According to the American Institute of Architects, the purpose of a construction contract is threefold:
- Define the responsibilities of all stakeholders
- Assign legal and financial liability to each stakeholder
- Establish project goals that serve as a foundational document for all preconstruction, construction, and post construction planning and collaboration.
Time and materials (T&M) contracts are used in construction when the project’s scope isn’t predetermined, making it difficult to agree on a fixed price and timeline for the contract. Instead, time and materials contracts allow for the flexibility of an “as-we-go” agreement.
Like all other contracts, there are positives and negatives. Let’s dive in.
Parts of a Time and Materials Contract
Unlike fixed-rate construction contracts where contractors get paid in predetermined installments based on the percentage of work completed, working on a time and materials basis allows for contractors to get paid for actual labor hours and materials or equipment used.
Tip #1: To maintain control over profits, contractors should negotiate the following terms before signing a T&M contract.
Rate of Labor
Rate of labor refers to an agreed-upon fixed hourly billing rate for the work of project, field, and office administrative staff. On fixed-rate contracts this is often built into the project overhead or general conditions costs, however, the time and materials basis typically dictates sticking to “list price.”
Maximum Labor Hours
To incentivize efficient construction, maximum labor hours are established in the T&M contract before work begins. This allows the contractor to estimate the hours needed to complete the project based on past productivity data and build efficiently on that schedule. If the subcontractor exceeds that number of hours, the owner or prime contract holder does not have to pay for the excess amount of labor.
Predetermined Mark-up on Materials
The industry-standard markup for time and materials contracts ranges between 15% and 35%. That means, if a subcontractor paid $1,000 to their vendor for lumber, the price for materials billed to the project budget could range between $1,150 and $1,350. Negotiate with your contractor and owner to agree upon a rate that best reflects the scope of work completed.
In lieu of a fixed-price contract, T&M tickets often come with the caveat of a not-to-exceed amount. This is similar to the maximum labor hours rule, where the contractor agrees to bill for labor and materials only up to a certain maximum. Once that maximum is reached, the contractor resumes responsibility for those costs which further incentivizes efficient work that sticks to the schedule and budget.
Why a Time and Materials Contract is Advantageous
On projects with moving goal posts like increased scope, lengthened timelines, and design revisions—unit-based contracts provide flexibility for both the owner and contractor. Especially in environments where change management is processed manually and can take several days to complete, time and materials contracts can keep projects moving without forcing subcontractors to proceed at the risk of not getting paid for work performed.
Disadvantages of Billing On a Time and Materials Basis
Time and materials contracts are born out of an inability to predict future needs, and thus, are more difficult to plan for. This can create a working environment where contractors have little control over job costs and scheduling availability.
Tip #2: There are plenty of jobsite horror stories where paper-based time and materials contracts are agreed-upon in the moment while on site in order to keep work moving. If lost or unsigned, there is no paper trail for contractors to support invoiced amounts. Digital change management solutions can help avoid the risk of paperwork falling through the cracks.
Time and Materials Contract Example Templates
Tip #3: Time and materials contract example templates can be a good starting point. However, no two projects are the same and your contracts should reflect that.
To protect yourself from the risk of payment disputes, always consult your estimators and legal team before signing a time and materials agreement.
If you’re looking for reliable time and materials contract templates to start with, Procore’s lien waivers and notices integration partner, Levelset, offers a template. Alternatively, the AIA has contract document families to choose from.
Billing On a T&M Basis
There is a tough balancing act between the flexibility that time and materials contracts provide and the lack of foresight inherent in the process. However, if managed properly with digital construction project management software, any time and materials contract can be adapted to fit the needs of the construction project and protect all stakeholders involved.