FAR 52.232-7—Payments under Time-and-Materials and Labor-Hour Contracts.
Plain-English Summary
FAR 52.232-7 is the core payment clause for time-and-materials (T&M) and labor-hour (LH) contracts. It explains how the Government pays for labor at fixed hourly rates, what labor qualifies for payment, how vouchers must be submitted and substantiated, when the Government may withhold funds, how overtime is handled, and how materials are priced and reimbursed. It also defines key terms such as hourly rate, direct materials, materials, and commercial product or commercial service when the contractor furnishes its own materials. In practice, this clause is critical because it separates labor payment from material reimbursement, requires strong timekeeping and labor-category compliance, and gives the Contracting Officer tools to protect the Government through withholds and approval controls. Contractors must understand that payment is not simply based on hours worked; it depends on the right labor category, proper documentation, and compliance with the contract’s pricing and accounting rules. Contracting officers must use the clause to verify that billed labor and materials are allowable, properly supported, and consistent with the contract schedule and applicable cost principles.
Key Rules
Hourly rate governs labor payment
The Government pays the contract’s prescribed hourly rates for labor that meets the stated labor-category qualifications, whether performed by the prime contractor, subcontractors, or transferred among commonly controlled affiliates. Payment is based on direct labor hours multiplied by the applicable rate, and fractional hours are paid on a prorated basis.
Only qualified labor is payable
Labor hours are payable only when the person performing the work meets the labor qualifications specified in the contract. If the work is done by someone who does not meet the required qualifications, those hours are not payable unless the Contracting Officer specifically authorizes the exception.
Voucher submission and support
Vouchers may generally be submitted no more than once every two weeks, although small business concerns may be paid more frequently. Each voucher must be substantiated with evidence of actual payment and supporting records such as daily timekeeping records, proof that employees meet labor-category qualifications, or other Contracting Officer-approved support.
Prompt payment after approval
After receipt of a properly substantiated voucher, the Government must promptly pay the approved amount, subject to any other contract terms and the specific limitations in paragraph (e) of the clause. This makes documentation quality and approval workflow central to cash flow under T&M and LH contracts.
Withholding authority protects the Government
The Contracting Officer may unilaterally require the contractor to withhold amounts from billings to create a reserve protecting the Government’s interests. Unless the schedule says otherwise, the CO may require a 5 percent withhold, capped at $50,000 for the contract, and the withheld funds are retained until the contractor provides the required release.
Overtime is not automatically premium-priced
Hourly rates do not change just because work is performed on overtime. If no overtime rates are in the schedule and overtime is approved in advance, the parties must negotiate the overtime rates; if they cannot agree, the issue is handled as a dispute. If overtime rates are already in the schedule, only the premium portion is reimbursable and only to the extent the overtime was approved.
Materials are separately reimbursed
The clause defines materials broadly to include direct materials, certain transferred supplies, subcontracts for supplies and incidental services without a labor category, other direct costs such as travel and computer usage, and applicable indirect costs. Materials are reimbursed separately from labor and are subject to the Allowable Cost and Payment clause and FAR part 31 cost principles.
Own commercial materials have price limits
If the contractor furnishes its own materials that qualify as a commercial product or commercial service, the price paid cannot exceed the contractor’s established catalog or market price, adjusted for quantity and any contract-required modifications. This prevents overcharging when the contractor is selling its own commercial items through a T&M or LH arrangement.
Material reimbursement depends on payment practices
For materials not covered by the commercial-item pricing rule, the Government reimburses allowable cost only if the contractor has paid the supplier in accordance with the agreement or invoice, or ordinarily pays within 30 days of submitting its payment request and does so consistently with the supplier terms. This ties reimbursement to actual or customary payment behavior.
Indirect costs and discounts must be handled properly
The contractor may include allocable indirect costs and other direct costs only if those costs are clearly excluded from the hourly rate, allocated under the contractor’s written or established accounting practices, and not applied to subcontracts paid at hourly rates. The contractor must also obtain materials at the most advantageous prices available and take all cash and trade discounts to the extent practicable.
