Labor Hour (LH)
A Labor Hour (LH) contract is a contract type that pays a contractor at fixed hourly labor rates for specified labor categories, without separately reimbursing materials. It is used when the government cannot accurately estimate the extent or duration of the work. The hourly rate includes wages, indirect costs, and profit.
What Is Labor Hour (LH)?
A Labor Hour contract is a contract type that pays a contractor at fixed hourly labor rates for specified labor categories, without separately reimbursing materials. It is used when the government cannot accurately estimate the extent or duration of the work.
The hourly rate includes wages, indirect costs, and profit.
Key Characteristics
Fixed hourly rates for defined labor categories
No separate reimbursement for materials
Typically includes a not-to-exceed ceiling price
Requires close government oversight of hours billed
Used when scope cannot be precisely defined
How It Works in Government Contracting
Where it appears in the procurement lifecycle
Labor Hour contracts are used during contract award when requirements are uncertain but immediate performance is needed.
Who uses it
Contracting officers use LH contracts when other contract types are not suitable. Contractors performing professional, technical, or support services often operate under LH structures.
Why it matters
It provides flexibility when the government cannot define the exact amount of work required.
Practical application
The contract establishes labor categories such as engineer, analyst, or technician. Each category has a fixed hourly rate. The contractor bills based on actual hours worked, subject to a ceiling price. The government pays only for approved hours.
Regulatory Framework
Labor Hour contracts are governed by:
Federal Acquisition Regulation Part 16.6
FAR 16.602, which addresses Labor Hour contracts specifically
These contracts may only be used when no other contract type is suitable. A determination and findings document is required to justify their use.
Why It Matters for Contractors
Revenue depends on labor utilization and approved hours billed.
Contractors must maintain accurate timekeeping systems and detailed invoicing records.
LH contracts allow entry into uncertain or evolving projects where fixed pricing would be risky.
If the ceiling price is reached, the contractor cannot continue performance without a modification. Poor time tracking can result in audit findings or payment disputes.
Common Misconceptions
Labor Hour contracts allow unlimited billing.
Most include a strict ceiling.
They are the same as Time-and-Materials contracts.
LH contracts do not separately reimburse materials.
They are easier to manage than fixed-price contracts.
They require strict timekeeping and oversight.
Frequently Asked Questions
What is the difference between a Labor Hour and a Time-and-Materials contract?
Time-and-Materials contracts reimburse both labor and materials. Labor Hour contracts reimburse only labor at fixed hourly rates.
When is a Labor Hour contract appropriate?
When the scope, duration, or level of effort cannot be accurately estimated at the time of award.
Are Labor Hour contracts cost-reimbursement contracts?
They are not traditional cost-reimbursement contracts. They are a variation of Time-and-Materials contracts with fixed hourly labor rates.
Is there always a ceiling price?
Yes. The contract includes a maximum amount the government will pay unless formally modified.
Related Government Contracting Topics
Time-and-Materials Contract: A contract that provides for acquiring supplies or services on the basis of direct labor hours at specified fixed hourly rates and materials at cost.
Cost-Reimbursement Contract: A contract type that provides for payment of allowable incurred costs, to the extent prescribed in the contract.
Firm-Fixed-Price Contract: A contract where the price is not subject to adjustment based on the contractor's cost experience.
Federal Acquisition Regulation: The primary regulation governing the acquisition process by the U.S. federal government.
Determination and Findings: A special form of written approval by an authorized official that is required as a prerequisite to taking certain contract actions.
Ceiling Price: The maximum amount the government is obligated to pay under a contract.
Labor Hour contracts offer flexibility for both government and contractors when work requirements are uncertain but immediate performance is needed. For contractors, they provide a pathway to engage in evolving projects while requiring disciplined timekeeping and cost control to ensure profitability and compliance.