There are two ways owners can pay for work done on a project. One is by a fixed price, where a contract defines what will be done and sets a specific and final price for that work. If the team takes too long to complete their tasks or requires more materials than outlined in the contract, they eat those costs.
The other is a time and materials contract. As the name implies, this is a more flexible agreement that bills the client for however long the work takes to complete and whatever materials are used. Is a T&M contract right for your project? Before you decide on how to pay for the services related to your next project, take a moment to look into what a time and materials contract is and when it’s advisable to use one.
What Are Time and Materials on a Construction Project?
The term “time and materials” refers to the amount of time and construction materials that a contractor or subcontractor requires to execute the project. Time and materials are often referred to by the shorthand T&M.
All tasks in a construction project use some material and take time to execute. When the term is used, it’s to indicate the contractor is billing for the amount of time they take doing the task and whatever materials are used in the process.
What Is a Time and Materials Contract?
A time and materials contract is commonly used in construction project management, though it’s also used in product development and other types or projects. Basically, a time and materials contract outlines how the employer will pay a contractor for the time they spend on the project and the materials they use in executing the work.
This means the contractor is tracking the time and materials its crew or subcontractors use. They use this data to bill the employer appropriately over the course of the project. However, T&M contracts can have a guaranteed maximum price that places a ceiling on costs.
A time and materials contract is used when the project is open-ended or undefined, and an accurate estimate of the time and materials needed cannot be calculated. In this case, a fixed-price contract is unadvisable as the actual costs can far outpace the agreed-upon contract.
Related: Free Construction Estimate Template
How Is a T&M Contract Different from Other Contracts?
As mentioned above, there are two main types of payment plans. T&M contracts are used when plans are not precise enough to use a fixed-price contract (because there is no definite price for the work.) Instead, contractors are reimbursed for any materials purchased and given a day or hourly rate for their labor.
Beyond T&M and fixed-price contracts, there is a third type of construction contract called a cost-reimbursable contract. This is when the owner pays the contractor for the actual cost of the work. That includes direct and indirect costs, such as materials, equipment and anything else, including salary, that must be paid to get the job done. Contractors will add a clause, such as a fixed fee or some incentive, to make a profit.
When to Use a Time and Materials Contract
Again, a T&M contract is ideal for a project without a clear or accurate estimate of the time and costs involved. There’s no point in using a fixed-price contract unless there is a way to determine the cost. And a cost-reimbursable contract would be impossible to determine without knowing the exact time and materials required to execute the work.
However, a time and materials contract is advisable when the duration of the project is unknown, but there’s a fixed hourly rate for the labor involved. When using a T&M, contractors will usually add a markup of between 15 and 35 percent.
Therefore, a time and materials contract would be an option when dealing with unpredictable scenarios. It is only possible to enter into such an agreement when both parties agree on the conditions, though this is true of all contracts. More importantly, a T&M contract is ideal when there’s a need for flexibility, or you’re new to the industry and can’t make an accurate estimates of costs and duration.
Best Practices for T&M Contract
When entering into any contract, it’s important the agreement is in writing. Both sides need to agree on the terms and sign off on them. This is especially true of the time and materials contract, as it can end up with the employer bleeding money without construction daily reports. As mentioned earlier, having a maximum price is a recommended safeguard.
When working with any contractor, ensure that they’re licensed by the Contractors State License Board and that the work they’re doing is within the scope of that license. Working with unlicensed contractors opens up liabilities that can impact the project and even the whole organization. This is also true for business licenses or business tax registration if required in the jurisdiction the project takes place in.
One problem with T&M contracts is they can result in more lawsuits than a fixed-price contract. Therefore, know the risks and consequences involved with contracting with third-party workers. There can be issues with back taxes and other IRS penalties, back pay and damage to the organization’s reputation.
Pros & Cons of Time and Material Contracts
Let’s take a moment to look into the benefits and problems with time and material contracts. Depending on the situation, they could be just the kind of contract that works within a construction project. They can just as easily be a detriment and the cons might outweigh the pros, leading an organization to seek one of the other contract options.
The Advantages of T&M Contracts
- It’s easy to respond to changes in the project.
- Delays and roadblocks can be dealt with easily.
- Negotiations are set at the beginning of the job.
The Disadvantages of T&M Contracts
- Tracking time and materials can difficult.
- Contractors have little incentive to work efficiently.
- Contractors have to front their own costs.
How ProjectManager.com Helps with Tracking Time & Materials
Time and material contracts may be right for you. But if you’re going to use one, it’s crucial you closely track the time and materials used by your contractor. This way you’re only paying for work that has actually been done. ProjectManager.com is award-winning construction project management software that can monitor the time your contractors work on the job and track the materials they use, all in real time.
Easy Time Management
It’s easy to onboard contractors to our tool, and security settings make sure they’re only able to access those parts of the software you give them permission to use. One feature that helps you track their work is our timesheets. Time is logged on the My Work or time page of our software. When contractors submit their timesheets they are sent to someone authorized to approve them and locked to keep the data secure.
Plan with Gantt Charts
Use our Gantt chart view to plan and schedule your project. You can assign and keep track of contractors’ work, as well as track expenses Once you have a schedule and budget, set the baseline and now you can compare the actual progress and costs to your plan. If you notice contractors spending too much time or money, you can address the issue before it becomes a problem.
Track with Dashboards
There’s also a live dashboard that tracks a high-level view of the project’s progress and performance. It automatically collects real-time data and calculates it into project costs, time, variance and more. Whatever type of contract you use, our tool will make sure your contractors are working efficiently.
ProjectManager.com is a cloud-based software that helps you organize tasks, teams and projects. Plan, monitor and report on your project. Manage your project through every phase of its life cycle while giving your teams the tools they need to collaborate and work more productively. Join the tens of thousands of teams already using our tool and take this free 30-day trial today.