Responsibilities
Contracting Officer
Approve or authorize vouchers, determine whether labor meets contract qualifications, authorize exceptions for unqualified labor only when appropriate, issue withhold modifications when needed, approve overtime in advance when required, negotiate overtime rates if none are in the schedule, and determine allowable material costs under FAR part 31 and the contract’s payment terms.
Contractor
Bill only for labor that meets the contract’s labor-category qualifications, maintain daily timekeeping and qualification records, substantiate vouchers with evidence of actual payment and other required support, comply with withholding requirements, seek advance approval for overtime when required, price and bill materials correctly, apply indirect costs only as allowed, and obtain materials at the best available prices while taking discounts.
Subcontractors
Perform only the labor or furnish only the materials/services for which the prime contractor can properly bill under the contract, and provide the documentation needed for the prime contractor to substantiate billed hours or material costs.
Agency/Government
Review substantiated vouchers, pay approved amounts promptly, enforce the clause’s documentation and allowability requirements, and use withholding or other controls when necessary to protect the Government’s interests.
Practical Implications
This clause makes labor-category compliance a payment issue, not just a performance issue. If the wrong person performs the work, the Government can refuse to pay those hours unless the CO specifically authorizes them.
Timekeeping must be precise and contemporaneous. Daily job time records and proof of qualification are common audit points, and weak records can delay payment or trigger disallowance.
Contractors should watch overtime carefully. Overtime does not automatically increase the hourly rate, and unapproved overtime can create unreimbursable premium costs or disputes.
Materials billing is often where errors occur. Contractors must separate labor from materials, avoid double-counting indirect costs, and ensure any commercial-item pricing limitation is applied correctly.
The CO’s withholding authority can affect cash flow. Contractors should understand any reserve or release requirement early, because withheld amounts may remain unpaid until the required release is delivered.
Official Regulatory Text
As prescribed in 32.111 (a)(7) , insert the following clause: Payments under Time-and-Materials and Labor-Hour Contracts (Nov 2021) The Government will pay the Contractor as follows upon the submission of vouchers approved by the Contracting Officer or the authorized representative: (a) Hourly rate . (1) Hourly rate means the rate(s) prescribed in the contract for payment for labor that meets the labor category qualifications of a labor category specified in the contract that are- (i) Performed by the Contractor; (ii) Performed by the subcontractors; or (iii) Transferred between divisions, subsidiaries, or affiliates of the Contractor under a common control. (2) The amounts shall be computed by multiplying the appropriate hourly rates prescribed in the Schedule by the number of direct labor hours performed. (3) The hourly rates shall be paid for all labor performed on the contract that meets the labor qualifications specified in the contract. Labor hours incurred to perform tasks for which labor qualifications were specified in the contract will not be paid to the extent the work is performed by employees that do not meet the qualifications specified in the contract, unless specifically authorized by the Contracting Officer. (4) The hourly rates shall include wages, indirect costs, general and administrative expense, and profit. Fractional parts of an hour shall be payable on a prorated basis. (5) Vouchers may be submitted not more than once every two weeks, to the Contracting Officer or authorized representative. A small business concern may receive more frequent payments than every two weeks. The Contractor shall substantiate vouchers (including any subcontractor hours reimbursed at the hourly rate in the schedule) by evidence of actual payment and by- (i) Individual daily job timekeeping records; (ii) Records that verify the employees meet the qualifications for the labor categories specified in the contract; or (iii) Other substantiation approved by the Contracting Officer. (6) Promptly after receipt of each substantiated voucher, the Government shall, except as otherwise provided in this contract, and subject to the terms of paragraph (e) of this clause, pay the voucher as approved by the Contracting Officer or authorized representative. (7) Unless otherwise prescribed in the Schedule, the Contracting Officer may unilaterally issue a contract modification requiring the Contractor to withhold amounts from its billings until a reserve is set aside in an amount that the Contracting Officer considers necessary to protect the Government's interests. The Contracting Officer may require a withhold of 5 percent of the amounts due under paragraph (a) of this clause, but the total amount withheld for the contract shall not exceed $50,000. The amounts withheld shall be retained