A time and materials (T&M) contract is an agreement where a contractor is reimbursed for material costs plus a fee for the time worked. Often, the materials portion will include markups for profit, whilethe time fee is based on a schema that typically factors additional overhead beyond materials. Daily or hourly rates are popular time-based schemas in construction contract management.
A T&M contract usually sets the final price after the project is completed when the actual material costs and time worked become certain.
In project management, T&M contracts are helpful for a scope that can’t be definitively set ahead of time. They provide enough flexibility for pricing adjustments as the project evolves – without additional paperwork. This makes time and materials contracts popular in the construction industry, which often faces unpredictable project scopes.
Please note this blog is not intended to act as a substitute for legal advice.
The Key Elements Of A Time and Materials Contract
Conducting a contract audit as part of your contract management lifecycle can ensure your business follows consistent best practices. The exact structure of your time and materials contracts can and should vary according to your situation and based on your legal department’s advice. Still, we recommend considering several critical elements in planning your audits.
The following clauses are likely to be core to any T&M contract. Let’s explore what they entail – and some universal best practices to follow.
Definitions & Scope Of Project
The definitions and project scope clearly outline what work is and isn’t covered under the agreement. These sections also define key terms to be used throughout the contract so everyone is in agreement with the same terms.
A vague scope of work can cause contracts to go seriously wrong. Disputes can arise if the contractor or owner assumes specific tasks were (or weren’t) included but doesn’t clearly document those expectations. Similarly, misunderstandings happen if key terms aren’t defined clearly.
So, define all your contract’s key terms at the beginning of the section. This includes names for parties (such as “contractor” and “client”) and terms like “work” or “project.”
Also, consider all possible stages of work the project can involved in the project. Which tasks are you, as a contractor, responsible for? Which are out-of-scope and the owner’s responsibility? State this clearly.
Rates & Charges
This section will need an attached pricing schema clearly laying out the structure for any fees the client is agreeing to pay. For the time-based portion, this should include hourly or daily rates, clear distinctions between time and materials costs, and any not-to-exceed (NTE) limits, if applicable.
In the clause addressing rates and charges, clearly name the attached pricing schema(s) it’s referring to. Delineate the terms under which the rates apply, too. If additional rates are needed, specify their details here, too.
Materials & Supplies
Include a section delineating all supplies and materials provided for under the contract. Specify which materials are included in the reimbursement rate and which are the owner’s responsibility to furnish.
Also, specify additional material charges that may accrue, such as damage costs, and the circumstances under which the owner must reimburse the contractor versus when the contractor is liable.
Clearly state in writing who is responsible for costs should non-listed materials be required, and give instructions regarding the proper way to add them to the list (if allowed under the contract).
Invoicing & Payment Terms
The section specifying invoicing and terms of payment helps ensure everything is clear and in the signing parties’ best interests. It also helps avoid disputes over payment, data usage, or payment conditions.
A well-written invoicing and payment terms clause should therefore include all of these details. What specifically must occur before the client is required to pay the invoice? Be very specific, especially if this involves subjective judgment on the client’s part. Similarly, what are the contractor’s rights regarding full and timely payment (such as the right to charge a predetermined late fee)? What happens if the contract ends prematurely? Is payment to be made for all work completed until that point? What forms of payment are to be accepted?
Laying out the terms for payment and invoicing in this section is critical. As with all other parts of your contract, run this section by your legal counsel before finalizing. Law Insider provides examples in this article.
When To Use Time and Materials Contracts
As mentioned above, project managers may use T&M contracts for projects whose scope is difficult to predict reasonably. These are typically large or complex projects with many contingencies. Government contracts sometimes use this model when exact costs or scopes cannot be determined ahead of time. More commonly, T&M contracts are used in the private sector for less predictable work, such as certain types of repairs or renovations.
Below, we discuss the similarities and differences in use cases between T&M, fixed-price (lump sum), and cost-plus contracts.
Time and Materials vs Fixed-Price Contracts
While T&M contracts determine the final price after the project, fixed-price contracts agree on a set lump sum to be paid before the project begins. Changes are possible but require a change order and are more complicated. Therefore, a T&M contract is best for projects with unpredictable elements, but lump sum contracts are better for projects whose scope can be known at the outset. These are typically smaller and have a clear design that leaves little guesswork.
Firms following contract management best practices should thoroughly understand the projects they usually undertake before deciding between T&M and fixed-price. Historically, how predictable has the scope of different types of projects been? What factors (such as supply chain issues or changing customer preferences) are key in determining the level of predictability? It might also be a good idea to seek specialized legal counsel on the best format to use in different scenarios based on your firm’s unique business model.
