Time and Materials vs Fixed Fee Contracts: Choosing the Right Pricing Model for Construction Projects

By

Josh Krissansen

Last Updated May 20, 2026

By

Josh Krissansen

Construction contracts do more than define payment terms. They determine how cost risk is allocated and how much budget certainty each party has during the project.

In Australia, time and materials and fixed fee contracts are two commonly used pricing approaches. Each suits different project conditions, and understanding where each works well — and where it introduces risk — helps project teams make the right call at procurement.

This article explains how each model works, how risk and cost responsibility sit under each structure, and how to match the right contract type to your project's scope, complexity, and delivery requirements.

How Fixed Fee and Time and Materials Contracts Differ

The core difference between fixed fee and time and materials (T&M) contracts is how cost risk is allocated.

Under a fixed fee contract (also known as a lump sum contract), the contractor carries the risk of any overrun, so costs exceeding the agreed price reduce their margin. Under T&M, the client pays for actual costs, so if the scope grows or takes longer than expected, the total spend increases.

This directly affects how both parties manage scope and delivery. Fixed fee contracts offer high budget predictability but limited flexibility when scope changes, while T&M contracts provide greater flexibility but less certainty over the final cost.

The table below highlights the key differences between the two pricing models.

What Are Time and Materials Contracts in Construction?

Under a time and materials contract, contractors bill for actual labour hours, materials, and equipment, plus an agreed markup. The final cost reflects the work completed, rather than a fixed upfront price.

How T&M Contracts Typically Work on Construction Projects

Each billable element is agreed before work starts and typically includes:

• Labour: Charged at set hourly rates by trade or role
• Materials: Billed at cost plus an agreed margin
• Equipment: Charged by hour or day

At the end of each claim period, typically monthly, the contractor submits a progress claim itemising hours worked, materials supplied, and any equipment costs, supported by timesheets, site dockets, and receipts.

Benefits of T&M Contracts for Contractors

• Actual costs are typically recovered, removing the estimating risk that comes with fixed price work
• Scope changes don't require formal variations, reducing administrative friction
• Margin is predictable on a per-unit basis, regardless of how the project evolves
• Work can begin before the full scope is defined

Risks for Clients Using T&M Contracts

• Final cost is not known upfront and can exceed initial estimates if scope grows
• Clients need to actively monitor hours and costs throughout delivery to control spend
• Detailed timesheets, dockets, and approval workflows are required to validate claims
• Without a not-to-exceed clause, there is no contractual ceiling on total spend

Projects Best Suited for Time and Materials Contracts

T&M works best when scope can’t be reliably defined at tender. Common applications include:

• Remediation and demolition work where site conditions are unknown
• Renovation and refurbishment of existing structures
• Early design and construct phases before documentation is complete
• Investigative or exploratory works such as dilapidation surveys or services location

When site conditions or design intent are still being resolved, T&M allows work to proceed without forcing either party to price risk they can't yet quantify.

What Are Fixed Fee Contracts in Construction?

Under a fixed fee contract, the contractor agrees to deliver a defined scope of work for an agreed price. That price remains fixed, regardless of how long the work takes or what it costs to complete, making this model best suited to projects with well-defined scope and documentation.

Clients and lenders tend to favour fixed fee contracts because the total project cost is known before work begins, which simplifies budgeting, approvals, and financing.

How Fixed Fee Contracts Typically Work on Construction Projects

In the fixed fee model, the contract price is built from the contractor's assessment of labour, materials, plant, overhead, and contingency. Once agreed, it remains fixed unless both parties approve a formal variation.

Payment is typically structured around project milestones, such as building envelopes and practical completion.

Most fixed fee contracts also contain variable elements through allowances:

• Provisional sums: Cover work where scope or cost cannot be determined at the time of contracting, such as unforeseen ground conditions or complex services coordination
• Prime cost items: Allow clients to select specific materials or fixtures after the contract is executed, with the final cost adjusted accordingly

These allowances mean that even fixed fee contracts still carry some cost uncertainty, particularly where site conditions or client selections are unresolved at tender.

Benefits of Fixed Fee Contracts for Project Clients

• Total project cost is known upfront, supporting accurate budget planning
• Financing and investment approvals are easier to secure with a fixed cost
• Payment milestones are straightforward to administer
• Cost risk sits with the contractor, not the client

Risks of Fixed Fee Contracts for Contractors

• Estimating errors sit with the contractor, not passed through to the client
• Unforeseen site conditions can significantly increase costs without a corresponding increase in the contract price
• Material price increases and supply chain delays can cut into margin unless a rise and fall clause is included
• Scope disputes arise when contract documentation is incomplete or ambiguous at the time of tender

Under fixed fee contracts, the quality of the contractor's pre-tender assessment directly determines profitability, as there is limited room to recover costs that weren't anticipated at pricing.

