FAR 12.207—Contract type.
Plain-English Summary
FAR 12.207 governs which contract types may be used to buy commercial products and commercial services, and it is one of the core rules that keeps commercial-item acquisitions aligned with market-based pricing and streamlined buying practices. The section starts with the general rule that agencies must use firm-fixed-price contracts or fixed-price contracts with economic price adjustment, then explains the limited circumstances in which time-and-materials (T&M) or labor-hour (LH) contracts are allowed for commercial services. It also covers the competition conditions that must exist before using T&M/LH, the required determination and findings (D&F), ceiling-price requirements, and the extra steps needed before increasing a ceiling price or making a scope change. The section further addresses how indefinite-delivery contracts may be structured for commercial services, including when T&M/LH pricing is allowed at the basic contract or order level, and when a D&F must support the basic contract or each order. It also permits award fees and performance/delivery incentives in limited circumstances, and it flatly prohibits using any contract type not authorized by this subpart for commercial products or services. In practice, this section is about controlling risk: it pushes agencies toward fixed-price commercial buying whenever possible, allows T&M/LH only when justified and competitively awarded, and requires documentation and approvals to prevent overuse of cost-reimbursement-like structures in commercial acquisitions.
Key Rules
Default to fixed-price
Agencies must use firm-fixed-price or fixed-price with economic price adjustment for commercial products and commercial services unless a specific exception applies. This reflects the FAR’s preference for pricing structures that place cost risk on the contractor and are consistent with commercial market practices.
T&M and labor-hour are limited
A time-and-materials or labor-hour contract may be used only for commercial services, and only when the service is acquired through one of the specified competitive paths: full and open competition, certain other-than-full-and-open competition with two or more responsible offerors, or fair opportunity procedures for a multiple-award delivery-order contract. The contract officer must also determine that no other authorized contract type is suitable.
D&F is mandatory
Before using T&M or labor-hour pricing, the contracting officer must execute a determination and findings that explains why no other authorized contract type is suitable. The D&F must include market research, explain why the work cannot be accurately estimated with reasonable confidence, show the requirement was structured to maximize use of fixed-price methods, and describe future actions to move toward fixed-price pricing.
Ceiling price required
T&M and labor-hour contracts or orders must include a ceiling price, and the contractor performs at its own risk once that ceiling is reached. The ceiling is a key control to limit Government exposure and must be managed carefully if the Government later considers increasing it.
Ceiling increases need analysis
Before increasing the ceiling price, the contracting officer must analyze pricing and other relevant factors, document the decision in the file, and follow the proper procedures if the change affects the general scope of the contract or order. Different procedures apply depending on whether the change affects a stand-alone contract, a Federal Supply Schedule order, or a multiple-award task or delivery order.
Indefinite-delivery contracts have special rules
Indefinite-delivery contracts may be used with fixed-price or fixed-price with economic price adjustment pricing, or with rates for commercial services acquired on a T&M or labor-hour basis. When such a contract allows T&M/LH orders, the contracting officer must, to the maximum extent practicable, also allow fixed-price orders and must execute the required D&F for each T&M/LH order.
Basic contract D&F in limited cases
If an indefinite-delivery contract only allows T&M or labor-hour orders, the D&F must support the basic contract itself and explain why an alternative fixed-price structure is not practicable. That D&F requires approval one level above the contracting officer.
Award fees and incentives are allowed only on non-cost factors
The contract types authorized by this section may be combined with award fees and performance or delivery incentives, but only when the award fee or incentive is based solely on factors other than cost. This preserves the commercial-item policy against using pricing structures that blur cost responsibility.
Other contract types are prohibited
Using any contract type not authorized by this subpart to acquire commercial products or commercial services is prohibited. This is a hard stop rule that prevents agencies from importing noncommercial contract structures into commercial-item buys.
Responsibilities
Contracting Officer
Select a firm-fixed-price or fixed-price with economic price adjustment contract unless a narrow exception applies. If using T&M or labor-hour for commercial services, ensure the acquisition meets the competition requirements, prepare and obtain approval of the required D&F, include a ceiling price, document any ceiling increase analysis, and follow the correct procedures for scope changes and order placement.
Agency
Use acquisition strategies and oversight processes that favor fixed-price commercial contracting, ensure required approvals are in place for extended-duration T&M/LH contracts, and maintain compliance with the commercial-item contract type restrictions.
Contractor
Perform within the ceiling price at its own risk once the ceiling is reached, and comply with the pricing structure and any award-fee or incentive terms established in the contract or order.
Approving Official / Higher-Level Reviewer
Approve the D&F when required, including the one-level-above-CO approval for a basic indefinite-delivery contract that only permits T&M or labor-hour orders, and any other approvals required for longer-term T&M/LH arrangements.
Acquisition Team / Market Research Personnel
Conduct and document market research that supports the D&F, including evidence about pricing uncertainty, available contract types, and how the requirement was structured to maximize fixed-price use.
Practical Implications
This section strongly favors fixed-price commercial buying, so T&M or labor-hour should be treated as an exception that must be justified, not a convenient default.
