# FAR 16.601 and Time-and-Materials for AI Services > Source: https://ibl.ai/resources/guides/far-16-601-time-and-materials-ai-services > Last updated: 2026-08-19 *What the regulation actually requires before a T&M award, why AI programmes keep reaching for it, and when a preferred contract type becomes available instead* Reading time: 12 min read | Difficulty: advanced **On ibl.ai you own all the code and the data, run it model-agnostic across any LLM, and pay with no per-seat pricing — so you can deploy anywhere, from your own cloud to a fully air-gapped network.** ## How do you fAR 16.601 and Time-and-Materials for AI Services? FAR subpart 16.6 governs time-and-materials, labor-hour, and letter contracts. It treats all three as instruments of last resort, and the reasoning is stated plainly in the text. A T&M contract may be used only when it is not possible at the time of award to accurately estimate the extent or duration of the work, or to anticipate costs with any reasonable degree of certainty. The contracting officer must sign a Determination and Findings establishing that no other contract type is suitable. The contract must include a ceiling price. And because a T&M contract provides no positive profit incentive to the contractor for cost control or labor efficiency, appropriate government surveillance is required. AI services keep landing in this category, and usually for a defensible reason: the contractor is expected to build the platform as well as integrate it, and nobody can size that in advance. This guide covers what the D&F must contain, what the ceiling does and does not protect, and the specific circumstance in which a preferred contract type becomes available — which is when the platform already exists and can be licensed. ## Prerequisites - **Market research on record:** The D&F must describe the market research conducted. For AI specifically, research more than two years old is likely to be wrong about what can be bought rather than built. - **A defined requirement:** Distinguish the outcome the agency needs from the solution a contractor proposes. T&M is justified by uncertainty about effort, not by uncertainty about what you want. - **Your data-handling constraint:** Whether the workload can be processed outside the agency perimeter determines which architectures are viable and belongs in the requirement, not in evaluation. - **Software and data rights position:** Rights are governed by separate clauses. Decide what the agency must be able to operate and modify independently before the solicitation. ## Step 1: Test whether the estimate is genuinely impossible The D&F standard is that it is not possible to accurately estimate the extent or duration of the work. That is a statement about the work, and it changes when the thing being acquired already exists. - [ ] Separate platform construction from integration in the requirement - [ ] Ask whether any existing product satisfies the platform portion — For AI infrastructure the answer has changed rapidly; re-run this rather than inheriting a prior conclusion. - [ ] Estimate the integration surface against named agency systems ## Step 2: Write the Determination and Findings The D&F must describe the market research conducted, establish that costs cannot be anticipated with reasonable certainty, and address why a cost-plus-fixed-fee term, other cost-reimbursement, incentive, or fixed-price arrangement is not appropriate. - [ ] Describe the market research, including what existing products were evaluated - [ ] Establish specifically why extent or duration cannot be estimated - [ ] Address each alternative contract type and why it was rejected - [ ] Obtain the required approvals before executing the base period **Tips:** - Head of contracting activity approval is required before executing the base period where base plus options exceeds three years. ## Step 3: Set a ceiling price that means something The ceiling caps exposure. It does not create an efficiency incentive, which is why the regulation pairs it with a surveillance requirement rather than treating it as sufficient on its own. - [ ] Set the ceiling against a defensible estimate, not against available budget - [ ] Define what happens on approach to the ceiling, in the contract - [ ] Require reporting against technical progress, not only against hours ## Step 4: Specify labor categories and rates precisely The contract specifies separate fixed hourly rates that include wages, overhead, general and administrative expenses, and profit for each category of labor. Vague categories are where effort drifts upward in seniority. - [ ] Define each labor category by qualification, not by title - [ ] Require reporting of actual hours by category - [ ] Verify that the mix delivered matches the mix proposed ## Step 5: Establish the surveillance the regulation requires Because the contract type provides no positive profit incentive for cost control or labor efficiency, government surveillance is required to give reasonable assurance that efficient methods and effective cost controls are being used. - [ ] Name the surveillance role and its authority in the contract - [ ] Define technical acceptance criteria in advance — For AI, an evaluation set with a threshold, drawn from agency data. - [ ] Review the labor mix and hours monthly, not at option exercise ## Common Mistakes ### Reusing a prior D&F for an AI acquisition **Consequence:** The market research no longer reflects what can be bought, so the justification rests on a false premise. **Prevention:** Re-run market research specifically for the platform portion of the requirement. ### Setting the ceiling to the available budget **Consequence:** The ceiling stops being an estimate of the work and becomes a spending target. **Prevention:** Derive the ceiling from an independent government estimate of the effort. ### Treating the ceiling as sufficient control **Consequence:** Exposure is capped while efficiency is not, which is exactly the condition the surveillance requirement addresses. **Prevention:** Stand up the required surveillance with named authority and monthly review. ### Leaving software rights to the default clause **Consequence:** The agency funds construction of a system it cannot independently operate or modify. **Prevention:** Specify required rights in the solicitation and evaluate them. ## FAQ **Q: When may a federal agency use a time-and-materials contract?** Only when it is not possible at the time of award to accurately estimate the extent or duration of the work or to anticipate costs with reasonable certainty, and after the contracting officer signs a Determination and Findings that no other contract type is suitable. A ceiling price is required. **Q: What must the Determination and Findings contain?** A description of the market research conducted, an establishment that the extent or duration of the work and its costs cannot be estimated with reasonable certainty, and an explanation of why cost-plus-fixed-fee, other cost-reimbursement, incentive, or fixed-price arrangements are not appropriate. **Q: What is the difference between time-and-materials and labor-hour contracts?** A labor-hour contract covers hours only at fixed hourly rates per labor category; time-and-materials adds materials. Both fall under FAR subpart 16.6, both require a ceiling price, and both carry the same justification burden. **Q: Why does FAR require surveillance on T&M contracts?** Because the contract type provides no positive profit incentive to the contractor for cost control or labor efficiency, so government surveillance is required to give reasonable assurance that efficient methods and effective cost controls are being used. **Q: Can an agency license an AI platform instead?** Frequently yes, and it is easier to justify. When a platform already exists in production and can be delivered with source rights, a firm-fixed-price licence against a defined deliverable is a preferred contract type rather than one requiring a last-resort determination. **Q: Does a T&M award give the agency rights to the software?** Not by itself. Software and data rights are governed by separate clauses and must be specified in the solicitation. 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