A time and materials contract for construction work is a tool for handling unusual or time-sensitive work. Unless handled properly, though, these contracts burn both contractors and owners.
Why a Time and Materials Contract Is Advantageous
The biggest advantage of using a time and materials approach to building anything is that you can get started quickly. Just order materials, get workers on site, and go to work. This is an advantage to the owner when they need something done quickly, like a repair after a storm. It’s an advantage to the contractor as well because they don’t have to spend time and resources doing takeoffs, estimates, and detailed contracts.
But, there is another major advantage of doing construction work on a time and materials basis. It avoids lengthy and costly discovery. If you don’t know what’s in a wall, where load bearing points are, or what has been disposed of on the property, using a time and materials contract gets work moving ahead.
Sometimes, a job has aspects requiring special fittings or research and development of new methods. A time and materials approach might be the only way to get it started.
Another advantage falls to the owner. A time and materials approach allows them to have maximum control over the build. They can dictate daily, and even by-the-minute, what they want and how they want it.
The last advantage falls to the contractor—they don’t need to worry about making a profit. Assuming the owner is good for the tab, the contractor can just build and bill. That also assumes the contractor has set their labor prices accurately.
Disadvantages of Billing On a Time and Materials Basis
Both owners and contractors face disadvantages when doing jobs on a time and materials basis. The owner must stay on top of the work. They can’t just leave a list at the day’s start and go away. Either they or their representative needs to stay closely involved throughout the work.
Owners who know little about construction will face the biggest challenges. The realities of building will blindside them, and they’ll face challenges if they haven’t planned well. It’s one thing to say you want an extra bathroom in a certain space and quite another to make it fit.
Owners are also blindsided by the costs of the items they want. If they want specialty items but don’t do any shopping to come to terms with what they cost, they’ll be making changes on the fly, and that will make costs soar.
All owners, and contractors unfamiliar with time and materials contracts, will face challenges with construction contract management. If you don’t structure the contract correctly and don’t administer it, you will probably end up unhappy with the project outcomes. Contractors must keep highly detailed records if they expect to justify costs when requested.
Contractors will set themselves up for headaches on time and materials contracts when they give a quick estimate. In fact, it’s better to take the time to develop an accurate estimate when possible if deciding to work on a time and materials basis.
Parts of a Time and Materials Contract
Time and materials contracts can vary as they often govern unique projects or unique aspects of projects. They must match the conditions of the job. Still, you’ll find they have some common elements.
Many time and materials contracts specify the maximum labor hours allowed. The contractor should alert the owner when it appears labor will run over that amount. The parties must then work out a new agreement for completing the work.
Unit Labor Cost
This is where many T&M contracts leave the door open for disputes. Contractors can structure the labor rate according to the desires of the owner. For example, the owner might want a schedule of values for labor performed by various specialties. A detailed schedule may include the base labor rate and all the labor burdens broken out individually.
However, most contracts done on a T&M basis use a lump sum labor rate that covers all labor costs including payroll taxes, benefits expenses and markup. The most important factor in preventing disputes over the labor rate is listing everything included and anything not included in the rate.
Set Materials Markups
These contracts often include a set markup on materials. The reason is that T&M contracts usually cover brief time frames, so price protection for the contractor is less of an issue. Standard materials markups take into account the current costs, type of materials, and their availability.
Owners will typically want daily reporting on the labor and materials costs for work put in place. This running tally is totaled and paid at the end of an agreed-to time, usually weekly.
Time and Materials Contract Template
It’s not wise to structure a T&M contract without legal counsel. Even small, short duration, low-cost jobs might pose more risks than either party wants to take on when using a time and materials contract template.
Billing On a T&M Basis
Parties to time and materials contracts work out their own billing and payment schedules. Contractors will want to get paid as quickly as possible for work in place. Owners will want to satisfy themselves that completed work meets the quality expected before making payment.
Once parties agree to a billing and payment schedule, adhering to the schedule can keep relations positive. That means contractors must bill on time and with the correct information. Owners must complete their inspections for quality so they can make timely payments.
A time and materials contract is not a preferred form of contract for either owner or contractor. But, when projects have unknowns, time is of the essence, contractor and owner have an ongoing relationship already, or specialized materials and methods must be worked out, these contract types might be the best option.