How does a time-and-materials contract differ from firm-fixed-price and cost-reimbursement?

A time-and-materials (T&M) contract combines elements of both firm fixed price (FFP) contracts and cost-reimbursement (cost-plus) contracts, shifting some risk from the government to the contractor compared to cost-plus, but less than an FFP.

Under a T&M contract, the government pays for direct labor hours at fixed hourly rates that include wages, overhead, general and administrative expenses, and profit. The contractor also gets reimbursed for actual material costs. This means the contractor takes on the risk of managing labor efficiency within those fixed hourly rates, but the government bears the risk of the total hours needed for the project. For materials, the government carries the risk of price fluctuations.

In contrast, an FFP contract puts all the risk for costs and profit or loss squarely on the contractor, as the price is not adjusted based on the contractor's cost experience (FAR 16.202-1). A cost-reimbursement contract, however, pays for allowable incurred costs up to an estimated ceiling, placing more cost risk on the government (FAR 16.301-1).

Federal agencies use T&M contracts only when it's impossible to estimate the extent or duration of the work with reasonable confidence (FAR 16.601(b) and (c)). This often happens with unpredictable IT services or research and development efforts where the scope might evolve.