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In this tutorial, Matt explains the time and materials contract, often utilized in construction and product development. This contract type compensates for both labor and materials without a fixed price, making it suitable for projects with uncertain scope and potential changes. It is defined under federal acquisition regulation subpart 16.6, allowing the acquisition of supplies or services based on direct labor hours at specified fixed hourly rates, which cover wages, overhead, and profits, along with the actual costs of materials. Time and materials contracts are recommended for projects where estimating size and changes is challenging.