until the Contractor executes and delivers the release required by paragraph (g) of this clause. (8) Unless the Schedule prescribes otherwise, the hourly rates in the Schedule shall not be varied by virtue of the Contractor having performed work on an overtime basis. If no overtime rates are provided in the Schedule and overtime work is approved in advance by the Contracting Officer, overtime rates shall be negotiated. Failure to agree upon these overtime rates shall be treated as a dispute under the Disputes clause of this contract. If the Schedule provides rates for overtime, the premium portion of those rates will be reimbursable only to the extent the overtime is approved by the Contracting Officer. (b) Materials. (1) For the purposes of this clause- (i) Direct materials means those materials that enter directly into the end product, or that are used or consumed directly in connection with the furnishing of the end product or service. (ii) Materials means- (A) Direct materials, including supplies transferred between divisions, subsidiaries, or affiliates of the Contractor under a common control; (B) Subcontracts for supplies and incidental services for which there is not a labor category specified in the contract; (C) Other direct costs ( e.g. , incidental services for which there is not a labor category specified in the contract, travel, computer usage charges, etc.); and (D) Applicable indirect costs. (2) If the Contractor furnishes its own materials that meet the definition of a commercial product or commercial service in Federal Acquisition Regulation (FAR) 2.101 , the price to be paid for such materials shall not exceed the Contractor's established catalog or market price, adjusted to reflect the- (i) Quantities being acquired; and (ii) Actual cost of any modifications necessary because of contract requirements. (3) Except as provided for in paragraph (b)(2) of this clause, the Government will reimburse the Contractor for allowable cost of materials provided the Contractor- (i) Has made payments for materials in accordance with the terms and conditions of the agreement or invoice; or (ii) Ordinarily makes these payments within 30 days of the submission of the Contractor's payment request to the Government and such payment is in accordance with the terms and conditions of the agreement or invoice. (4) Payment for materials is subject to the Allowable Cost and Payment clause of this contract. The Contracting Officer will determine allowable costs of materials in accordance with FAR subpart 31.2 in effect on the date of this contract. (5) The Contractor may include allocable indirect costs and other direct costs to the extent they are- (i) Comprised only of costs that are clearly excluded from the hourly rate; (ii) Allocated in accordance with the Contractor's written or established accounting practices; and (iii) Indirect costs are not applied to subcontracts that are paid at the hourly rates. (6) To the extent able, the Contractor shall- (i) Obtain materials at the most advantageous prices available with due regard to securing prompt delivery of satisfactory materials; and (ii) Take all cash and trade discounts, rebates, allowances, credits, salvage, commissions, and other benefits. When unable to take advantage of the benefits, the Contractor shall promptly notify the Contracting Officer and give the reasons. The Contractor shall give credit to the Government for cash and trade discounts, rebates, scrap, commissions, and other amounts that have accrued to the benefit of the Contractor, or would have accrued except for the fault or neglect of the Contractor. The Contractor shall not deduct from gross costs the benefits lost without fault or neglect on the part of the Contractor, or lost through fault of the Government. (7) Except as provided for in 31.205-26 (e) and (f), the Government will not pay profit or fee to the prime Contractor on materials. (c) If the Contractor enters into any subcontract that requires consent under the clause at 52.244-2 , Subcontracts, without obtaining such consent, the Government is not required to reimburse the Contractor for any costs incurred under the subcontract prior to the date the Contractor obtains the required consent. Any reimbursement of subcontract costs incurred prior to the date the consent was obtained shall be at the sole discretion of the Government. (d) Total cost . It is estimated that the total cost to the Government for the performance of this contract shall not exceed the ceiling price set forth in the Schedule, and the Contractor agrees to use its best efforts to perform the work specified in the Schedule and all obligations under this contract within such ceiling price. If at any time the Contractor has reason to believe that the hourly rate payments and material costs that will accrue in performing this contract in the next succeeding 30 days, if added to all other payments and costs previously accrued, will exceed 85 percent of the ceiling price in the Schedule, the Contractor shall notify the Contracting Officer giving a revised estimate of the total price to the Government for performing this contract with supporting reasons and documentation. If at any time during performing