The whats, whens, and whys of time and materials contracts seem overwhelming.
They don’t have to be.
In this guide, we will go over the basics to get you started on time and materials contracts to help you feel more confident when using them.
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Flexbase is designed to:
In addition to all these tools, Flexbase is also prepared to seamlessly walk you through the ins and outs of time and materials contracts.
In short, a time and material contract (T&M contract) states that contractors will be reimbursed for the material costs and paid a set rate for time spent on the job.
The opposite is a fixed-price contract where the owner agrees to pay the contractor a lump sum to complete the contract when the payment does not depend on the resources used or time spent.
Keep reading to learn what is often found in a time and materials contract example and some pros and cons of using them.
In a time and materials contract, time is defined in fixed hourly or daily rates. This can include:
Materials can include:
Direct materials are those that enter directly into the end product and are consumed directly in making the end product or service.
Each time and materials contract is unique.
Depending on the needs of the project, the contracts may look different, but many have similar elements. Here are some key parts that are commonly found in a time and materials contract template.
Unit labor cost defines how you structure the labor rate and can depend on what the customer wants.
For example, some owners may want a base labor rate with individual specialties broken down separately.
The maximum number of hours is typically specified in T&M contracts.
If the contractor believes that the labor will run over that amount, the owner should be notified and a revised agreement signed.
The customer usually pays retail pricing on materials used in the project. Sometimes the contractor has wholesale pricing with a supplier and can charge an additional material markup to the customer.
Time and materials contracts often cover brief time frames, so price protection for the contractor is less of a concern.
Some owners may want daily reporting on the labor and materials cost of the project, while others are more flexible. Either way, specifying this ahead of time maintains the working relationship and gives accountants a schedule to work with.
With timely reporting, this running tally of expenses is more likely to be paid at the agreed-to time.
A billing and payment schedule will be mapped out in a T&M contract. Contractors want to be paid on time, and owners want to make sure the completed work meets their expectations before making a payment.
A not-to-exceed T&M contract includes an amount that is the maximum that can be charged by the contractor. This kind of contract means it's imperative that the contractor finish the project within a certain timeframe.
No matter how long the project takes or how high the materials costs run, the cap remains.
When there is a cap on how much the customer will pay, this is the time to use revenue recognition for time and materials contracts.
It’s unusual to run revenue recognition for pure T&M contracts, but when you do, you’re typically telling your tracking system that you’re not earning as much revenue as you are billing.
Revenue recognition is a conservative approach to recognizing revenue and is similar to using a holdback on a fixed-price contract.
Every project is unique, so let’s take a look at some advantages and disadvantages of using T&M contracts.
If something happens and the project goes longer than expected or the materials requirements change, having a simple, clear price structure means it's easy to move forward in the face of delays.
You may need to vary the workloads or modify the scope of the project. If the scope is not clearly determined, a T&M contract gives you the flexibility you need to get the project done.
The project can proceed even when there is no definitive plan for how it will be completed.
Negotiations can be simple if you:
One major drawback of T&M contracts is fronting your own costs. These contracts often work on a reimbursement basis where the contractor will purchase the materials in advance, then bill the owner later.
An owner might question the materials you've listed were actually used on the job. So this leads us to the next important point.
Paperwork. This pebble in the shoe of productivity is a necessary evil, but carefully tracking time and materials can help ensure that you get paid what you're owed and help prevent disputes.
If the payments are being made based on time and there is no not-to-exceed guideline in place, there is little benefit to finishing the job quickly.
This means the client may need to be more involved to make sure the contractor is motivated to stick within their time and materials budget.
But wait. Wasn’t this an advantage?
Negotiating T&M contracts don’t always work out in your favor. Owners or clients may not agree on:
Negotiating so that everyone benefits may take some creativity.
In construction contracts, contractors have two choices:
When might a T&M contract be beneficial?
A time and materials contract may help in the following situations:
T&M contracts give flexibility to the owners and the contractors. This is especially true in environments where change management is processed manually and can take several days to complete. Subcontractors aren't at risk for not getting paid for the work completed.
During longer projects, the need for flexibility increases because of the greater potential for the needs of the project to change. You may also need to account for overtime and longer work hours.
When you lack the time and experience, you run the risk of inaccurately forecasting what a project will take to complete.
New contractors may be unaware of:
Without a system in place to accurately estimate cost, you may be unable to provide an accurate quote for the owner. A T&M contract may allow you some flexibility to gain this experience.
Time and materials contracts can get risky.
Here are a few reasons why:
Let's take a look at what can be done to better manage T&M contracts to protect both the contractor and your client.
There are three fundamental dimensions of a project:
Try to rank these into first, second, and third in importance to see which dimension is least flexible. That way, you’ll understand the level of flexibility you’ll have with the other two.
Here are a few ways to better manage a T&M contract:
Ask for defined “not to exceed” guidelines so you can inform the customer when/if you’re getting close and find a solution.
Accurately tracking expenses is extremely important with T&M contracts.
Flexbase can help with that.
Through the use of Flexbase Cards, you'll have no more need for expense tracking.
Employees just swipe the card, and Flexbase does their expenses tracking for them.
Revolutionize the way your employees spend money and avoid cash leaking out.
Flexbase is fully compliant with state law, allowing you to send legal notices or intelligent reminders with confidence.
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