Time and Materials vs Cost-Plus Contracts
Both T&M and cost-plus contracts involve similar types of flexibility and are suited to use cases involving changeable scope. However, the actual payment structure is different.
In a cost-plus contract, the contractor is reimbursed for all costs (from materials to subcontractor payment) – plus an additional fee paid according to a predetermined schema. The “plus” fee usually covers profit. It may be a percentage, an amount fixed in advance, or a fee based on an incentive to meet certain project criteria.
With T&M contracts, some non-material costs are built into the “time” portion of the payment, making the cost breakdown less transparent to the client. In contrast, a cost-plus contract delineates all the “contractor costs” together, and then separately charges a markup in the “plus” portion.
Some owners may prefer the transparency of cost-plus. Set-fee and incentive-based fees can help ensure efficiency since they align owner and contractor interests. Others might be more comfortable with the comparative simplicity of a T&M contract.
The Limitations Of A Time and Materials Contract
Despite their flexibility, T&M contracts suffer from certain limitations and risks. If these aren’t carefully understood and mitigated, this can sour customer relations and even impact a firm’s reputation. Some limitations are specific to T&M-style contracts, while others are challenges faced in most contract management situations.
Let’s dig into some core issues and possible ways to address them.
Cost Uncertainty
A top concern to keep in mind is that T&M contracts cannot provide predictable or stable pricing to the project owner, and their fee structure is less transparent than other options.
In cases where trust isn’t established between contractor and owner, this can lead to disputes and owner concerns about being overbilled. A lack of incentive to maximize efficiency can lead to inflated timelines and materials overspend on the contractor’s end, which can harm customer relations in the long term.
To ensure the best possible outcomes for clients and firms alike, base your T&M contracts on a solid foundation of trust. Be as transparent and specific as possible, and ensure that any client concerns are addressed in the contract as far as possible. For example, you might include a time and materials not-to-exceed (NTE) clause to reassure a newer client that you have their best interests in mind.
Administrative Burden
T&M contracts share administrative busywork similar to other types of contracts. This is especially true if a firm’s contract management is still mostly manual. Every stage of a manual contract lifecycle is cumbersome, from drafting and review to negotiation, signing, and renewal. Teams may spend hours poring through disorganized data, manually drafting contracts, emailing versions back and forth, and having clients sign manually. Finding an old contract for reference may not be easy – especially if the filing system isn’t consistently centralized and organized.
Firms can eliminate many of these challenges with end-to-end contract automation. The right tool allows teams to draft custom contracts in moments with natural language generation (NLG). With robust template libraries, teams can modify common contract types quickly. Centralized data storage and communication tools can streamline reviews and negotiations. Meanwhile, a well-designed solution lets firms create customized, automated workflows using conditional logic.
Potential for Mismanagement
Firms may run into legal trouble without a centralized data management system that integrates compliant data security. Poorly organized data may go awry in audits and disputes, making it hard for a firm to show that it acted in compliance with an agreement or regulation. Since T&M contracts can be open to allegations of unreasonable timeframes or materials charges, ensuring efficient, consistent data handling is especially important.
Firms may also overlook contract renewal deadlines and opportunities to secure recurring contracts, which can harm long-term client retention.
Robust contract management solutions secure and centralize data in one place. Some tools even use AI for targeted document retrieval. This is done using natural language processing (NLP), which can find relevant information more precisely and quickly than keyword searches.
Streamline Your Time and Materials Contracts Using Docubee
Time and materials contracts are one of the more commonly used agreement types in construction. Their advantages and disadvantages stem from the same feature: their flexibility upfront. This means that a T&M contract is not well-suited for projects whose scope is predictable, simple, or otherwise well-defined. However it can be very useful when a contractor needs to undertake a project involving significant flexibility.
Correct and thorough T&M contract language is crucial. Construction firms must carefully define contract terms to reflect their situation, giving special attention to the scope, materials to be used, rates, and payment terms. Before moving forward with a prospective client, the final draft must be run by trusted legal counsel.
Docubee’s contract generation and contract lifecycle management simplifies every contract management stage – and beyond. Construction firms can use conditional logic and AI to:
- Intelligently generate best-practice contracts using a rich template library or AI-driven natural language prompts
- Create infinitely customizable automated contract management workflows
- Automatically assign tasks to team members and contracting parties during negotiation, signing, and contract renewal
- Trigger reminders based on due dates or other custom triggers
- Centrally, securely, and compliantly store documents and sensitive data
Fly to new heights with Docubee’s automated contract generation! Schedule a demo to learn more.
