracting officer

may amend the provision to make mandatory one of the three approaches in paragraph (c) of the

provision, and/or to require the identification of all subcontractors, divisions, subsidiaries, or

affiliates included in a blended labor rate.

(2) The contracting officer shall insert the provision at 52.216-30, Time-and-Materials/Labor-Hour

Proposal Requirements—Other Than Commercial Acquisition Without Adequate Price Competition,

in solicitations for the acquisition of other than commercial products or commercial services

contemplating use of a time-and-materials or labor-hour type of contract if the price is not expected

to be based on adequate price competition.

(3) The contracting officer shall insert the provision at 52.216-31, Time-and-Materials/Labor-Hour

Proposal Requirements—Commercial Acquisition, in solicitations contemplating use of a commercial

time-and-materials or labor-hour contract.

16.602 Labor-hour contracts.
Description. A labor-hour contract is a variation of the time-and-materials contract, differing only in

that materials are not supplied by the contractor. See 12.207(b),16.601(c), and 16.601(d) for

application and limitations, for time-and-materials contracts that also apply to labor-hour contracts.

See 12.207(b) for the use of labor-hour contracts for certain commercial services.

16.603 Letter contracts.

16.603-1 Description.

A letter contract is a written preliminary contractual instrument that authorizes the contractor to

begin immediately manufacturing supplies or performing services.

16.603-2 Application.

(a) A letter contract may be used when (1) the Government’s interests demand that the contractor

be given a binding commitment so that work can start immediately and (2) negotiating a definitive

contract is not possible in sufficient time to meet the requirement. However, a letter contract should

be as complete and definite as feasible under the circumstances.

(b) When a letter contract award is based on price competition, the contracting officer shall include

an overall price ceiling in the letter contract.

(c) Each letter contract shall, as required by the clause at 52.216-25, Contract Definitization, contain

a negotiated definitization schedule including (1) dates for submission of the contractor's price

proposal, required certified cost or pricing data and data other than certified cost or pricing data;

and, if required, make-or-buy and subcontracting plans, (2) a date for the start of negotiations, and

(3) a target date for definitization, which shall be the earliest practicable date for definitization. The

schedule will provide for definitization of the contract within 180 days after the date of the letter

contract or before completion of 40 percent of the work to be performed, whichever occurs first.

However, the contracting officer may, in extreme cases and according to agency procedures,

authorize an additional period. If, after exhausting all reasonable efforts, the contracting officer and

the contractor cannot negotiate a definitive contract because of failure to reach agreement as to

price or fee, the clause at 52.216-25 requires the contractor to proceed with the work and provides

that the contracting officer may, with the approval of the head of the contracting activity, determine

a reasonable price or fee in accordance with subpart 15.4 and part 31, subject to appeal as

provided in the Disputes clause.

(d) The maximum liability of the Government inserted in the clause at 52.216-24, Limitation of

Government Liability, shall be the estimated amount necessary to cover the contractor’s

requirements for funds before definitization. However, it shall not exceed 50 percent of the

estimated cost of the definitive contract unless approved in advance by the official that authorized

the letter contract.

(e) The contracting officer shall assign a priority rating to the letter contract if it is appropriate

under 11.604.
16.603-3 Limitations.

A letter contract may be used only after the head of the contracting activity or a designee

determines in writing that no other contract is suitable. Letter contracts shall not-

(a) Commit the Government to a definitive contract in excess of the funds available at the time the

letter contract is executed;

(b) Be entered into without competition when competition is required by part 6; or

(c) Be amended to satisfy a new requirement unless that requirement is inseparable from the

existing letter contract. Any such amendment is subject to the same requirements and limitations as

a new letter contract.

16.603-4 Contract clauses.

(a) The contracting officer shall include in each letter contract the clauses required by this

regulation for the type of definitive contract contemplated and any additional clauses known to be

appropriate for it.

(b) In addition, the contracting officer shall insert the following clauses in solicitations and contracts

when a letter contract is contemplated:

(1) The clause at 52.216-23, Execution and Commencement of Work, except that this clause may be

omitted from letter contracts awarded on SF 26;

(2) The clause at 52.216-24, Limitation of Government Liability, with dollar amounts completed in a

manner consistent with 16.603-2(d); and

(3) The clause at 52.216-25, Contract Definitization, with its paragraph (b) completed in a manner

consistent with 16.603-2(c). If at the time of entering into the letter contract, the contracting officer

knows that the definitive contract will be based on adequate price competition or will otherwise

meet the criteria of 15.403-1 for not requiring submission of certified cost or pricing data, the words

"and certified cost or pricing data in accordance with FAR 15.408, Table 15-2 supporting its

proposal" may be deleted from paragraph (a) of the clause. If the letter contract is being awarded on

the basis of price competition, the contracting officer shall use the clause with its Alternate I.

(c) The contracting officer shall also insert the clause at 52.216-26, Payments of Allowable Costs

Before Definitization, in solicitations and contracts if a cost-reimbursement definitive contract is

contemplated, unless the acquisition involves conversion, alteration, or repair of ships.