FAR says that hourly rates in a T&M contract are fixed. FAR 16.601(c )(2).
?The contract shall specify separate fixed hourly rates that include wages, overhead, general and administrative expenses, and profit for each category of labor.? (emphasis added)
This is further confirmed in the T&M payment clauses in FAR 52.232-7 and Alt I of 52.212-4 Alt I. They provide for calculating payment for labor by multiplying the hourly rate by the numbers of hours.
But, as Vern points out, FAR is direction to Government contracting officers, not to a prime contractor.* A prime contractor must follow FAR only to the extent required by its prime contract. So, if your prime contract doesn?t prohibit ceilings on hourly rates, you can use same in a subcontract - but that wouldn?t be a T&M contract as described by FAR.
I don?t know why one would want to create such a contract - or what to call it.
If you simply set a ceiling (maximum) hourly rate for a T&M labor category, how would you determine any unspecified lower rates for the same labor category?
Why would you expect to get billed for anything lower than the ceiling rate?
You could fix the lower rates, but in so doing the so-called ceiling rate would become the highest of several rates, not a ceiling. This would conform to the FAR description of T&Ms.
Maybe you could set up some method or establish standards for determining any rates lower than the ceiling.
Ceilings on cost elements is a cost-reimbursement concept. Maybe your folks are thinking of advance agreements on cost elements, as described in FAR 31.109.
*[One place where FAR seems to speak directly to prime contractors is 15.404-3 and [c]. There may be others.]