Under the payment rules in FAR 52.232-7, the government pays a time-and-materials or labor-hour contractor in two separate streams: labor at fixed hourly rates written into the contract schedule, and materials at the contractor’s actual cost with no markup. Layered on top are documentation requirements, a two-week invoicing cadence, a withhold against labor billings, a hard ceiling price, and a release of claims that must be signed before final payment is released.1Acquisition.GOV. FAR 52.232-7 Payments Under Time-and-Materials and Labor-Hour Contracts
How Labor Gets Paid
The labor calculation is simple arithmetic. Multiply the fixed hourly rate for each labor category in the schedule by the direct labor hours actually worked. That rate is all-inclusive: wages, overhead, general and administrative expense, and profit are already inside it, so no separate line items for indirect costs or fee can ride on top of billed hours.1Acquisition.GOV. FAR 52.232-7 Payments Under Time-and-Materials and Labor-Hour Contracts
Every voucher has to be backed up. The clause requires evidence of actual payment together with individual daily job timekeeping records, documentation that the workers meet the labor-category qualifications in the contract, or other substantiation the Contracting Officer approves. Thin timekeeping is where most payment disputes begin. If the records cannot show that the hours claimed were worked by qualified people on contract tasks, the Contracting Officer can reject the voucher.
Overtime
Overtime hours bill at the same fixed rate unless the schedule contains separate overtime rates. Where the schedule does include them, the premium is reimbursable only to the extent the Contracting Officer approved the overtime in advance. When the schedule is silent and overtime is nevertheless authorized, the parties negotiate a rate, and a failure to agree becomes a formal dispute under the contract’s Disputes clause.
Subcontractor and Affiliate Labor
Labor performed by subcontractors, or transferred in from the contractor’s own divisions, subsidiaries, or affiliates under common control, flows through the same hourly rates. The prime bills the government at the contract schedule rate, substantiates the voucher with the same timekeeping and qualification records, and must show evidence of actual payment to the sub or affiliate. There is no separate reimbursement channel for subcontractor labor.
How Materials Get Reimbursed
The clause treats four categories as reimbursable materials: direct materials that go into the end product or are consumed producing it (including supplies moved between divisions or affiliates under common control), subcontracts for supplies and incidental services that do not fit a contract labor category, other direct costs such as travel and computer usage charges, and indirect costs applicable to those items.1Acquisition.GOV. FAR 52.232-7 Payments Under Time-and-Materials and Labor-Hour Contracts
When the contractor supplies its own materials that qualify as commercial products, the price cannot exceed the contractor’s established catalog or market price, adjusted for the quantity ordered and the cost of any modifications the contract requires. That keeps the contractor from inflating the price of items it already stocks.
No Profit, No Handling Fee by Default
Material costs and subcontracts reimburse at actual cost only. No markup. Any discounts, rebates, or credits the contractor receives reduce the amount the government owes; those savings belong to the government. If the contractor wants to recover the cost of handling, storing, or processing materials, a material handling factor has to have been negotiated into the contract schedule before work started. Without that provision, those costs are the contractor’s to absorb.
The 30-Day Payment Rule
The government reimburses allowable material costs only if the contractor has already paid the vendor or ordinarily pays within 30 days of submitting the payment request to the government. The Contracting Officer decides allowability using the cost principles in FAR Subpart 31.2. In practical terms, keep vendor invoices, receipts, or equivalent proof that each cost was real, reasonable, and tied to contract performance.
How Often You Can Invoice
Vouchers may go in no more than once every two weeks. Small business concerns are the exception and may submit payment requests more frequently. Each voucher goes to the Contracting Officer or an authorized representative with the labor and material substantiation described above.
The 5 Percent Withhold
The Contracting Officer can unilaterally modify the contract to require the contractor to hold back a reserve against its own billings. The default is 5 percent of amounts due for labor, and the total withheld across the whole contract cannot exceed $50,000. Those funds stay in reserve until the contractor signs and delivers the release of claims required for final payment. The contract schedule can prescribe different withholding terms, so check the schedule before assuming the default rate applies.
The Ceiling Price and the 85 Percent Warning
Every contract under this clause carries a ceiling price in the schedule. The government owes nothing above it, and the contractor is not obligated to keep working once costs would exceed it. This is a hard cap, not an estimate.
The clause also builds in an early-warning duty. Any time the contractor believes that labor payments and material costs accruing in the next 30 days, added to everything already incurred, will exceed 85 percent of the ceiling, the contractor must notify the Contracting Officer in writing with a revised cost estimate and supporting documentation. A separate notification is required whenever the contractor believes the total price will end up substantially greater or less than the current ceiling.
Raising the ceiling requires a written modification from the Contracting Officer specifying the new amount. Until that document is issued, anything spent above the ceiling is on the contractor. One piece of relief: if the ceiling is later raised, hours and material costs incurred above the old ceiling before the increase are allowable retroactively, as if they had been incurred after the raise took effect.
Release of Claims Before Final Payment
Withheld funds and final payment are not released until the contractor, and any assignee with an active assignment under the contract, signs a release discharging the government from all liabilities, obligations, and claims arising from the contract. No release, no final check.
The release permits three narrow carve-outs: specified claims the contractor knows about, stated in dollar amounts or estimates; claims based on third-party liabilities unknown at the time of release, so long as the contractor gives written notice within six years; and claims for patent-related reimbursement costs. Anything not listed is waived. Contractors who sign without carefully identifying their exceptions lose the ability to raise those issues later, so treat the release as a document to draft, not just to sign.