Are T&M contracts considered Cost-Type contracts? Are T&M contracts eligible to receive the 5% adjustment under the Indian Incentive Program per FAR 52.226-1(b)(2)(i)?
This response is based on the information provided. We suggest you discuss with your contracting team, program manager and/or legal department as appropriate.
Time and Material (T&M) contracts are not "cost-type" (i.e., cost-reimbursement) contracts. Support:
1. FAR part 16 covers the various types of FAR-based contracts available for the US Government's use. FAR subpart 16.2 covers the family of fixed-price (FP) contracts while FAR subpart 16.3 covers the family of cost-reimbursement (CR) contracts. T&M contracts fall under their own FAR subpart, and are specifically dealt with at FAR 16.601. T&M contracts fall within a class known as "level of effort contracts". Within the level of effort class, there are two broad categories, the first includes T&M and labor-hour (LH), while the second includes versions of FP (e.g., FFP/LOE) and CR (e.g., CPFF-term).
2. T&M contracts have qualities of both FP and CR, and thus are not purely one or the other.
a. One of the major FP aspects is that the rates within the contract are fully-burdened, containing all associated direct and indirect costs plus profit. Thus for every satisfactory hour worked, the contractor receives the firm, fixed hourly rate as established under the contract regardless of their actual costs incurred--although they have to support actual hours worked. Whereas, if it were a CR contract, the contractor would recover all actual, allowable, allocable costs incurred for performance plus any negotiated fee.
b. One of the major CR aspects of a T&M arrangement is that you are paying for labor effort and associated materials at cost (no profit on materials) rather than for delivery of a completed product or specific service output. So, even if the effort does not result in the delivery of something initially expected, the government must still pay for the hours expended in attempting the desired result.
3. T&M CLINs are allowed (if justified) in a commercial item (i.e., FAR part 12) acquisition per FAR 12.207(b). On the other hand, CR CLINs are not (per FAR 12.207(b)). This further supports a major difference between T&M and CR.
4. Lastly, if T&M were considered a type of CR, then there would not be the need for separate clauses for T&M contracts when it comes to changes (e.g., FAR 52.243-3), inspection and acceptance (e.g., FAR 52.246-6), payments (e.g., FAR 52.232-7) and so forth.
Based on the above:
1) T&M is not considered a cost-type contract.
2) Since T&M does not clearly fit any of the four at FAR 52.226-1(b)(2), the T&M portion of your contract would not appear to be eligible for the adjustment (although other parts that fit one or more of those four would).