this contract, the Contractor has reason to believe that the total price to the Government for performing this contract will be substantially greater or less than the then stated ceiling price, the Contractor shall so notify the Contracting Officer, giving a revised estimate of the total price for performing this contract, with supporting reasons and documentation. If at any time during performing this contract, the Government has reason to believe that the work to be required in performing this contract will be substantially greater or less than the stated ceiling price, the Contracting Officer will so advise the Contractor, giving the then revised estimate of the total amount of effort to be required under the contract. (e) Ceiling price . The Government will not be obligated to pay the Contractor any amount in excess of the ceiling price in the Schedule, and the Contractor shall not be obligated to continue performance if to do so would exceed the ceiling price set forth in the Schedule, unless and until the Contracting Officer notifies the Contractor in writing that the ceiling price has been increased and specifies in the notice a revised ceiling that shall constitute the ceiling price for performance under this contract. When and to the extent that the ceiling price set forth in the Schedule has been increased, any hours expended and material costs incurred by the Contractor in excess of the ceiling price before the increase shall be allowable to the same extent as if the hours expended and material costs had been incurred after the increase in the ceiling price. (f) Audit . At any time before final payment under this contract, the Contracting Officer may request audit of the vouchers and supporting documentation. Each payment previously made shall be subject to reduction to the extent of amounts, on preceding vouchers, that are found by the Contracting Officer or authorized representative not to have been properly payable and shall also be subject to reduction for overpayments or to increase for underpayments. Upon receipt and approval of the voucher designated by the Contractor as the "completion voucher" and supporting documentation, and upon compliance by the Contractor with all terms of this contract (including, without limitation, terms relating to patents and the terms of paragraph (g) of this clause), the Government shall promptly pay any balance due the Contractor. The completion voucher, and supporting documentation, shall be submitted by the Contractor as promptly as practicable following completion of the work under this contract, but in no event later than 120 days (or such longer period as the Contracting Officer may approve in writing) from the date of completion. (g) Assignment and Release of Claims . The Contractor, and each assignee under an assignment entered into under this contract and in effect at the time of final payment under this contract, shall execute and deliver, at the time of and as a condition precedent to final payment under this contract, a release discharging the Government, its officers, agents, and employees of and from all liabilities, obligations, and claims arising out of or under this contract, subject only to the following exceptions: (1) Specified claims in stated amounts, or in estimated amounts if the amounts are not susceptible of exact statement by the Contractor. (2) Claims, together with reasonable incidental expenses, based upon the liabilities of the Contractor to third parties arising out of performing this contract, that are not known to the Contractor on the date of the execution of the release, and of which the Contractor gives notice in writing to the Contracting Officer not more than 6 years after the date of the release or the date of any notice to the Contractor that the Government is prepared to make final payment, whichever is earlier. (3) Claims for reimbursement of costs (other than expenses of the Contractor by reason of its indemnification of the Government against patent liability), including reasonable incidental expenses, incurred by the Contractor under the terms of this contract relating to patents. (h) Interim payments on contracts for other than services. (1) Interim payments made prior to the final payment under the contract are contract financing payments. Contract financing payments are not subject to the interest penalty provisions of the Prompt Payment Act. (2) The designated payment office will make interim payments for contract financing on the _________ [ Contracting Officer insert day as prescribed by agency head; if not prescribed, insert "30th ] day after the designated billing office receives a proper payment request. In the event that the Government requires an audit or other review of a specific payment request to ensure compliance with the terms and conditions of the contract, the designated payment office is not compelled to make payment by the specified due date. (i) Interim payments on contracts for services . For interim payments made prior to the final payment under this contract, the Government will make payment in accordance with the Prompt Payment Act ( 31 U.S.C. 3903 ) and prompt payment regulations at 5 CFR part 1315 . (End of clause)