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Time and Materials Contract MathTime and Materials Contract MathA commonly employed contract vehicle for obtaining the services of temporary staff or to engage in highly speculative R&D is the time and materials (T&M) contract. The usual form of this contract is that the time charges are at a standard and fixed rate for a labor category, but there may be many different labor categories, each with a different labor rate, that are chargeable to the contract. Nonlabor items for all manner of material, travel, subsistence, and other things are charged at actual cost, or actual cost plus a small percentage uplift for administrative handling. The T&M contract is somewhat of a hybrid, having FP rates but CP materials. In addition, the total charges for labor are wholly dependent on how much of what kind of labor is actually used in the contract. The T&M contract shares the CP problem of no limit to the dollar liability of the project. The contractor need only provide a "best effort" toward the SOW. There is no fixed or incentive fee. The fee is fixed on a labor rate, but the total fee paid is dependent on what labor rates are employed and how much of each is used in the performance of the tasks on the work breakdown structure. Time and Materials Example 1Scenario: Two labor categories are chargeable to the contract, developer at $75/hour and tester at $50/hour; 50 hours of the former and 100 hours of the latter are employed on the work breakdown structure. In addition, $500 in tool rental and $300 in training expense are chargeable to the contract. A 2% fee is assessed for material handling.
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The supplier is at some risk on T&M contracts, but compared to FFP, the supplier's risk is pretty minimal. The supplier's risk is in the difference between the actual salaries and benefits paid to the employees and the standard rates charged in the contract. If salaries are higher than the standard rates for the specific individuals provided, the supplier will lose money. Consider the following example. Time and Materials Example 2Scenario: For the T&M scenario given above, assume that two developers, Tom and Mary, are provided for 25 hours each. Including benefits, Mary makes $76/ hour, more than the standard rate, and Tom makes $65/hour, less than the standard rate. Each billable hour by Mary is a loss for the supplier, but each billable hour by Tom is profitable. Susan is provided as the tester and her salary is $48/hour, again profitable at the standard rate. [2]In cost-reimbursable contracts, the contractor's costs consist of three components: direct costs of performance for labor and material (nonlabor) applied exclusively to the contract; overhead costs attendant to the direct costs, usually for managers, buildings, general supplies like pencil and paper, utilities, and so forth; and general and administrative costs (G&A) that cover marketing and sales, general management, finance and accounting, independent R&D, and human resources. Overhead and G&A are applied through multiplying the direct costs by a rate that recovers the overhead and G&A proportionately. For instance, if the overhead rate is 110% and the G&A rate is 35%, then for every direct dollar of cost, the project is charged $1.10 additional for overhead and $0.35 for G&A, making the burdened cost to the project of a direct dollar of cost equal to: $1 direct + $1.10 overhead + $0.35 G&A = $2.45. [3]For organizations that routinely engage in CP contracting, guidelines are developed for calculating fee. Normally these guidelines are published for both parties, the contractor and the project. The guidelines help identify the fee rate given the fact that the contractor's cost risk is all but zero. Without risk, the fee represents more of an opportunity cost wherein the project is seeking to attract the contractor's assets rather have some other opportunity capture the contractor's capability. 955
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