As an incentive to work efficiently, payment may be tied to reaching milestones in the project. Payment milestones: To protect the contractor’s workflow, in some cases you may include agreed-upon milestones for progress payments.Īdditional Items to Consider for a Time and Materials ContractĪ time and materials contract should stipulate when the contractor will be paid.Time and materials not-to-exceed clause (T&M NTE): A not-to-exceed quote for the entire project can be included so the client knows the maximum cost of the project before work begins.
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Materials markup: The client will be billed for the actual cost of materials (including freight), plus a specified markup, usually between 15% and 35%.Any excess hours must be absorbed by the contractor. Maximum labor hours: To guard against runaway costs and protect the client, a maximum number of labor hours can be specified.Labor rates: This should include the hourly wages for not only the laborers and subcontractors, but also administrators who manage the project and billing.To that end, these items are usually included in a time and materials contract. The goal of any contract is to meet the project requirements, cover the contractor’s costs and overhead and deliver a profit to the contractor. Where appropriate, the contract should also specify a maximum price by way of a not-to-exceed clause. Materials cost should include freight, taxes and a standard markup - usually between 15% and 35%. What Should Be Included in a Time and Materials Contract?īesides specifying the goals of the project, a time and materials contract should include a fixed price for labor that includes wages, overhead, general and administrative costs and a markup for profit. Perhaps lumber costs or gas prices are predicted to rise significantly over the duration of the job. Another situation ripe for a time and materials contract is when the materials prices are likely to change. When renovating an old building, for example, removing walls may uncover rot or other damage not visible before the job started. Time and materials contracts are best when the scope of the job or its duration cannot be determined before work begins, as is sometimes the case in construction projects. When to Use Time and Materials Contracts? The contractor also specifies the materials to be used, along with a markup rate for material prices. Within that framework, they agree on hourly wages for the contractor’s employees, as well as for subcontractors. It might not be feasible to define all the steps along the way. The contractor and client agree on the goal of the project and specify the finished product. How Do Time and Materials Contracts Work? They’re suited to situations with less predictability because if the job specifications change no renegotiation is required it just costs more in time and materials. But a time and materials contract usually specifies only the purpose of the job along with hourly labor rates and materials costs. In fixed price contracts, if job specifications change after the work begins, client and contractor must negotiate an amendment to their agreement. Fixed price contracts are best suited to projects that are well understood by both the client and the contractor and, therefore, the time needed and costs required are predictable. Fixed price contracts, in which the final price is determined before work begins, are more common than time and materials contracts. There are some important differences between fixed price and time and materials contracts. The contractor might also include a maximum price for the project - commonly called a “not-to-exceed” clause - as a guarantee to protect the client against runaway costs. With a time and materials contract, instead of quoting a fixed price for the entire project, a contract will describe the rough scope of the job along with a quote for a fixed hourly wage plus the cost of materials. What Is a Time and Materials (T&M) Contract? That’s why some contractors propose a time and materials contract. Materials costs could rise, laborers could drop out of the workforce, new regulations could be imposed. Adding to the difficulty, the contractor’s costs can change between the estimate and the completion of work. Too small, and the project ends up in the red. If the estimate is too large, the contractor loses the project to a lower bidder. East, Nordics and Other Regions (opens in new tab)Īccurately estimating any construction job is a challenge.
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