A Time and Materials contract pays the contractor for actual hours worked at fixed hourly rates by labor category, plus actual material costs at cost (with limited markup allowed for material handling). The contract has a not-to-exceed ceiling that caps total payment regardless of hours billed. T&M is the federal government's contract type of last resort under FAR Part 16 — used when the scope cannot be defined with enough precision to support FFP and a cost-reimbursement structure is inappropriate.
T&M is most appropriate when the scope is genuinely uncertain at award — emergency repair work, ad-hoc engineering support, or response to evolving operational requirements. Hourly rates are typically loaded with the contractor's wrap rate (direct labor plus fringe, overhead, G&A, and fee). The government bears the cost risk: more hours mean more payment, up to the ceiling. The contractor must maintain timekeeping records that support DCAA-reviewable invoicing — incurred-cost submissions are not required, but billable-hours discipline is.
For small contractors, T&M offers cash-flow stability and lower estimating risk than FFP — but the federal government strongly prefers FFP for predictable scopes, and contracting officers face documented pressure to convert T&M work to FFP when possible. T&M is best used as a bridge: a transition vehicle for new customer relationships where neither party fully understands the scope, with the expectation of moving to FFP or IDIQ task orders once the work stabilizes. Long-term, profitable T&M relationships exist, but they are increasingly rare.