How to Understand Time & Material Contracts With Federal Contracting
- 1). Determine whether to seek a time and materials contract or a firm-fixed-price contract. Firm-fixe- price contracts specify a certain budget within which a supplier must complete a project. All expenses (including labor costs) are subtracted from this, and the remainder represents the supplier's profits. Firm-fixed-price contracts are most useful when you are confident of your ability to minimize expenditures. A time-and-materials contract is more appropriate when it is difficult to predict the cost of materials and the number of man-hours required to complete the project.
- 2). Calculate an acceptable expense "ceiling" on the cost of materials needed to complete the project. The government will insist on this in order to prevent you from unreasonably delaying completion in order to maximize your profits. In most time- and-materials contracts, the supplier may stop working when the ceiling is reached, even if the project has not been completed.
- 3). Request that the government present you with a set of clear written goals (as opposed to firm deliverables). These should be included in the time-and-materials contract, and clearly identified as goals rather than absolute requirements.This will reduce the possibility of misunderstandings that could lead to disputes.
- 4). Work out a notification system whereby you notify the government of the estimated total cost of materials at least 60 days prior to the time you estimate you will complete each of the government's goals, so that that the government's contract- management representative will know when the expense ceiling is being approached.
- 5). Determine which of the implied warranties included in Article 2 of the Uniform Commercial Code (see Resources section) you wish to disclaim, and draft clauses that unambiguously disclaim these warranties. Implied warranties such as the Warranty of Title, the Warranty of Merchantability and the Warranty of Fitness for a Particular Purpose can be enforced even if they are not mentioned in the contract, unless they are disclaimed within the contract through use of capital letters, bold type, or in another conspicuous manner.
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