A Labor-Hour (LH) Contract is a type of time-based contract used in federal procurement where payment is made strictly based on the number of labor hours expended, multiplied by fixed hourly rates. These rates are pre-negotiated and include wages, overhead, general and administrative expenses, and profit. Unlike fixed-price contracts, LH contracts do not establish a total contract amount at the time of award because the scope of work is not fully defined or quantifiable.
This contract type is a close relative of the Time-and-Materials (T&M) contract, but with a key distinction: under a Labor-Hour contract, only labor is billed — the inclusion of materials or other direct costs is not permitted. It is primarily used when the precise extent or duration of the work cannot be estimated with sufficient accuracy at the outset, making it a flexible option for both the government and contractors in uncertain or rapidly changing project environments.
The Nature and Structure of a Labor-Hour Contract
The defining feature of a Labor-Hour contract is its reliance on labor categories and established hourly rates, rather than a predetermined total price or output-based deliverables. In essence, the government purchases professional labor as needed, rather than a finished product or fixed service.
These contracts typically specify:
- The labor categories that may be used (e.g., Project Manager, Systems Engineer, Administrative Support)
- The maximum number of labor hours authorized for each category
- The fixed hourly rates associated with each category
- The ceiling amount of the contract, beyond which the contractor cannot perform without modification
Since the total quantity of hours may vary depending on the evolving needs of the agency, this structure provides flexibility while still imposing boundaries through authorized ceilings and labor categories.
When Labor-Hour Contracts Are Appropriate
The Federal Acquisition Regulation (FAR) categorizes Labor-Hour contracts as a form of “other than firm-fixed-price” contract, which means they should only be used when it is not possible to accurately estimate the extent or duration of the work at the time of contract award. They are generally considered suitable in situations where:
- The nature of the work is exploratory, variable, or undefined
- The agency requires immediate access to specialized labor
- Time constraints prevent the development of detailed requirements
- Ongoing support or services are needed, but the volume or duration is unpredictable
Common use cases include IT services, technical consulting, advisory services, and certain types of professional or administrative support. GSA’s Multiple Award Schedule (MAS) program often accommodates Labor-Hour orders when properly justified, making them a practical tool within GSA’s broader acquisition strategy.
Key Differences Between Labor-Hour and Time-and-Materials Contracts
Although Labor-Hour and Time-and-Materials contracts are similar, they are not interchangeable. The key difference lies in the billing structure. A Time-and-Materials (T&M) contract allows contractors to charge for both labor and materials, including supplies, travel, and incidental expenses. A Labor-Hour contract, however, restricts reimbursement strictly to labor hours.
This distinction simplifies administration and audit for the government but places greater responsibility on the contractor to manage any incidental costs not recoverable under the contract. For contractors, it also means tighter financial control and a clearer scope of allowable billings.
Oversight and Accountability in LH Contracts
Because Labor-Hour contracts shift some of the cost risk from the contractor to the government, they are subject to heightened oversight. FAR 16.601 and GSA-specific guidance stress the need for strong contract administration to ensure that hours billed are reasonable, allowable, and properly documented.
Agencies using LH contracts must:
- Justify their use in the acquisition file
- Include detailed determinations and findings (D&Fs) supporting why no other contract type is suitable
- Implement monitoring processes to ensure labor is being applied efficiently and effectively
Contracting officers must also verify that labor categories being billed match the services performed and that rates are in accordance with the contract. For contractors, this means maintaining robust timekeeping and documentation practices to remain compliant.
The Role of Labor-Hour Contracts Within GSA Schedules
GSA Schedule contracts are designed to streamline the acquisition of commercial products and services by pre-negotiating terms and rates. Within this framework, agencies can place Labor-Hour task orders when the work is suitable and properly justified.
For example, under GSA MAS, an agency might issue a Labor-Hour task order for help desk support during the implementation of a new IT system — knowing that the number of service tickets, hours required, or user training needs may fluctuate significantly during rollout.
GSA requires that such orders include appropriate justification and be issued under conditions that comply with FAR Part 12 (commercial items) and Part 16 (contract types). The labor categories and rates used must already be part of the contractor’s awarded GSA Schedule contract, offering assurance that pricing is fair and reasonable.
Advantages and Limitations
The primary advantage of a Labor-Hour contract is flexibility. It allows agencies to acquire needed labor quickly without being locked into a rigid scope or deliverable timeline. It is also administratively efficient when used correctly, particularly for recurring or level-of-effort services.
However, the same flexibility introduces certain limitations:
- It places more risk on the government, which pays for time rather than results
- It can lead to cost inefficiencies if not properly monitored
- It requires careful oversight to prevent misuse or waste
- It is not appropriate for projects with well-defined outcomes or schedules
Because of these risks, FAR guidance recommends that LH contracts be used only as a last resort, after determining that no other contract type is feasible. They are often used as transitional solutions until requirements can be better defined.
Compliance Considerations for Contractors
For contractors, performing under a Labor-Hour contract demands discipline in several key areas. Timekeeping systems must be accurate and auditable, with labor hours tied clearly to contract tasks. Staff must be qualified under the labor categories they are billing, and contract managers must ensure that total hours remain within the contract ceiling unless formally modified.
Contractors are also expected to:
- Submit regular progress reports or status updates
- Avoid charging unapproved labor categories or exceeding authorized hours
- Comply with any agency-specific invoicing formats or validation processes
Given that payment is based solely on time, any billing irregularity — such as misclassification of labor or lack of support documentation — may result in rejected invoices or post-award audits.
Conclusion
A Labor-Hour (LH) Contract is a flexible and often necessary tool within the federal acquisition system, especially when requirements are not fully defined at the outset. It enables agencies to procure professional labor efficiently while retaining the ability to scale services up or down as needs evolve.
However, its use comes with increased oversight responsibilities for both government and contractor stakeholders. When used judiciously and managed carefully, Labor-Hour contracts provide a valuable mechanism for addressing complex or dynamic service needs within GSA’s procurement portfolio.
For any contractor working with GSA — particularly under MAS contracts — a thorough understanding of Labor-Hour structures, requirements, and compliance expectations is key to maintaining performance and sustaining eligibility for future work.
