Can a Labor Hours award be appropriate for Research and Development effort?
You are correct in that FAR Part 35 does not explicitly specify labor hours (neither allowed or prohibited). From FAR Part 16.602, a labor-hour contract is variation of the time-and-material contract, differing on that the contractor does not supply materials. On this rationale, I maintain this is in the government’s best interest to FFP (LH) in Research and Development.
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1.102 -- Statement of Guiding Principles for the Federal Acquisition System.
(d) The role of each member of the Acquisition Team is to exercise personal initiative and sound business judgment in providing the best value product or service to meet the customer’s needs. In exercising initiative, Government members of the Acquisition Team may assume if a specific strategy, practice, policy or procedure is in the best interests of the Government and is not addressed in the FAR, nor prohibited by law (statute or case law), Executive order or other regulation, that the strategy, practice, policy or procedure is a permissible exercise of authority.