In a time-and-materials (T&M) contract, or order placed against an indefinite-delivery contract, the Postal Service and supplier agree on a fixed hourly rate for each labor category required. Each required labor rate is inclusive of the supplier’s applicable cost elements such as direct labor, labor overhead, general and administrative expenses, and profit. All material and the associated material handling expense are supplied at cost (see Section 2-18.7.2 for definitions of material and material handling). A T&M contract is most commonly used when the quantity of labor required for the work to be accomplished cannot be adequately estimated in advance. Because a T&M contract does not encourage effective cost control or labor efficiency by the supplier, this contract type and order pricing structure should only be used when provision is made for adequate monitoring by the Postal Service to ensure that inefficient or wasteful work methods are not used. Examples of situations where a T&M contract type or order pricing structure may be appropriate include:
A T&M contract type or order should only be used when it is not possible to accurately estimate the extent or duration of the work, or anticipate project cost with a reasonable degree of certainty.
A T&M contract or order must establish a ceiling price in the schedule. The ceiling price is the maximum aggregate amount that the Postal Service is obligated to pay the supplier for efforts expended under the contract or order. The supplier is not obligated to continue performance once the ceiling price is reached. Should the supplier exceed the ceiling price, it does so at its own risk, and the Postal Service is not obligated to reimburse the supplier for such costs incurred.
A T&M contract amount and the ceiling price may differ, and are not synonymous. For example, where a purchase is incrementally funded, the ceiling price may exceed the contract or order total award amount.
During performance, the supplier must notify the contracting officer if it has reason to believe that the ceiling price may be exceeded. This obligation accrues to the supplier when either the supplier estimates that the required labor and material costs necessary for completion will exceed the ceiling price within 60 days, or the total amount for the scope of contract performance will be greater than the ceiling price. Conversely, if the supplier believes the total price for the contract will be substantially less than the ceiling price, then it must notify the contracting officer as well. As part of any supplier notification regarding the ceiling price, the supplier must give a revised estimate of the total price for performing the contract.
If the contracting officer determines that a change to the ceiling price is in the best interest of the Postal Service, he or she must modify the contract or order to revise the ceiling price in the schedule. To support the modification, the contracting officer must document the basis for any change and provide for the associated review and approval of the action. Such approvals must be maintained in the contract file.
A labor-hour contract is a variant of the T&M contract, differing only in that materials are not supplied by the supplier.
All T&M, labor-hour contracts, and indefinite-delivery contracts under which a T&M or labor-hour order is placed must include Clause 2-38: Payment (Time-and-Materials and Labor-Hour Contracts).
Material costs are the following:
- Costs for direct materials, such as raw materials, parts, subassemblies, components, and manufacturing supplies, 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, whether purchased or manufactured by the contractor, and may include such collateral items as inbound transportation and in-transit insurance.
- Costs of subcontracts for supplies and incidental services for which there is not a labor category specified in the contract.
- Other direct costs (e.g., incidental services for which there is not a labor category specified in the contract, travel, computer usage charges, etc.).
Material handling costs are all appropriate indirect costs allocated to direct materials in accordance with the supplier’s usual accounting procedures, but only to the extent they are clearly excluded from the hourly rate.
If the supplier furnishes its own materials that are considered a commercially available item, the price to be paid for such materials shall not exceed the supplier‘s established catalog or market price, adjusted to reflect the following:
As stated in Clause 2-38: Payment (Time-and-Materials and Labor-Hour Contracts), profit or fees will not be paid on the cost of material or material handling.
As specified in Clause 2-38: Payment (Time-and-Materials and Labor-Hour Contracts), the contracting officer may issue a unilateral contract modification that requires the supplier to provide for a withholding from invoices until a reserve is set aside to protect Postal Service interests. The contracting officer may require a withholding of 5% applied to the amounts billed at the labor-hour rates, up to a total of $50,000. Applying the 5% retainage is discretionary. Contracting officer considerations for retainage include the following:
Contracting officer considerations for not applying retainage are the following:
During the contract closeout process, the retainage should only be paid to the supplier after the contracting officer has determined that all deliverables were provided and accepted, that the supplier has met all its contractual obligations, and the supplier has executed a release of claims. At that time, the supplier may identify specific disputed matters to exclude from the release if it requires the right to pursue a matter further.
