Are You Wondering What T&M Stands For In Construction? Have You Or Your Company Been Assigned To A Time And Material Project? In This Article, We’ll Break Down The Time & Material Contract Plus Some Advantages, Disadvantages & Good Tips To Know!
What Does Time & Material Mean In Construction?
In construction, time and material refers to a contractual arrangement where the client pays the contractor for their exact costs of construction, plus a fixed overhead and profit margin. The costs the client pays are the exact costs of the contractor, including labor, equipment, materials and other subcontractors. Overhead and profit margins are typically billed on a percentage of the costs.
This type of agreement is also known as a ‘cost-plus’ contract, and is often referred to as a ‘T&M’ contract.
What Is The Difference Between Fixed Price And T&M Contracts?
There are a few distinct differences between fixed price and T&M contracts.
A fixed price contract refers to a contractual agreement, where the client agrees to pay a contractor one ‘lump sum’ price, in exchange for performing a specific scope of work. In fact, this is referred to as a lump sum contract. The profit that a contractor keeps will come down to managing their own costs, maintaining their budget and keeping their overhead costs where they should be. The only way in which this lump sum price will increase is through legitimate change orders.
A T&M contract may include a not-to-exceed price (NTE) which is similar to a lump sum; this is the maximum price that the client agrees to pay a contractor in total to perform a specific scope of work. This NTE price may also increase through change orders. In this way, fixed price and T&M contracts are similar.
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There Are Many Differences Between a Lump Sum Contract and a Time & Material Contract:
T&M contracts have fixed overhead and profit margins; overhead and profit margins rely completely on a contractor’s performance in a lump-sum scenario, but T&M contracts will pay contractors a fixed, predictable fee for overhead and a set profit. For example, a contractor may be paid 10% of the costs to cover overhead, and another 10% of the costs for profit. In this way, T&M contracts may be safer for a contractor from a financial perspective. There are risks though, which we will discuss below.
With a lump sum contract, contractors bill the client based on percentage of completion for every time in the schedule of values (SOV). With T&M contracts, the client gets billed based on the costs incurred by the contractor for the work they performed and the purchases they made.
T&M contracts require more administration…at least when the bills are due. As stated above, lump sum contracts are billed based on percentages of work completed – the amount of work done is what the bill is based on. With a T&M contract, a contractor must include a cost breakdown of all of their labor costs, along with copies of invoices for every purchase – equipment rentals, tools, supplies, safety equipment, materials, etc.
This is a brief comparison of fixed and T&M contracts – we’ll look at the details below.
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Advantages Of Time & Material Contracts
Lump sum contracts carry financial risk in the short term. Since the client is billed based on work completed, the contractor must closely monitor their costs in any given billing period to ensure they’re not ‘underwater’ – where the costs for the period exceed what they can bill. Contractors must have enough cash on hand to be able to take this loss. With a T&M contract, this risk is less – the contractor will receive a fixed amount of overhead and profit, usually based on the total costs in a billing period. If additional costs are spent in a period, the contractor shall receive a larger payment for overhead and profit on top of those costs.
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Another advantage of a T&M contract is transparency for the client. The client will see a breakdown of every cost they’re being billed for. This includes a labor summary, outlining every worker’s activity on the job site per day, along with the hours each activity is taking. This leaves a contractor less room for cutting corners, purchasing excess materials, wasting resources, etc. This gives the client more control on what’s being spent.
A third advantage of a T&M contract is the ability to forecast cost overruns. Both the contractor and the client know exactly what is spent on a particular task. If the cost of a particular task is creeping upwards, but the progress on the project is not there to match, both parties can anticipate higher cost and make decisions ahead of time to mitigate the work. The client may decide to hire a different contractor to perform some of the work, or a contractor may decide to subcontract some of the work. All of this is done with transparency. In a fixed price contract scenario, cost overruns are primarily the contractor’s concern and not the client. However, if a contractor is going to lose money, they may be incentivized to get out of the contract, void the agreement, drag out the work, allocate more resources to other clients, or even go bankrupt! In these ways, a contractor’s risk of overruns still affects the client.
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Disadvantages Of Time & Material Contracts
While T&M contracts provide transparency and fixed overhead and profit margins, they also come with disadvantages.
First, contractors will need to spend money up front on overhead expenses. In the planning stages of a project, the contractor’s management team will be working hard to get the project in motion, which will require substantial hours of effort by the team. However, overhead is typically billed and paid based on the costs of the work. In these planning periods, the project will not have much cost, and therefore the amount of overhead the contractor can be paid is little to none.
Second, time and material contracts still have a NTE (maximum) price. While overhead and profit margins are fixed, the contractor must still adhere to a budget in order to stay under this NTE price. Most T&M contracts are written so that the risk of cost overrun, without legitimate change orders, is on the contractor. As we discussed above, however, this risk is indirectly passed through to the client.
Thirdly, just as a client can dispute a contractor’s billing in a fixed price contract (percentage completed), a client can also dispute a contractor’s T&M bill. The dispute won’t involve overhead and profit, but instead will involve the scope of work. If the contract includes specific qualifications and exclusions, there may be restrictions on billing for specific labor tasks, on paying for excess materials, on paying for unneeded equipment rental, etc. An example of this: union workers are often entitled to ‘show up’ time; that is, if the workers come to the job site but are cancelled for any reason, the workers are entitled to being paid for two hours of work, even if they showed up for only one minute. The contract may be written to exclude the client from paying for any show up time.
Even if a contractor feels they are within their rights to bill for certain tasks on a T&M project, the client may disagree and spite paying for some of the work being billed.
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Time & Material Contracts: Tips
As discussed above, time and material contracts have many advantages and disadvantages. However, both contractors and clients can maximize the advantages of this contract arrangement using the following tips and tricks:
- Agree to a deposit up front to cover the contractor’s initial overhead expenses such as project management, administrative staff, etc.
- Contrary to the above point, contractors and clients can agree to hourly rates for project managers and other management staff. In this arrangement, overhead for staff is billed hourly along with other project costs, rather than a percentage of the work.
- Have regularly scheduled project reviews with the client. During these reviews, the contractor and client can review the work in progress onsite. These meetings should be as regular as possible for transparency.
- Contractors should fill out daily tickets that itemize the labor staff, the hours each person worked and the work they performed. Ideally, these tickets should be signed off by the client or Owner’s representative every day to minimize confusion when the bill is turned in.
- Clients should require that the contractor forecast the project’s schedule and costs in advance. While a contractor normally provides look ahead schedules for the next few weeks or months on a project, they should also cost-load this schedule for the cost of labor, equipment, materials, etc. This helps predict overruns, as well as predict billings (based on cost), overhead and profit.
- Agree on clear contract terms on what is billable and what is not. Overtime, for example, won’t be billable unless approved beforehand.
- Clients and contractors can both benefit from implementing a Guaranteed Maximum Price (GMP) contract instead of a T&M contract. The benefit? Contractors will have incentive to keep costs lower for a larger profit margin (or to not lose money), and clients still have the benefit of transparency and paying exact costs of construction.
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In Conclusion
We hope this article has explained time & material contract’s advantages & disadvantages, and that our tips will help you in the future!
