In January 2021, the number of construction bids increased by 36% (Autodesk + Dodge Data & Analytics). That’s great news for the sector and can create enormous opportunities for your company. Setting yourself up for success requires understanding how to win bids and stay competitive, which is no easy task. When timelines and scope aren’t predetermined, you might think about using a time and material contract. This is a good way to guarantee that all project costs are covered.
Time & Materials (T&M) Contracts
What to include in a time and material contract
A time and materials agreement must include a number of essential components. This makes it possible for contractors to let clients know the set prices for the work on a project. These are some typical provisions found in this kind of contract:
Labor rate
The labor rate specifies the number of labor hours and wages for each person working on the project. This can assist a client in planning their project’s labor costs. Some common aspects that contractors address in this section include:
Maximum labor hours
Setting a maximum labor hour rate can help to safeguard both clients and contractors. This clause frequently states that the contractor cannot charge the client for additional labor hours if they exceed the predetermined number. Additionally, this helps contractors complete projects in a timely manner.
Material markup
This section provides material cost information for each component that directly affects the project’s outcome. Additionally, this budgets for a material markup that is typically between 15% and 35% to account for market fluctuations. Providing customers with a precise material markup can assist them with project budgeting, material-related inquiries, and change requests to reduce costs.
Not-to-exceed (NTE) clauses
This clause sets a maximum cost for the project or materials, similar to a maximum labor hour clause. It’s a good idea for a contractor to work with the client to discuss the desired increase if they want to go over the cap. Because contractors are not allowed to charge more than the maximum allowed for the project, this clause helps to protect the customer. This can also help a project stay on track with predetermined timelines or milestones.
What is a time and material contract?
In a T&M contract, all parties to the construction agreement concur on set prices for the work that is to be performed. This entails the client consenting to pay predetermined rates for predetermined labor and material hours. This type of contract is beneficial for projects with an ambiguous scope or timeline despite carrying a higher risk for customers than other construction contracts.
Benefits of using a time and material contract
A time and material contract has a number of advantages over other kinds of construction contracts. Those benefits include:
When to use a time and material contract
This contract is useful in several situations. Following are five typical scenarios where contractors choose a time and material contract over another type of construction contract:
When a company is new to the industry
Newcomers to the construction industry are still learning about unforeseen expenses, hidden costs, and overhead costs. They can forecast these costs thanks to this kind of contract, and when the project is finished, they can precisely bill for them. Additionally, this contract type gives novice contractors the chance to develop their project estimation skills in order to avoid future over- or underestimating projects.
When the project has dynamic requirements
With a time and materials contract, contractors can easily adapt to changes on long-term or constantly changing projects. Customers may use this to add to the project, alter the timeline, or remove certain components. By adding or changing a project, this contract can speed up project progress.
When each involved party can collaborate effectively
Time and material agreements frequently entail coordination between the contractor and the client Contractors frequently include “not to exceed” clauses to facilitate collaboration because they safeguard the client. Additionally, this aids clients and contractors in estimating material and labor costs, which can aid the contractor in estimating the profitability of the project.
When companies establish risks beforehand
Time and material contracts can have increased risk, so it’s crucial that both clients and contractors talk about this risk before the project begins. Before the project begins, it’s common to talk about project estimates, productivity tracking, and any changes the client may decide to make. It’s important to research the specific state contract requirements because some states might forbid the use of time and material contracts.
When the project is unpredictable
Challenges of using a time and material contract
Customers and contractors should think about these disadvantages before choosing a time and material contract type. These challenges include:
Tips for using a T&M contract
Best practices for time and material contracts can be incorporated to help both contractors and customers experience less risk. Here are some ideas to keep in mind when drafting this kind of contract:
FAQ
What is meant by time and material contract?
Although open-ended, time and materials contracts define a project’s scope. They determine the costs of the materials and the labor at an hourly rate, and the client is charged according to those rates for the labor hours and the materials needed to complete the project.
What is the difference between T&M and fixed price?
It’s a straightforward contract that specifies your hourly rate as $30 plus an additional 10% of any materials you buy. Additionally, it states that your client won’t pay more than $1,000 in materials and 80 hours of labor.
What is time and material in construction?
With a fixed-price arrangement, you can delegate all work to the developers up until the product is complete. On the other hand, Time and Material calls for regular meetings with the development team and constant monitoring of task progress, materials used, and budget expenditures.
