When contractors have a construction project without a clearly defined scope of work or an undefined project closeout date, they use a time and materials contract (T&M). An example might include a contractor renovating or reconstructing portions of a large commercial building. The objective of the construction project is understood, but the amount of work, the type of work, and the materials required are undefined.
Learn about why a time and materials contract is one of the more flexible and transparent contracts used in construction and how your company can navigate the ins and outs of this contract on your next project.
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For construction companies, a time and materials contract offers the ultimate in flexibility and transparency. It requires strong synchronization and communication between the contractor, owner, and stakeholders within a commercial or industrial construction project.
With a T&M contract, the owner is aware of the costs of the materials used and the labor rates. This means that an owner could theoretically determine the actual overhead charged by the contractor within their rates. Regardless of whether the owner and contractor choose to negotiate this portion, it's still a more transparent type of construction contract.
With a T&M contract, contractors are paid for their hourly labor rates and material costs. Given that the length and scope of the construction project are undefined, it could represent a serious windfall for the contractor. However, the exact opposite is possible, and the billable hours and revenue generated may be much less than the contractor anticipated.
A T&M contract differs from other contracts in that contractors are only paid for the hours they work and the materials they use. For some contractors, this can be somewhat prohibitive if they have equipment, machinery, or work processes that help to reduce time on projects. However, for other contractors, it provides a level of flexibility they don’t often see.
Contractors and owners rely on T&M contracts because of the construction project variables they cannot account for at the outset of the project launch. Ultimately, it’s these unforeseen variables that stops them from having a clearly defined scope of work (SOW). Instead, they need to be able to quickly adjust and change as the project unfolds.
With a time and materials contract, both parties benefit from an extremely flexible, open, and transparent process. Both owners and contractors use the framework of the T&M contract to ensure they can immediately react to uncertainty by defining newly-discovered project roadblocks and agreeing upon a way forward.
Some contractors prefer these contracts as the ramp-up time and start time on construction projects are minimized. Without an elongated scope of work, the contractor doesn’t have to worry about zoning laws, building regulations, or the time required for permits. Instead, they can quickly get to work. For owners, this means starting a project much sooner and resolving project issues faster.
The very same reasons a time and materials contract is used are the very same reasons it can become confusing and lead to disputes. This is why constant communication is critical to the success of any T&M contract.
Given the inherent nature of T&M contracts, contractors must ensure they have a well-presented and detailed outline of the work they perform and the materials they use.
While the construction project doesn't have a project closeout date, it doesn’t mean there isn’t a Scope of Work within a time and materials contract. It simply means that the Scope of Work is condensed and should be open-ended. That Scope of Work should still be well-defined, have clearly understood deliverables, and associated labor rates and material costs.
When using a time and materials contract, contractors must ensure they have agreement from the owner in terms of payment milestones. Labor rates and material costs must be meticulously defined, cataloged, and tracked.
Payment and billing terms are another important part of a T&M contract. Since these projects sometimes have an element of stop-and-go to them, contractors and owners must agree on construction project billing frequency.
Contractors should focus on consistent billing, but not so often that it causes the owner issues. Ultimately, billing and payment frequency are one of the more discussed portions of a T&M contract.
Not-to-exceed clauses are also common in time and materials contracts. These clauses protect the owner from excessive billing and help to foster consistent communication between the contractor, owner, and stakeholders. Not-to-exceed clauses can put caps on hours worked or material used.
Finally, contracts must have easily-understood hourly rates and material cost structures. There should also be a section within the contract that allows for either party to terminate the agreement. Contractors need this clause in case they encounter issues they cannot resolve, while owners need it to ensure they mitigate higher costs should continuing the project be deemed too expensive.
Contractors should use T&M contracts when there is no means of generating a complete Scope of Work with a final project closeout date. These contracts should also be used when a contractor is unable to provide a reasonable estimate for work.
This is another reason that ramp-up and start times on time and material contracts are faster than conventional construction contracts. Depending upon the size of a given construction project, estimation can take up a considerable amount of time. However, with T&M contracts, the time needed for estimation is not a barrier to getting started.
In general, time and materials contracts are used when owners need construction companies to perform repairs, renovations, or when needing contractors to rework an existing portion of the building, whether due to age or poor quality construction.
There are several advantages to using T&M contracts for both contractors and owners. Each is outlined below.
T&M contracts offer extreme flexibility for all parties involved. The costs of labor and materials aren’t tied to any definitive project closeout date. These costs are driven entirely by the circumstances the contractor encounters and the continued collaboration between the contractor and owner.
Time and materials contracts provide owners with greater cost controls. While this may seem to be a negative or hindrance for contractors, it isn’t, especially given how quickly contractors can get started and how little time is needed for estimation and project planning.
There is a level of comfort and familiarity that builds between contractors and owners within time and materials contracts. Both parties must be in constant communication with one another. Both must discuss various issues as the project unfolds. It’s this constant collaboration that ensures a successful project.
One of the drawbacks of fixed-priced contracts includes the number of misunderstandings, disputes, and disagreements. Whether due to misaligned expectations over pricing or the lack of oversight from the owner, disagreements are common with fixed-price agreements. This is not an issue with T&M contracts.