Projects Best Suited for Fixed Fee Contracts

Fixed fee contracts work best when scope is stable and documentation is complete. Common applications include:

• New commercial buildings with fully documented design and specifications
• Standardised developments such as residential subdivisions or retail fit-outs
• Government-procured works where budget certainty is a funding requirement
• Projects where competitive tendering requires pricing comparability across submissions

Hybrid Contract Models in Construction

Some projects include both well-defined and uncertain scope within the same contract. In these cases, using a single pricing model across the entire project can create problems. A fixed fee applied to uncertain scope forces contractors to price unquantifiable risk, while using T&M for defined scope removes the cost certainty clients need for budgeting and financing.

Hybrid contracts solve this by applying each model where it fits. The defined work is priced as a fixed fee, and the uncertain work runs on T&M.

Consider a commercial refurbishment, where some cost elements are clear, and others are less certain.

The structural upgrade, new façade, and lobby fit-out are fully documented and tendered as a fixed fee package. The services remediation behind existing walls runs on T&M because the extent of the work can't be confirmed until walls are opened. The head contractor manages both arrangements under a single head contract, with clear distinction in the contract schedule between what is fixed and what is billable by time and materials.

That distinction is what makes hybrid contracts effective. Without a clear contractual boundary between the fixed fee scope and the T&M scope, disputes over which work falls under which pricing model often arise.

How to Manage T&M and Fixed Fee Contracts More Efficiently

Both fixed fee and T&M contracts require disciplined project controls from the moment the contract is executed.

The pricing model determines where cost risk sits, but it doesn't manage that risk automatically. That comes down to the systems and processes a project team puts in place.

Managing Fixed Fee Contracts

Under a fixed fee contract, the priority is tracking actual costs against the contract price before overruns become unrecoverable. Key controls include:

• Cost code structures that align directly with the contract schedule, making it straightforward to track spend by scope item
• Variation workflows that document scope changes, record client approvals, and maintain an audit trail from instruction to claim
• Budget vs actual dashboards that give project managers real-time visibility over cost performance without waiting for month-end reporting
• Payment claim templates structured to comply with applicable security of payment legislation in each state and territory

Scope disputes are the most common source of margin pressure on fixed fee contracts. A clear variation log, maintained from day one, is the most practical protection against them.

Managing T&M Contracts

Under a T&M contract, the priority is capturing every billable hour and material cost accurately. Key controls include:

• Mobile time capture on site for labour tracking, reducing reliance on end-of-day or end-of-week timesheet reconstruction
• Site docket workflows for materials and equipment that require client acknowledgement at the point of delivery or use
• Regular cost reporting to keep clients informed of spend against any agreed budget or not-to-exceed limit
• Payment claim templates that itemise hours, materials, and equipment with supporting records attached

Billing disputes on T&M contracts almost always come down to documentation. If hours and materials aren't recorded and approved as they happen, recovering them later is difficult.

Using Technology to Improve Contract Management

Connected construction platforms can improve information flow between site and office and support the audit trails required under both contract types. Key capabilities include:

• Cost tracking that connects contract schedules directly to cost codes, giving project managers real-time visibility over committed costs, actual spend, and forecast at completion
• Mobile time capture that allows site staff to log hours against specific cost codes directly from site, removing the inaccuracy that comes with reconstructing timesheets after the fact
• Variation management workflows that allow scope changes to be raised, documented, priced, and approved within a single system, with a full audit trail from instruction to approved change
• Payment claim tools that generate claim documentation directly from cost and progress data, structured consistently with applicable security of payment legislation

Some platforms also offer AI-assisted workflows that help identify potential scope changes and streamline documentation.  Capabilities vary across providers, and accuracy depends on data quality, user permissions, and system configuration.

Choosing the right contract model depends on project certainty

The contract model you choose determines how cost risk is shared, how scope changes are managed, and how smoothly the project runs. Matching the pricing approach to what is known at tender helps protect margins and reduce disputes during delivery.

Written by

Josh Krissansen

78 articles

Josh Krissansen is a freelance writer with two years of experience contributing to Procore's educational library. He specialises in transforming complex construction concepts into clear, actionable insights for professionals in the industry.

View profile