Time-and-materials (T&M) contracts are the one contract type federal grants regulations single out for special restriction. Under 2 CFR 200.318(j), a recipient or subrecipient of a federal award may only use a time-and-materials contract after making a documented determination that no other contract type is suitable, and only if the contract includes a ceiling price the contractor exceeds at its own risk. This page explains what the rule actually requires, why it exists, where research institutions most often run into it, and how to document compliance.
What counts as a “time-and-materials type contract” under 2 CFR 200.318(j)
The regulation defines a time-and-materials contract by its pricing formula, not by its subject matter. Under 2 CFR 200.318(j)(1), the cost to the recipient or subrecipient is the sum of:
- The actual cost of materials, and
- Direct labor hours charged at fixed hourly rates that already build in wages, general and administrative expenses, and profit.
That combination — pay for materials at cost, pay for labor at a rate that already includes profit — is what makes T&M distinct from a firm-fixed-price contract (where the price is set regardless of actual hours worked) or a cost-reimbursement contract (governed by its own set of Uniform Guidance provisions). Any contract with that structure is a T&M contract for purposes of 2 CFR 200.318(j), regardless of what a vendor calls it on the purchase order — “time and materials,” “labor and materials,” and some hourly-rate service agreements can all fall under this definition depending on how the price is actually calculated.
Why the Uniform Guidance restricts this contract type specifically
2 CFR 200.318(j)(2) states the regulatory rationale directly: because the price formula is open-ended, a time-and-materials contract “provides no positive profit incentive to the contractor for cost control or labor efficiency.” A fixed-price contractor loses money if the job runs long; a T&M contractor is paid more the longer the job takes. That misalignment is exactly what federal procurement standards are designed to guard against — 2 CFR 200.318(a) requires recipients to maintain procurement procedures that ensure full and open competition and reasonable pricing, and an unrestricted T&M arrangement is one of the more direct ways that discipline can break down.
The regulation doesn’t prohibit T&M contracts outright. It imposes two specific conditions that function as guardrails, plus an ongoing oversight duty.
The two-part test before a T&M contract can be used
1. A documented determination that no other contract type is suitable
The recipient (or subrecipient) must determine — and be able to show, on request, that it determined — that a fixed-price or cost-reimbursement structure would not work for the specific procurement. In practice this determination usually turns on genuine scope uncertainty: the buyer cannot reasonably estimate in advance how many labor hours a job will take. Emergency equipment repair, diagnostic troubleshooting where the extent of the problem is unknown until a technician is on site, and open-ended IT or facilities service calls are the recurring examples in research settings. A procurement office that routinely writes T&M purchase orders for work whose scope is actually well-defined (e.g., a fixed annual maintenance contract dressed up as hourly billing) has not made a defensible determination and is exposed on audit.
This determination should be documented in the procurement file at the time the contract is awarded, not reconstructed after the fact. Institutions that already use a sole-source justification workflow for noncompetitive procurements can typically extend the same documentation discipline here: a short written memo stating why the scope cannot be priced firm, signed by the responsible procurement or PI-adjacent official, kept with the purchase order.
2. A ceiling price the contractor exceeds at its own risk
Every T&M contract permitted under this rule must include a stated ceiling — a not-to-exceed price. The contractor bears the risk of cost overruns above that ceiling; the recipient’s exposure is capped. This is the mechanism that substitutes for the missing profit-incentive-based cost control: without a ceiling, there is no cap on federal-award exposure to an open-ended billing arrangement, which is precisely the failure mode the regulation is written to prevent. A T&M purchase order with an hourly rate but no stated ceiling does not meet the requirement, even if a determination memo exists.
The ongoing oversight obligation
2 CFR 200.318(j)(2) doesn’t stop at the two conditions above — it also requires the recipient or subrecipient to “assert a high degree of oversight to obtain reasonable assurance that the contractor is using efficient methods and effective cost controls” for the life of the contract. In practice, that means procurement and PI staff should be reviewing itemized invoices against actual hours and materials as work proceeds, not simply reconciling a final bill against the ceiling price. An institution that signs a T&M contract with a ceiling and a determination memo, then pays invoices without any labor-hour review until the ceiling is nearly reached, has satisfied the paperwork requirements but not the oversight requirement — and auditors reviewing procurement files for 2 CFR 200.318 compliance look for evidence of both.