The D&F is often the most common compliance failure point: if it lacks market research, a real explanation of why costs or duration cannot be estimated, or a plan to move future buys to fixed-price, it may be vulnerable to protest or audit findings.
Ceiling management matters operationally; if the Government lets a T&M/LH ceiling run too low, work may stop, but if it raises the ceiling without proper analysis or scope review, it risks an unauthorized commitment or improper contract modification.
For indefinite-delivery vehicles, contracting officers must think ahead: even if T&M/LH is allowed, the FAR expects the contract to support fixed-price ordering whenever practicable, which means the vehicle should not be structured as T&M-only unless that is truly unavoidable.
Award fees and incentives do not make a T&M/LH arrangement more flexible on cost risk; they are allowed only when based on non-cost factors, so teams should avoid mixing them with pricing concepts in a way that obscures accountability.
Official Regulatory Text
(a) Except as provided in paragraph (b) of this section, agencies shall use firm-fixed-price contracts or fixed-price contracts with economic price adjustment for the acquisition of commercial products or commercial services. (b) (1) A time-and-materials contract or labor-hour contract (see subpart 16.6 ) may be used for the acquisition of commercial services when- (i) The service is acquired under a contract awarded using- (A) Competitive procedures ( e.g. , the procedures in 6.102 , the set-aside procedures in subpart 19.5 , or competition conducted in accordance with part 13 ); (B) The procedures for other than full and open competition in 6.3 provided the agency receives offers that satisfy the Government’s expressed requirement from two or more responsible offerors; or (C) The fair opportunity procedures in 16.505 (including discretionary small business set-asides under 16.505 (b)(2)(i)(F)), if placing an order under a multiple-award delivery-order contract; and (ii) The contracting officer- (A) Executes a determination and findings (D&F) for the contract, in accordance with paragraph (b)(2) of this section (but see paragraph (c) of this section for indefinite-delivery contracts), that no other contract type authorized by this subpart is suitable; (B) Includes a ceiling price in the contract or order that the contractor exceeds at its own risk; and (C) Prior to increasing the ceiling price of a time-and-materials or labor-hour contract or order, shall- (1) Conduct an analysis of pricing and other relevant factors to determine if the action is in the best interest of the Government; (2) Document the decision in the contract or order file; and (3) When making a change that modifies the general scope of- (i) A contract, follow the procedures at 6.303 ; (ii) An order issued under the Federal Supply Schedules, follow the procedures at 8.405-6 ; or (iii) An order issued under multiple award task and delivery order contracts, follow the procedures at 16.505 (b)(2). (2) Each D&F required by paragraph (b)(1)(ii)(A) of this section shall contain sufficient facts and rationale to justify that no other contract type authorized by this subpart is suitable. At a minimum, the D&F shall- (i) Include a description of the market research conducted (see 10.002 (e)); (ii) Establish that it is not possible at the time of placing the contract or order to accurately estimate the extent or duration of the work or to anticipate costs with any reasonable degree of confidence; (iii) Establish that the requirement has been structured to maximize the use of firm-fixed-price or fixed-price with economic price adjustment contracts ( e.g. , by limiting the value or length of the time-and-material/labor-hour contract or order; establishing fixed prices for portions of the requirement) on future acquisitions for the same or similar requirements; and (iv) Describe actions planned to maximize the use of firm-fixed-price or fixed-price with economic price adjustment contracts on future acquisitions for the same requirements. (3) See 16.601 (d)(1) for additional approval required for contracts expected to extend beyond three years. (4) See 8.404 (h) for the requirement for determination and findings when using Federal Supply Schedules. (c) (1) Indefinite-delivery contracts (see subpart 16.5 ) may be used when- (i) The prices are established based on a firm-fixed-price or fixed-price with economic price adjustment; or (ii) Rates are established for commercial services acquired on a time-and-materials or labor-hour basis. (2) When an indefinite-delivery contract is awarded with services priced on a time-and-materials or labor-hour basis, contracting officers shall, to the maximum extent practicable, also structure the contract to allow issuance of orders on a firm-fixed-price or fixed-price with economic price adjustment basis. For such contracts, the contracting officer shall execute the D&F required by paragraph (b)(2) of this section, for each order placed on a time-and-materials or labor-hour basis. Placement of orders shall be in accordance with subpart 8.4 or 16.5 , as applicable. (3) If an indefinite-delivery contract only allows for the issuance of orders on a time-and-materials or labor-hour basis, the D&F required by paragraph (b)(2) of this section shall be executed to support the basic contract and shall also explain why providing for an alternative firm-fixed-price or fixed-price with economic price adjustment pricing structure is not practicable. The D&F for this contract shall be approved one level above the contracting officer. Placement of orders shall be in accordance with subpart 16.5 . (d) The contract types authorized by this subpart may be used in conjunction with an award fee and performance or delivery incentives when the award fee or incentive is based solely on factors other than cost (see 16.202-1 and 16.203-1 ). (e) Use of any contract type other than those authorized by this subpart to acquire commercial products or commercial services is prohibited.