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A time and materials contract is generally used in the construction industry to outline the timeframe and materials that are needed to complete a project.
Often, these contracts are based on estimates and they should be viewed as a guideline, as opposed to set in stone. These are complex contracts with many moving parts, meaning they require strong contract management to be successful.
This software can help you automate this process, from creating a contract template to an in-depth analysis of key contract metrics.
Keep reading to find out what a time and materials contract is, when you should use them and how to effectively manage them using contracting software.
What is a time and materials contract?
A time and materials (T&M) contract is a legal agreement that outlines the relationship between how a client pays for a contractor’s time and the money the contractor spends on materials. This type of contract is commonly used in the construction industry.
Typically, one party pays a contractor for the costs of all materials needed to complete the job alongside an established hourly wage for the work. The contract will likely also include any fees related to the service provided. This guarantees that the contractor will be paid for expenses, as well as their labor.
In addition, a T&M contract will usually include an estimated timeframe and material list for work to be completed. This is not set in stone however and the client should be aware that costs could end up higher when the project is completed.
What is the purpose of a time and materials contract?
Contractors use time and materials contracts to ensure they are paid in full for their services. In contrast to a fixed-price contract, which establishes a set price for the delivery of goods and services, a T&M contract plans for any changes that could happen.
This means that it outlines what the customer can expect in terms of cost while making it clear that this is subject to changes. These changes could be around the cost of materials, timeframe or just the practical requirements to complete the work needed.
For the contractor, this type of agreement gives them confidence that they will be paid in full regardless of any issues with supplies, materials or workforce.
For the customer, it simplifies negotiation and sets boundaries, as an agreed fair rate of pay for the work performed is predetermined. This is an important distinction, as the purpose of any contract is to provide clarity for parties and to create boundaries within a business relationship.
When would you need a time and materials contract?
This type of contract should be used when the extent of the job cannot be determined before the work itself begins. This often happens in the construction industry, as so many factors are beyond the control of the contractor, like the cost of materials when work begins.
However,, this could also occur in other industries. For example, a T&M contract may be used by software or other product creation businesses. Normally when the economic conditions are too unstable to rely on a fixed-price contract. A T&M contract ensures you are paid for the exact cost of both your labor and materials used.
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What should be included in a time and materials contact?
Time and materials contracts are complex with lots of moving parts, here’s what should be included:
- Labor rates. An hourly pay rate for laborers, subcontractors, administrators and any other workers on the project.
- Maximum labor rates. The contract should specify a maximum cost to protect the client and ensure that the project does not run wildly over budget. Any excess hours will need to be absorbed by the contractor.
- Materials markup. The client should be billed for the actual cost of materials (plus freight), plus a markup of somewhere between 15 per cent and 35 per cent.
- Time and materials not to exceed clause. This covers all aspects of cost, not just labor. A not-to-exceed quote for the whole project can be included so the client knows what the maximum cost will be before work begins.
- Payment milestones. In some cases, you may choose to include pre-agreed-upon milestones for progress payments.
Some more common contract clauses that you could include are:
- Breach of contract clause. This clause specifies the circumstances in which either party can end the contract for breach of a contractual term. In this example, the clause will limit contract termination to situations where a major contract violation occurs.
- Disclaimers. Contractors may wish to include disclaimers for warranties, especially as to the quality of the product chosen by the client. For instance, if a client chooses a specific material for their project, the contractor may not want to be reliable for the quality of that particular material.
- Modification clause. In bigger projects, changed minds are inevitable. This could be a necessity or simply the client’s choice, either way, the time and materials contract should outline how exactly this change may occur and when it’s enforceable.
Time and materials contracts: pros and cons
Time and materials contracts exist to provide greater clarity for both parties, but they certainly aren’t without fault. Like most types of contracts, T&M agreements have their advantages and disadvantages.
Advantages of time and materials contracts
For the contractor, some advantages of a time and materials contract include:
- Assurance that all costs will be covered
- Easy implementation
- Predictable profit
- Adjustable for certain specifications
- Guaranteed profit for the contractors
While the advantages for the client could be:
- Clarity on cost, despite variations in material prices
- A timeframe for project completion
- Easy adjustment for resource changes or specifications
Disadvantages of time and material contracts
For the contractor, the disadvantages of a T&M contract may be:
- Losing a contract to a competitor if they are offering a fixed-price contract
- Difficulty tracking material costs and labor hours could cost the contractor more
- Lack of motivation for laborers due to unfixed hours
- Running out of cashflow before a project is complete
Disadvantages of this contract type for the client include:
- Difficulty in budgeting for a project with no fixed prices
- Increased risk of going over budget due to no fixed prices
- Heightened tracking of labor hours and material costs
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How can you create a time and materials contract?
Once you’ve decided that the pros outweigh the cons when it comes to using a time and materials contract, it's time to create one. The best place to start is by creating a standard form agreement template using contract management software.
This document should outline the basics and can be used as a starting point for most of your time and materials contracts. This template can be pre-approved by your legal team and populated with drag-and-drop fields ready to fill in with contract-specific details.
Best practice means this template can also be modified in line with an individual project or to meet the requirements of a particular client.
Using contract management software to aid with template creation is only the first step. It can also help with the entire contract process, from handling complex contract negotiations to contract storage. Streamlining this process can save your business a good deal of time and money.
Let’s take a look at what this process might look like in more detail.
How to manage time and materials contracts in 2024
As with all contracts, time and materials contracts need to be managed properly to reduce risk and avoid legal repercussions.
Luckily, time and materials contracts are a standardized contract type, making them easy to manage using a tool like Juro.
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