Where this shows up in research procurement
T&M restrictions rarely surface in grant budgeting conversations; they surface in the procurement file when equipment or facilities needs repair. Common triggers on sponsored awards include:
- Specialized instrument repair and service contracts — a mass spectrometer, sequencer, or imaging system vendor billing hourly for diagnosis-and-repair work where the extent of the fault isn’t known until a technician opens the unit.
- Facilities and building-system service calls on federally funded core facility or shared-instrumentation space, where the vendor bills parts-plus-hourly-labor.
- Short-notice IT consulting or systems integration work tied to a sponsored project, billed hourly against an undefined scope.
- Change-order labor on a construction or renovation contract funded in whole or part by a federal award, where the added work is priced time-and-materials rather than negotiated as a fixed change order.
None of these require a separate written policy from scratch — they need the procurement office’s existing purchase-order and contract-file process to include the determination memo and stated ceiling before the order is issued, and a documented invoice-review step while the work is underway.
How this interacts with subawards
2 CFR 200.318’s procurement standards, including the T&M restriction, apply to non-federal entities acting as either a direct recipient or a subrecipient of a federal award — the obligation flows down through the subaward relationship. A pass-through entity is responsible for confirming, as part of its subrecipient monitoring, that a subrecipient’s own procurement of goods and services (including any T&M contracts the subrecipient enters into using federal award funds) follows 2 CFR 200.317–200.327. This is one of the specific procurement controls worth checking during subrecipient risk assessment and monitoring, alongside the broader monitoring obligations under 2 CFR 200.332. See CASRAI’s subrecipient monitoring checklist for the fuller set of pass-through entity obligations.
Audit and compliance exposure
A T&M contract missing a documented “no other type suitable” determination, missing a stated ceiling price, or lacking evidence of ongoing cost-control oversight is a textbook procurement-standards finding in a Single Audit (Uniform Guidance Subpart F) or an agency-level desk review. Costs incurred under a noncompliant procurement can be questioned or disallowed even when the underlying goods or services were legitimately needed and delivered — the deficiency is procedural, not a dispute over whether the purchase itself was reasonable. Because the rule is specific and narrow (it only applies to contracts priced this particular way), it’s also an easy one for a procurement office to overlook entirely until an audit sample happens to pull a T&M purchase order.
Frequently asked questions
Does 2 CFR 200.318(j) apply to all hourly-billed vendor work?
No — only to contracts priced as the sum of actual material costs plus labor hours at a fixed rate that includes profit and overhead, matching the regulation’s definition. A straightforward hourly consulting rate with no separate materials component may or may not meet this definition depending on how the rate is structured; when in doubt, treat any open-ended hourly billing arrangement funded by a federal award as subject to the rule and document accordingly.
Is a ceiling price the same as a not-to-exceed clause?
Functionally, yes. The regulation’s language (“a ceiling price that the contractor exceeds at its own risk”) is what a not-to-exceed clause is designed to implement: a maximum contract value the vendor cannot bill past without separate authorization.
Who makes the “no other contract type suitable” determination?
The regulation doesn’t prescribe a specific title — it places the obligation on the recipient or subrecipient as an institution. Most institutions assign this to the procurement or contracts office, often in consultation with the requesting PI or department, and document it the same way they document other procurement determinations (sole-source justifications, cost/price analyses).
Does this rule apply to state and local government recipients the same way it applies to universities?
2 CFR 200.317 directs states to follow their own procurement laws and regulations for federal awards, while 200.318–200.327 (including the T&M restriction in 200.318(j)) apply to all other non-federal entities — universities, nonprofits, and most other recipients and subrecipients. Check 200.317 specifically if your institution is a state agency or receiving funds through one.
What should a procurement file contain to demonstrate compliance?
At minimum: a brief written determination explaining why no other contract type was suitable, the contract or purchase order showing a stated ceiling price, and evidence (invoice annotations, review sign-offs, or a monitoring log) that someone reviewed actual labor hours and materials against the ceiling as billing occurred, not only at contract close-out.