For both contractor and owner, time and material contracts mean a much faster ramp-up and start time on construction projects. For construction companies, there’s little time spent on construction estimation and little time wasted waiting for building code approvals and licenses. For owners, the faster start times and greater cost control mean less time managing the logistics that are so often a part of fixed-price contracts.
While there are advantages to time and materials contracts, there are also disadvantages. First among them is that these contracts can be both too short and too long. When too short, contractors do not generate sufficient billable hours. When too long, project management costs can become problematic.
Second, there is an opportunity cost for contractors when pursuing T&M contracts. The decision to move forward with a fast-ending contract effectively means the contractor may have missed out on a larger, more lucrative construction project.
Third, for owners, there is some inherent risk involved in T&M contracts. The project could take longer than they budgeted for or anticipated, and they may not be able to stop the project if they are legally required to complete it.
Fourth, administrative costs for contractors can be higher with time and materials contracts compared to other contracts. This is because they must diligently and meticulously track hours worked and materials used more so than they would in other contracts. It’s this allotment of time that can increase costs for contractors.
Finally, if hours worked and material used aren’t properly tracked or accounted for, then disputes and disagreements can become commonplace. This problem is made even worse should the project’s complexity increase over time.
Contractors should understand that they need to apply the same attention to detail, meticulous, and methodical approach when pursuing time and materials contracts. Here is a breakdown of what is involved.
Ensure you and the owner have a clear understanding of what is required on the project. This involves managing the customer’s (project owner’s) expectations and agreeing on the work that needs to be done.
Ensure your scope of work clearly outlines the objectives of the project alongside an estimate of the timeline required. While this timeline can and most likely will change, having it itemized at the outset is important. Next, ensure your scope of work has deliverables and payment milestones as well as a structure for tracking progress and convening with the owner for any go/no-go decisions.
Your time and materials contract should have clear labor rates and material costs. While you won’t be able to define the total labor or material costs, having a per-hour labor rate and per-unit material cost ensures transparency and easier billing.
In addition to having clear billing milestones, payment terms, deliverables, and cost breakdowns, contractors must also include expense caps. This protects contractors from overextending themselves on material purchases. Finally, ensure the T&M contract includes the owner’s not-to-exceed clauses governing labor hours and materials.
A T&M contract does require more administrative work than other fixed-priced contracts. This means contractors must diligently track hours worked and materials used especially to avoid construction disputes down the line.
When such meticulous tracking is required, extensive documentation, particularly visual in the form of photos, goes a long way in supporting details. With date and time stamps, photos provide supportive evidence when work is installed, and materials used to complete.
In addition, contractors should never exceed the Scope of Work within these contracts without first discussing the situation with the owner. It’s common for contractors to sometimes “go it alone” and decide to repair or replace something on a construction project, believing that the owner will agree afterward. This is done to save time, but it can cause more problems than it solves.
Always ensure your team stays within the framework of the contract. They should only do the work that has been agreed to and should never buy more materials than needed without first having an agreement to continue.
Doing this saves time, helps you avoid confrontations, disagreements, billing and payment disputes, and could save you from legal action.
One of the more troublesome aspects of managing time and materials Contracts is when contractors rely on outdated manual tracking and paper processes. Manual data, work, and material tracking are always fraught with mistakes, which can all but shut down the project or lead to extremely long receivable collection times.
One solution includes replacing manual tracking and paper processes with digital, cloud-based software. These real-time solutions eliminate manual tracking errors, provide more accurate summaries and breakdowns of labor and material costs, while also providing insightful analytics and granular data on all things project-related.
Real-time software tracking solutions provide a central location for all stakeholders. Edits are done seamlessly, and these systems are designed to provide near-instant feedback thanks to the collaborative work of other platform users.
Whether it’s having a more accurate account of project costs, timelines, or even ensuring compliance with building code regulations, having automated digital solutions provides numerous benefits.
It’s an all-too-common mistake to confuse time and material contracts with cost-plus contracts. However, they are different. While a T&M contract includes charges for actual hours worked and material used, a cost-plus contract summarizes all the costs of a project plus an additional fee for the project.
The following time and materials contract best practices should help you should you decide to pursue this type of construction work.
First, ensure you have constant communication with all stakeholders involved in the construction project. This means establishing clear channels with owners and subcontractors.
Second, ensure you properly track hours worked and materials used. Do not go outside the boundaries of your scope of work.
Third, focus on eliminating manual paper tracking and data entry processes. In its place, use a cloud-based software solution that provides real-time updates and greater visibility.
Time and materials contracts are good solutions for construction projects with undefined timelines or where the Scope of Work does not include a project closeout date. Contractors who use them are paid only for the actual hours worked and the materials they use.
Contractors and owners enjoy a high level of flexibility with these types of contracts. However, both parties should ensure there are conditions set forth within the contract that protect their interests and mitigate their risk.
Finally, contractors that use a T&M contract should consider streamlining their operations with cloud-based software that eliminates manual tracking errors while ensuring real-time functionality.
Autodesk’s human-centric, cloud-based software is used by construction companies around the world. Every day, Autodesk helps construction companies keep better track of their projects, billing, payments, and performance. With numerous intuitive AI features, endless analytics, and real-time feedback and tracking, you’ll never have to worry about the projects under management.
If you are a construction company that wants to do away with manual paper processes and manual billing and payments collection and prefer a real-time solution you can rely on, contact us now.
